Futures Spread: What Does It Indicate for Oil Prices?

Futures spread

On July 25, 2017, US crude oil (DBO) September 2018 futures were priced $1.27 higher compared to September 2017 futures. On July 18, 2017, the spread (or premium) was at $1.91. On July 18–25, 2017, US crude oil September futures rose 2.8%.

Futures Spread: What Does It Indicate for Oil Prices?

Currently, crude oil’s futures forward curve is in “contango.” During expanding contango, oil prices usually move lower. On November 3, 2014, the futures spread shifted to a contango structure. Since then, oil prices have fallen 39.2%. However, when the contango contracts, it can be accompanied by bullish moves in crude oil prices.

Backwardation

When the futures forward curve slopes downward, it’s said to be in “backwardation.” The futures contracts deliverable in the future would trade at lower prices compared to contracts delivered promptly. Oil prices generally move upward during expanding backwardation.

The oil futures forward curve reflects expectations of the demand-supply situation in the oil market. So, oil’s futures forward curve can be an important indicator of the sentiment in oil prices.

For example, the contango premium contracted and oil prices rose in the trailing week.

Futures curve and the energy industry

The futures spread could impact energy stocks in the upstream (XOP) (DRIP) and midstream (AMLP) sectors. US oil producers’ hedging decisions and midstream oil storage and transportation businesses are sensitive to oil’s futures forward curve.

The spread between prompt futures contracts and the contract deliverable in the following month can also impact the performance of the United States Oil Fund LP (USO)—compared to active US crude oil futures.

Read Market Realist’s upstream premier to learn more about upstream stocks.