The virulent crude oil contango that's been both revered and reviled – depending upon your market stance – was halved Tuesday, a signal that inventories may be being drawn down rather than built up.
Of course, there's a lot of money on the table, so traders could be forgiven if they just wanted to rake a few bills into their pockets by closing out their bear spreads. You sell nearby futures and buy deferred contracts in a bear spread; reversing the trade narrows the contango.
Last week, the quarterly NYMEX contango spiked to a record-breaking $15.21 a barrel. By yTuesday's close, the spread had been pared to $7.82. That reduced the potential cash-and-carry to 17%, so there's still bank money in the trade.
The contango wasn't the only spread trimmed yesterday. There was a fair reduction in refining margins, too. The nearby 3-2-1 NYMEX crack spread (for an explanation, see "Crack Spread Yes, Futures No") implied a 34.3% margin Tuesday. The previous Thursday, the yield was over 54%.
NYMEX Implied Refining Margin
Futures-averse traders using the 2-1-1 ETF spread illustrated in the crack spread article, however, made a couple of bucks as the futures spread contracted. The ETF version's created by purchasing equal lots of the ProShares UltraShort DJ-AIG Crude Oil ETF (NYSE Arca: SCO), the United States Gasoline Fund (NYSE Arca: UGA) and the United States Heating Oil Fund (NYSE: UHN).
The spread was worth $79.67 last Thursday. At Tuesday's close, it fetched $81.61.
The vagaries of compounding in the doubly-leveraged SCO fund have more to do with this seeming pricing anomaly than anything else. Still, fund investors aren't looking at this gift horse's teeth.
Enjoy it for now. There's likely a lot more volatility ahead.
