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Futures Spread: Perhaps Bearish Sentiments for Oil

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Nov. 20 2020, Updated 1:01 p.m. ET

Futures spread

On October 29, US crude oil December 2018 futures closed ~$0.01 below the December 2019 futures. On October 22, the futures spread was at a premium of ~$0.60. Between October 22 and October 29, US crude oil December futures fell 3.3%. In fact, in that period, the futures spread shifted from a premium to a small discount.

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Bearish sentiment for oil

The market sentiment toward 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 shifted from a premium to a small discount, which might indicate a bearish sentiment for oil prices.

US crude oil prices have fallen ~3 percentage points. The factors we looked at in Part 1 of this series could make oil prices fall more. Inventories at 2% above their five-year average might threaten any upside in oil prices, as we saw in the previous part.

Energy stocks

Between October 22 and October 29, oil-weighted stocks for Whiting Petroleum (WLL), Oasis Petroleum (OAS), and Denbury Resources (DNR) fell 14.4%, 19.3%, and 36.9%, respectively, and underperformed their peers.

Forward curve

As of October 29, US crude oil futures contracts for delivery between December 2018 and June 2019 were priced in ascending order. The price pattern is a negative sign for ETFs that follow US crude oil futures such as the ProShares Ultra Bloomberg Crude Oil ETF (UCO) and the United States 12 Month Oil ETF (USL).

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