Oil: Three Month Roll Breaks the Buck

Real-time Monetary Inflation (last 12 months): 2.1%*

By Brad Zigler

Yeah, I know. Gold made a record-breaking move Tuesday morning. But you saw that coming, right? Not exactly a surprise, that. Spot gold hit a record $1,043.48 an ounce by midday on the back of a wobbling U.S dollar, besting its previous peak of $1,030.80 set in March last year. Mayhem in the forex market ensued after the Reserve Bank of Australia became the first OECD country to hike its key interest rate in the wake of the current recession. There. That's the headline. But there's another headline of equal import. Monday, tremors ran through the NYMEX crude oil market as the three-month roll tightened to less than a dollar a barrel. Nearby November futures settled at $70.41 while the February delivery was pegged at $71.37—a 96-cent spread. So what's the big deal? Just this—a carrying charge market develops when there's more-than-adequate supply. Carrying charges, sometimes referred to as contango, consist of storage, insurance and financing fees. These costs push the price of deferred delivery contracts above the spot market level. Oil tends to live in an inverted, or backwardated, world in which front-month futures actually trade at higher prices than latter months. Since 1985, the NYMEX three-month roll has averaged a negative 16 cents a barrel, reflecting high demand for above-ground supplies. The crude market, however, slipped into contango in June 2008 ahead of the July breakdown that sent oil prices into a record tumble. Since then, the three-month roll has averaged $3.78. That's a positive $3.78, mind you. And that's just the average. At the top of the year, the roll was wider than $15 a barrel. Three-Month NYMEX Roll Vs. U.S. Crude Oil Inventory Contango's shrunk since January as crude oil prices rose. And now, the spread's been pared to less than a buck, a level not seen since October 2008. The oil market's mentality is shifting away from oversupply. It's hard to say when the market might slip into backwardation. The last time oil flipped from contango was July 2007, when it took only 12 trading days from buck-breaking to inversion. If backwardation is accompanied by higher prices—as is usually the case—a breakout move to the $90 level for the nearby contract seems likely. Now, that seems worthy of a headline. Nearby NYMEX Crude Oil (WTI) *Note: The monetary inflation rate is calculated daily and represents the change in our proprietary index over the last 12 months. We update long-term inflation in real time as well. Since 1999, the compound annual growth rate in our index is 4.9%.

Comments

[Ron2008:]

Or is the market realizing that the recovery will be far slower than they thought, so they are running out of buyers for the back months?

It's not lack of supply, it's lack of demand.

Oct 07 03:55 PM

[envoyencore:]

perhaps compounded by a lack of storage facilities/ tankage which are all full to the brim!


On Oct 07 03:55 PM Ron2008 wrote:

> Or is the market realizing that the recovery will be far slower than
> they thought, so they are running out of buyers for the back months?
>
>
> It's not lack of supply, it's lack of demand.

Oct 07 05:07 PM

[Albertarocks:]

"Yeah, I know. Gold made a record-breaking move Tuesday morning. But you saw that coming, right? Not exactly a surprise, that."

Easy to say after the fact, isn't it! One thing we know for sure, you wouldn't be puffin' your chest out like that when gold was rising toward $950.

Oct 07 10:29 PM

[BullnBear:]

Thanks for posting this, I’ve been watching this oil action and it seems odd to me that no one else is picking up on this.

Oct 08 01:12 AM

[Brad Zigler:]

Better check what you "know" ...

See the history of HAI articles trailing back to mid July when gold was, in fact, BELOW $950 encapsulated in "Gold's Breakout Revisited ( www.hardassetsinvestor...).


On Oct 07 10:29 PM Albertarocks wrote:

> "Yeah, I know. Gold made a record-breaking move Tuesday morning.
> But you saw that coming, right? Not exactly a surprise, that."<br/>
>
> Easy to say after the fact, isn't it! One thing we know for sure,
> you wouldn't be puffin' your chest out like that when gold was rising
> toward $950.

Oct 08 07:47 PM