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Why Is the Risk in Oil Prices Rising?

PART:
1 2 3 4 5
Part 4
Why Is the Risk in Oil Prices Rising? PART 4 OF 5

Are Supply Fears Returning to the Oil Market?

Futures spread

On December 5, 2017, the January 2018 futures contract for US crude oil settled at a premium of $2.5 to January 2019 futures. On November 28, the futures spread was at a premium of $2.7. The “futures spread” represents the price difference between US crude oil January 2018 futures and January 2019 futures. On November 28–December 5, 2017, US crude oil active futures fell 0.6%.

Are Supply Fears Returning to the Oil Market?

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If the premium falls or the “backwardation” eases, we might see a fall in oil prices. If the premium expands, we might see a gain in oil prices. On November 24, 2017, the premium rose to $3.6. US crude oil active futures contracts closed at the highest closing price in 2017.

If the discount falls or the “contango” eases, we might see a rise in oil prices. If the discount expands, we might see a fall in oil prices. On June 21, 2017, the discount reached $2.6. US crude oil active futures contracts closed at the lowest closing price in 2017.

Is oil supply rising?

On November 28–December 5, 2017, the fall in the premium as well as oil prices might point towards concerns surrounding record high US crude oil production, as we discussed in Part 2. In the next part, we’ll discuss US crude oil exports. The fear about a rise in oil’s supply might also drag the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) because of their energy exposure.

Energy sector

The futures spread at a premium or a discount is important for US oil producers (XOP) (DRIP) (IEO) to devise appropriate risk management techniques. It’s also true for midstream companies (AMLP).

On December 5, except for US crude oil futures contracts for January 2018 and February 2018, all of the other contracts’ prices until January 2019 settled in a descending price pattern.

The descending pattern could benefit oil-following ETFs like the United States 12 Month Oil ETF (USL), the United States Oil ETF (USO), and the ProShares Ultra Bloomberg Crude Oil (UCO).

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