crude and time spreads

Water Cooler Investing
#1

I am having troubling understanding something I read this morning and I was hoping some of the derivatives experts here could shed some light on it:

“Time spreads in Brent and oil products have strengthened, not weakened, and weakening times preads are characteristic of demand-driven price declines.”

When time spreads are strengthening, the difference in spread is greater, correct? Could that be a positive or negative difference depending on whether we are in backwardation or contango?

So, the guy argues that it must be a supply driven price decline but why?

A weakening time spread due to slow demand would mean prices in the closer months came down more than in the far off months. Why wouldn’t that happen the same way if prices decline because supply increased?

Thanks

#2

I’ll round some numbers, but front month crude is about $31, while each month forward is 32, 33, 34, etc. The $1 spread between months is pretty significant. What’s happening, is with supplies so high, they are willing to sell at this lower price today to just get it out. Storages are full or near capacity in many areas, so there’s not many alternatives… either sell at $31 or be screwed. With storages near capacity, you’re paying quite a bit to store any more oil month to month - about $1, as seen by the curve (ignoring interest rates and other costs). If this was more of a demand driven market, you may see prices at $31, $31.25, 31.50, 31.75 on the curve, because there would be excess storage capacity and that premium would be much lower on the curve.

#3

makes sense now, thanks