Howdy,WPL is our largest oil/ gas company .....Just been looking...

Howdy,

WPL is our largest oil/ gas company .....

Just been looking at the overall oil market and trying to make some sense of it all.
Market has been on a one way trip for the last 12 months with no letup in sight.
Currently trading near the recent highs of the past run up we saw less than 6 months ago.
In fact most contracts have hit all time highs but not by too much.

Something of note has changed with the forward oil market. Last year we saw a drop off in prices the further we went out on the contract curve. In fact the drop off got steeper the higher the price went. This anomaly has been in the oil market virtually unchanged for my whole time in the markets, in other words over 20 years. This cheaper pricing of forward contracts is known as backwardation or contango.

Now having been a bull for a long time with oil, I have questioned why they had oil priced USD$15- lower than spot for say a 6 year contract. My own reading was oil was going higher and going to stay there for a very long time. The market held onto this spread for a very long time with the longest contracts being at this USD$15- discount. This still is the case but something has changed and changed a lot.

Late last year we saw a push down in spot oil towards the support at USD$40- .... but something happened, the further dated contracts did not move as much and in fact some were going up when the spot end went down and hence narrowed the future spread to the forward contracts.

In the last few months the curve for oil in 2005 has virtually flattened and the 6 years spread has also narrowed down to USD 9.80 from over USD$15- less than 6 months ago.

Of even more concern is the 2005 curve we are seeing for the first time in a very long time the June contract trading at a higher price than the spot contract. In other words something that has been in force for over 20 years now seems to be disappearing, that is the backwardation of the forward prices. Admittedly we have a long way to see the December 2011 oil contract go up before it hits the spot oil price. However the forward oil contracts even for 2006 have only a tiny risk premium built into them allowing for the fact that oil is trading at all time highs.

Now who knows where the real direction for oil short term will be ? But looking at the traded markets this change is a fundamental relationship that has been true for well over 20 years and it points to higher expectations by the oil market and traders as time goes on in 2005.

My own call for a top in 2005 is a technical one, but between USD$64.20 and USD $66.90 there are three very large technical barriers I can see.

Maybe we stop here I don't know, but looking at the direction and charts, oil has for example in the last 9 months made 68 new highs on a 270 day average and only 3 new lows .... not too big a call to see it maybe higher from here.

Then again, markets like this turn around on a sneeze from OPEC as we saw in December with the heat wave in the US .... hahhahaha.


Where does this leave up at the petrol station ? Is it $1.30 or $1.35 ?

Good luck