Easing bottleneck shifts the bet on oil futures By Moming Zhou, MarketWatch Last update: 1:39 a.m. EDT April 27, 2009 A previous version of this story, originally published on April 23, incorrectly said contango costs are not reflected in USO daily prices. It has been corrected. NEW YORK (MarketWatch) -- The fast-shrinking price gap between crude-oil futures for prompt delivery and crude destined for delivery months down the road is backfiring on investors who bet big that the gap would widen. At the same time, the trend is playing nicely into the hands of investors in oil exchange-traded funds, who stand to benefit from the loss of a somewhat obscure hidden cost. That cost loops back to Cushing, Oklahoma, the delivery point for light sweet crude contracts traded on the New York Mercantile Exchange. As a weak economy slowed demand for oil, crude supplies backed up at Cushing, with sellers wanting to hold barrels in anticipation of a price rebound. This, in turn, put further pressure on near-term prices as storage became a problem. Late last year, this situation resulted in the January crude contract trading at a $8.49 discount to crude for delivery in February, a record between two successive months' contracts, and a situation known among futures traders as contango. The discount was so steep it got the label "super contango." See related story. Demand for storage prompted oil supertankers around the world to drop anchor and become floating oil storage tanks. But since December the contango gap has dropped sharply to less than $2, as Midwest refiners slowly shipped oil stored at Cushing to their refineries. That drop has been a blow to the mostly institutional investors who took part in these complex trades, betting that the gap would stay wide. But for individual investors, who tend to simply bet on the direction of a single-month contract, the drop in the price gap has brought some relief from a so-called "roll-yield" cost that hits exchange-traded funds. This cost, which is caused when ETFs that hold the front-month oil contract move their holdings into the next month contract, can penalize holders of funds like the United States Oil Fund (USO: USO News , chart , profile , more Last:
Delayed quote data Add to portfolio Analyst Create alert Insider Discuss Financials Sponsored by: , , ) , the biggest oil ETF. The narrowing of contango will help reduce this cost. That relief may soon disappear, however. As summer driving season approaches, analysts expect contango to change course again, although not to approach its earlier record. "You really have demand destruction now," said Tariq Zahir, managing member of New York-based trading firm Tyche Capital Advisors. Weak demand is pressuring the price of the front-month contract, he said. "But you get a little bit support [in the following months] with the hurricane season coming up, and of course the driving season coming up, that can keep the price further out high," he added. Zahir said he is betting on a wider contango going into summer. But he said he isn't trading the front-month contract because of "higher volatility," instead choosing to enter a contango trade between the July and August contracts. As of Thursday's close, contango between the front-month June contract and July contract stood at $1.45 a barrel, while contango between the July and August contract stood at $1.26. On Thursday oil ended up 77 cents, or 1.6%, to $49.62 a barrel. Front-month contracts have gained 11% so far this year ETF costs For oil ETF investors, shrinking contango has brought some good news. Unlike gold ETFs, which buy physical gold, oil ETFs tend to hold front-month crude futures contracts. Each month, the ETF has to roll over to the next month's contract by selling the expiring one and buying the next-month contract. In a contango market, ETF funds are selling low while buying high.
I think he is arguing that there has been a temporary increase in oil being shipped from cushing to refineries causing an uplift in the daily oil price but unless the demand picks up or there is a larger than normal supply demand from temporary things like hurricanes in the gulf of mexico or a larger than expected use of petrol during the american driving season perhaps both could happen at once oil will fall in price.
Meanwhile technical analysis is predicrting that oil will continue to rise Bloomberg reports Oil Set to Break Resistance Point, PVM Says: Technical Analysis Share | Email | Print | A A A
By Grant Smith
May 8 (Bloomberg) -- Crude oil is set to reach $62.65 a barrel “in the near future” and rally to $78 within six months as prices retrace the surge that started in 1998, according to technical analysis by PVM Oil Associates Ltd.
Oil is on the brink of breaking through resistance indicated by its climb from a low of $10.35 in December 1998 to an all-time peak of $147.27 last July, PVM said. If oil reaches $62.65, that is equivalent to 38.2 percent of the 10-year rally, a milestone in the “Fibonacci” sequences that suggests additional gains are likely, according to the London-based firm.
“I’m certain we’ll get to the first correction point at $62.65 in the near future,” PVM Director Robin Bieber said by telephone. “The market has been moving into a position from where it can start to attack the higher correction points.”
Oil for June delivery traded as high as $58.57 yesterday on the New York Mercantile Exchange, the most since Nov. 17.
Gains of 38.2 percent and 50 percent are significant in the so-called Fibonacci sequence, technical analysts say. They use the ratios, sometimes known as the golden mean, to find points of support or resistance as prices retrace rallies or declines.
PVM forecast March 26 that oil would fall to $48.55 a barrel after prices failed to close above their five-day moving average. Crude prices declined to that level two days later.
To contact the reporter on this story: Grant Smith in London at [email protected] Last Updated: May 7, 2009 19:01 EDT Perhaps the figures they use do not take into account the factors in the first story
