What Investors Can Dig from the Oil Futures Spread



Oil futures spread

On August 8, 2017, US crude oil (DBO) September 2018 futures settled $0.80 above the September 2017 futures. On August 1, 2017, the premium was at $0.73, and during this period, US crude oil active futures were almost flat.

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Oil prices in contango

When 12-month futures trade above the active futures contracts, oil futures are said to be in “contango.” When the premium expands, oil prices usually fall. For example, US crude oil active futures closed below the $43 level on June 21, 2017. On the same day, the premium rose to $2.62.

Oil prices in backwardation

When 12-month futures trade below the active futures contracts, oil futures are said to be in “backwardation.” When the discount expands, oil prices usually rise. US crude oil active futures rose to the highest pre-crisis closing price of $107.26 per barrel on June 20, 2014. On the same day, the discount rose to $10.53.

The oil futures’ forward curve is an important indicator for oil supply-demand changes. In the trailing week, oil prices were flat, but the contango expanded, raising concerns about a supply-glut situation.

Which energy subsector could be impacted?

US energy subsectors such as US crude oil producers (XOP) (DRIP) and midstream (AMLP) companies engaged in oil storage and transportation businesses are all impacted by the shape of the oil futures forward curve. In contango, US oil producers could store the current production and sell it at a higher rate at a future date, increasing profits and leading to a higher oil stockpile.

Futures prices until May 2018 are now trading at progressively higher prices than the current US crude oil active futures. But oil-tracking products such as the United States Oil Fund LP (USO) may disappoint investors during periods of contango.

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