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Oil Futures Spread: Why the Divergence Is Interesting

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Nov. 20 2020, Updated 1:38 p.m. ET

Futures spread

On November 19, US crude oil January 2019 futures closed ~$0.7 below the January 2020 futures. On November 12, the futures spread was at a discount of ~$1.4. Between November 12–19, US crude oil January futures fell 4.8%.

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Interesting divergence

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. However, in the past five trading sessions, the spread’s discount contracted, while US crude oil prices have fallen by nearly five percentage points.

A possible OPEC and non-OPEC oil producer production cut deal might have helped the spread to contract, while oversupply concerns might have kept a lid on oil prices. Moreover, inventories at 5% above their five-year average might threaten any upside in oil prices, as we saw in the previous part.

Energy stocks

From November 12–19, oil-weighted stocks Whiting Petroleum (WLL), California Resources (CRC), and Denbury Resources (DNR) fell 8.3%, 8.9%, and 13.1%, respectively, and underperformed their peers.

Forward curve

As of November 19, US crude oil futures contracts for delivery between January and December 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).

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