Futures Spread Nearing Discount: US Crude Sentiment Might Reverse

On October 22, US crude oil December 2018 futures closed just ~$0.6 above the December 2019 futures. On October 15, the futures spread was at a premium of ~$2.1. Between October 15 and October 22, US crude oil December futures fell 3.1%. In fact, during this period, the futures spread is heading for a discount that might reflect a possible reversal in oil’s bullish sentiments.

The market sentiment towards the oil demand and supply situation is reflected in the futures spread. Usually, oil prices and the futures spread move in the same direction. In the past five trading sessions, the spread has contracted. US crude oil prices have fallen by just over three percentage points. The factors that we discussed in part one of this series could make oil prices fall more. Inventories at 2% above their five-year average might threaten oil’s upside.

Between October 15 and October 22, oil-weighted stocks Denbury Resources (DNR), Callon Petroleum (CPE), and California Resources (CRC) fell 7.9%, 8.7%, and 11%, respectively, and underperformed their peers.

As of October 22, US crude oil futures contracts for delivery between December 2018 and May 2019 were priced in ascending order. The price pattern is a negative sign for ETFs that follow US crude oil futures like the ProShares Ultra Bloomberg Crude Oil ETF (UCO) and the United States 12-Month Oil ETF (USL).