I have a question which is: Are we saying that with repect to Oil, the present futures price is higher than the cost of buying it now and storing it? And that would make the contago described ‘normal contango’? Thanks http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/21/cnoil121.xml post from another forum related to this article: 'I was an oil trader and this contango is not, I repeat NOT a positive sign for the oil market. When the prompt price of any commodity falls below the futures price that is a strong fundamental inidicator that people who wish to buy real physical commodity for real immediate use are not concerned about the availability of supply. If people were concerned then the market would be in a very strong backwardation - with prompt prices far higher than futures prices. It has not been in that position for the whole of the last year. This rise in futuires prices is purely speculative in my view. In the case of the fundamental physical oil market we know that US refineries are not running at full capacity, we know that Iran is storing heavier crudes on oil tankers because they cannot find a market for it. The run up in futures prices is being driven by speculative investors who have absolutley no intention of taking delivery of that oil or have any physical end use for it. We also know that real physical oil demand in the US is below that of last year. High prices are doing their work - creating a slump in demand at the same time as new capacity is being brought on the market. I expect a very sharp and rapid collapse in the oil market when speculators attempt to close their positions. At the moment it costs about 10c per barrel per day to store oil and no one wil be able to just take delivery and hope for the best - futures positions will have to be closed as the price slumps and I fully expect to see the NYMEX go limit down with positions being forced to mass liquidation and bankruptcies of some speculative funds. I have a vested interest in taking this view point and no one should be under any illusion that I know anything ‘secret’. This is a high risk market and not one that anyone should take positions on unless thay are willing to accept very severe losses. My positions are in long dated put options - I am expecting a very large ‘black swan’ event drop in prices at some point but the timing is very uncertain. Fundamentals are ultra bearish in my view but the timing of the sell off to return the market to fundamentals cannot be predicted. ’
Another misuse of the term “black swan”. The oil market is screwed up and is ready for a big fall, imo.
what’s a black swan? And no answers describing water fowl please!
After the book “The Black Swan”…nobody believed there was such a thing as a black colored swan until one day people found one. The are very rare events that nobody predicts or builds into a model.
Cool, thanks. So is this oil price thing normal contango? Meaning that theres a positive spread on top of the current price and storage price to get to the futures price Regular contago would be simply that the future contract price= future expected price, and are higher than the current price?
No, oil normally exhibits backwardation.
Doesn’t this have to do with the Hotelling principal?
Well I believe it goes against what the Hotelling principal says for oil to commonly exhibit backwardation.
Long-dated put options and whining on the Internet. I wonder why he “was an oil trader”? And nothing like the “Black swan” event of futures prices going limit down. I think the record is silver futures as the silver market got crushed following the Hunt bros attempts to corner the market. The market was limit down like 20 days in a row.
^^ we just used the Hunt bros story in our newsletter.
Did you read the description of it in “Serpent on the Rock” (which is a very cool but dated book anyway)?
No, I didn’t. We used it in a “History Lesson” talking about various bubbles over the years and some of the chronological “events”. Amazing how fast history repeats itself; it was only 20 years between real estate bubbles in New England.
Very glad I sold LAST year.