Inside the Oil Futures Spread: Why Traders May Be Turning Bullish


Nov. 20 2020, Updated 12:40 p.m. ET

Futures Spread

On September 19, 2017, US crude oil (USO) (OIIL) November 2018 futures settled at $0.97 higher than the November 2017 futures. On September 12, 2017, the futures spread was at $1.6. Between these two dates, US crude oil November futures rose 2.4%.


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Contango and oil prices

When the futures spread is at a premium as it was in the trailing week, it is referred to as “contango.” When the premium expands, it could impact oil prices negatively.

However, any fall in the premium could help oil prices gain. For example, the premium rose to $12.01 on February 11, 2016. On that day, US crude oil prices reached their 12-year low.

Backwardation and oil prices

When the futures spread shifts to a discount, it is referred to as “backwardation.” When the discount expands, it can impact oil prices positively. However, any fall in the discount could pressure oil prices. For example, the discount rose to $10.53 on June 20, 2014. On that day, oil prices closed at their peak before the three-year downturn in oil prices started.

In the trailing week, the contango contracted and US crude oil prices rose. This contraction of the contango spread likely reflects a rising bullish sentiment among traders.

Energy stocks

A wide enough contango could give an opportunity to US oil producers (XOP) (DRIP) and traders to store current production and sell it at a higher price in the future. It would also add to the existing oil inventory level.

The shape of the oil’s futures forward curve also impacts producers’ hedging decisions, and it impacts midstream (AMLP) oil transportation and storage companies as well.

On September 19, 2017, US crude oil futures contracts for delivery until June 2018 settled at progressively higher prices. Due to the positive sloping futures forward curve, ETFs that are meant to track active US crude oil futures, such as the United States Oil Fund LP ETF (USO)could return less compared to active crude oil futures.

For more updates on oil prices, keep checking in with Market Realist’s Energy page.


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