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Bullish on Oil’s Recovery? Here’s What You Should Watch

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Part 4
Bullish on Oil’s Recovery? Here’s What You Should Watch PART 4 OF 4

Futures Forward Curve Adjusts to Oil’s Recovery

WTI crude oil forward curve

On July 3, 2017, US crude oil (OIIL) (USO) August 2018 futures settled $2.2 above August 2017 futures. The premium, or spread, was $2.4 on June 26, 2017. On June 26–July 3, 2017, US crude oil August futures rose 8.5%.

Futures Forward Curve Adjusts to Oil’s Recovery

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Contango and oil prices

Currently, oil’s futures forward curve is in a structure called “contango.” Far month futures trade at a premium compared to near month futures. During an expanding spread (or contango), oil prices are usually weak. For example, the WTI crude oil futures forward curve shifted to contango on November 3, 2014. Since then, US crude oil active futures have lost 40.3%.

Backwardation

Unlike contango, in “backwardation,” the price versus time graph of oil futures with different expiries slopes downward. It has been observed that oil prices tend to be strong during expanding backwardation. On April  29, 2011, US crude oil active futures settled at its post-sub-prime crisis high level of $113.93 per barrel. Earlier the same month, oil’s futures forward curve shifted to backwardation.

Trailing week analysis

In the week ending July 3, 2017, the contango contracted and US crude oil active futures rose. Both moves could be pointing to fewer concerns regarding the oversupply situation in the crude oil market.

How it impacts energy stocks?

Energy stocks can take important cues from oil’s futures forward curve. It could impact US oil producers’ (XOP) (DRIP) hedging-related decisions. It could also impact Energy MLPs’ (AMLP) oil transportation and storage businesses.

Apart from energy stocks, oil’s futures forward curve also impacts the performance of crude oil tracking ETFs such as the United States Oil Fund LP (USO).

Read Everything You’d Better Know about Upstream Energy Companies to learn more about US upstream companies.

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