uploads/2018/01/image003-2.png

Is the Oil Supply Shrinking?

By

Updated

Futures spread

On December 29, 2017, the price gap between February 2018 futures and February 2019 futures was $3. On December 22, 2017, that price gap, or the futures spread, was at a premium of $2.35. On both dates, US crude oil February 2018 futures settled more than February 2019 futures. Between December 22 and December 29, 2017, US crude oil February futures rose 3.3%.

A rise in the premium could push oil prices higher. We saw that on December 29, 2017. That day, the premium reached ~$3, and US crude oil futures were at their highest level for 2017. Oil prices can fall with a fall in the premium.

On the other hand, the spread in discount could pull oil prices lower. On June 21, 2017, the discount reached $2.60, and US crude oil futures were at their lowest level for 2017. Oil prices can recover with a fall in the discount.

Article continues below advertisement

Oil supply

Between December 22 and December 29, 2017, the futures spread premium widened with the rise in oil prices. That could mean that the market expects a reduction in the global oil supply. It would benefit the S&P 500 (SPY) and the Dow Jones Industrial Average (DIA) because of their energy exposure.

Energy sector

The risk management operations of US oil producers (XOP) (DRIP) (IEO) could depend on the futures spread. That also influences midstream companies (AMLP).

On December 29, 2017, US futures contracts from March 2018 to January 2019 settled in a descending pattern. ETFs that invest in oil futures such as the United States 12 Month Oil ETF (USL), the United States Oil ETF (USO), and the ProShares Ultra Bloomberg Crude Oil (UCO) may benefit from this price pattern.

Advertisement

More From Market Realist