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Oil’s Forward Curve: What Does It Indicate?

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US crude oil forward curve

On June 13, 2017, US crude oil’s (USO) (OIIL) (DBO) July 2018 futures settled at a premium of $1.67 to July 2017 futures. On June 6, the premium (or spread) between the two futures contracts was $0.70. In the trailing week, US crude oil July 2017 futures fell 3.6%.

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Contango and crude oil prices

When the futures forward curve is sloped upward, it’s called contango. In the last ten years, during periods of expanding contango, crude oil prices were weaker. For example, on November 3, 2014, oil’s future curve shifted to contango. Between November 2, 2014, and June 13, 2017, US crude oil active futures fell 41.0%.

Backwardation and oil prices

When the futures forward curve slopes downward, it’s called backwardation. Oil’s bull markets have usually coincided with periods of backwardation. On July 3, 2008, US crude oil active futures settled at $145.30 per barrel, a record high closing price. Oil futures’ forward curve was in backwardation between 2007 and 2008.

The slope of the forward curve could hint at upcoming changes in oil supply-demand dynamics.

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Supply-demand dynamics and forward curve

Between June 6 and June 13, 2017, the premium of the US crude oil July 2018 futures contract over the July 2017 futures contract increased. During this trailing week, US crude oil active futures fell 3.6%. The rise in the premium could be reflecting concerns regarding current supply outstripping demand.

Forward curve and the energy sector

The shape of oil’s forward curve impacts the hedging decisions of US oil producers (XOP). It also impacts oil’s storage and transportation businesses of energy MLPs (AMLP). Because of the contango structure in the futures market, the United States Oil ETF (USO) underperformed crude oil prices in the past.

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