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Is the Oil Market Reacting to Oversupply Fears?

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Futures spread

On December 11, 2017, the price difference between January 2018 futures and January 2019 futures was $2.4. January 2018 futures closed higher or at a premium to January 2019 futures. On December 4, the futures spread was at a premium of $2.7. The price difference is called the “futures spread.” On December 4–11, 2017, US crude oil active futures rose 0.9%.

If the premium rises or the “backwardation” expands, oil prices could rise. On November 24, 2017, the premium was at $3.6, while US crude oil active futures settled at the highest closing price in 2017. If the premium contracts, oil prices could fall.

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If the “contango” expands, or the discount rises, oil prices could fall. On June 21, 2017, the discount between active futures and futures for delivery in the next 12 months was at $2.6, while US crude oil active futures settled at the lowest closing price in 2017. If the premium contracts, oil prices could fall.

Is the oil supply rising?

On December 4–11, 2017, the premium fell and oil prices rose. The supply disruption in the North Sea could have supported US crude oil prices. However, the rise in US crude oil production could have increased oversupply fears.

Oil’s oversupply concerns are important for the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA).

Energy sector

US oil producers’ (XOP) (DRIP) (IEO) risk management techniques depend on whether the futures spread is at a premium or discount. The same is also important for midstream companies (AMLP).

On December 11, US crude oil futures contracts between March 2018 and January 2019 were priced in a descending pattern. The pattern could be an advantage for oil tracking 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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