Premiums for deferred delliveries shrink when supplies tighten because traders want their oil sooner ratther than later. Nearbys are bid up and later deliveries lag. In the extreme, deferred prices imply NO carry costs because there's no inventory to store. Everybody wants their oil NOW.
Stasis for the oil market is actually a mild backwardation, reflecting the relative scarcity of supply (most oil is underground or undersea). Since 1985, the quarterly roll in the front end of the NYMEX WTI curve has averaged 4 cents a barrel. The discount was actually 12 cents deeper before the oil market flipped to contango in June 2008. Since then, the quarterly roll has averaged a $2.97 contango.
What you're seeing now is a market trying to transition back to inversion. The WTI curve is actually "humped" -- a carry charge market out to the November 2011 delivery and inverted thereafter.
The front months are where most of the commercial activity is concentrated, though there are pockets of liquidity in certain deliveries (June and December) in future years.
The front-loaded carry charge market indicates a mindset among traders that supplies will remain relatively abundant through November 2011, but afterwards -- as the economy steadies, demand increases and stocks worked down -- supplies may again tighten.
Sort of. First, buy a cargo of deliverable grade crude (under the terms of the WTI contract), then sell an appropriate number of NYMEX contracts. Thus, you straddle two markets: cash and futures.
The one-year Treasury rate bottomed in the November 3 weekly update, a month after the carry discount broke above its downtrend line and confirmed the nadir of August 11.
The compendium offers you a weekly update on key indicators that can be strung together into trends.
Take, for instance, the gold market carry premium/discount illustrated by the graph. A single weekly data point tells you very little about market expectations for interest rates. However, when several points are plotted over time, changes in expectations -- which tend to predict actual rate movements -- can be discerned.
In this case, the reversal in the discount's trend presaged the recent turnaround in one-year Treasury rates by three months.
The second installment of the primer show you how to construct a weighted matrix of user-defined indicators to arrive a weekly inflation consensus.
The point of all this is to facilitate critical evaluation and integration of market signals. That way, investors can think for themselves about inflationary trends rather than relying upon punditry.
Its harder for our economy to recover WITHOUT consumer spending/borrowing than before. We've transitioned to a service economy as our manufucturing base has eroded.
The "stasis" mentioned in the first quote refers to the average futures slope over a multi-year period. Specifically, the mean 3-month roll stretching back to 1985 (some 6,500 trading days) amounts to -4 (negative four) cents a barrel.
Garrison Keillor and the Association of English Majors would caution you to parse the second quote more carefully: The rarity is a contango of less than a buck SINCE JUNE 2008 -- a period of only 635 trading days (to date).
The oil market often flips between contango and backwardation. The backwardation that ended in June 2008 lasted 222 trading days. Preceding that, a contango persisted for 612 trading days.
Let's not forget, either, that the precipitous drop in prices ($110/bbl) shown on on the chart above occured when oil was in contango. Oil prices have yet to recover that ground.
For someone nicknamed "ETF'STER" it should matter a LOT. Which would you rather have inside your oil fund, a positive or negative roll yield?
The fact that a market is in contango doesn't preclude price increases, it just limits their velocity and trajectory. Contango acts as a governor, not a parking brake.
The focus of this article was gold futures -- not gold stocks. If you don't know what a trading ring is, and you don't know how open interest ebbs and flows, you clearly don't understand futures, an impression bolstered by your statement that "commercials are always net short because they're supposed to be."
You purport that a drawdown in commercial short positions is somehow "unusual." Yet, there was a similar decline in commercial concentration in the week ending July 20, just ahead of a $33 sell-off.
If, as you say, you're interested in gold mining stocks, stick with that. Just don't bother with futures.
Your sweeping and conclusory statements, e.g., that the trading of the "underlying metal ... [and] ETFs ... are the province of opportunistic Weak Longs - many of them long-term Gold haters," are incredulous.
Maligning traders by name-calling isn't the hallmark of cogent argument. Where's the factual foundation for your contention?
If money managers sell out long positions and open interest declines, it means other traders are buying to cover shorts, not establishing new long positions.
If you looked at the trader data, you'd find that exactly's what happened in the last reporting cycle. Producers, processors and dealers lightened up on their net short positions by the same degree that hedgies and other institutional accounts unloaded longs.
That leaves the market weaker, not more bullish. And it's NOT so unusual.
The December contract is used by commercials to manage inventory risk ahead of the Christmas season. They'll typically offset futures ahead the delivery month to transact their bullion in the cash market.
If you'd been around trading ring awhile you'd know that.
Merger deals, real or rumored, don't drive gold futures. The r-squared coefficient of the GDX and GDXJ portfolios to spot COMEX over the past year has been just 47%. No one who understands statistics would impute causation from that. In either direction.
If you'd been around the trading ring a while, you'd know that, too.
Gold Miners: A Bearish Hedge for Chickens [View article]
Oil: Sometimes It Pays to Carry On [View article]
Stasis for the oil market is actually a mild backwardation, reflecting the relative scarcity of supply (most oil is underground or undersea). Since 1985, the quarterly roll in the front end of the NYMEX WTI curve has averaged 4 cents a barrel. The discount was actually 12 cents deeper before the oil market flipped to contango in June 2008. Since then, the quarterly roll has averaged a $2.97 contango.
What you're seeing now is a market trying to transition back to inversion. The WTI curve is actually "humped" -- a carry charge market out to the November 2011 delivery and inverted thereafter.
The front months are where most of the commercial activity is concentrated, though there are pockets of liquidity in certain deliveries (June and December) in future years.
The front-loaded carry charge market indicates a mindset among traders that supplies will remain relatively abundant through November 2011, but afterwards -- as the economy steadies, demand increases and stocks worked down -- supplies may again tighten.
Oil: Sometimes It Pays to Carry On [View article]
Oil Market Firming Ahead of Inventory Reports [View article]
Gold’s Relatives: Mining Stocks [View article]
Inflation Scorecard: Gold’s Mixed Performance [View article]
Inflation Scorecard: Gold’s Mixed Performance [View article]
Take, for instance, the gold market carry premium/discount illustrated by the graph. A single weekly data point tells you very little about market expectations for interest rates. However, when several points are plotted over time, changes in expectations -- which tend to predict actual rate movements -- can be discerned.
In this case, the reversal in the discount's trend presaged the recent turnaround in one-year Treasury rates by three months.
You can find a two-part primer for these indicators on the Hard Assets Investor (HardAssetsInvestor.com) Web site at
www.hardassetsinvestor... and at
www.hardassetsinvestor....
The second installment of the primer show you how to construct a weighted matrix of user-defined indicators to arrive a weekly inflation consensus.
The point of all this is to facilitate critical evaluation and integration of market signals. That way, investors can think for themselves about inflationary trends rather than relying upon punditry.
What’s a Fed to Do? [View article]
Oil Rally: Another Head Fake? [View article]
None at all, really.
Seasonally, spreads have moved in a positive direction (widening the contango or narrowing the backwardation) in nine of the past ten years.
The outlier was 2006 when the three-month roll shrank from a $3.96 contango to $3.11 between November 6 and December 6.
Oil Rally: Another Head Fake? [View article]
Garrison Keillor and the Association of English Majors would caution you to parse the second quote more carefully: The rarity is a contango of less than a buck SINCE JUNE 2008 -- a period of only 635 trading days (to date).
The oil market often flips between contango and backwardation. The backwardation that ended in June 2008 lasted 222 trading days. Preceding that, a contango persisted for 612 trading days.
And so on ...
Oil Rally: Another Head Fake? [View article]
Oil Rally: Another Head Fake? [View article]
The fact that a market is in contango doesn't preclude price increases, it just limits their velocity and trajectory. Contango acts as a governor, not a parking brake.
If Gold Sells Off, Whither Silver? [View article]
A Holiday Gold Sale? [View article]
You purport that a drawdown in commercial short positions is somehow "unusual." Yet, there was a similar decline in commercial concentration in the week ending July 20, just ahead of a $33 sell-off.
If, as you say, you're interested in gold mining stocks, stick with that. Just don't bother with futures.
Your sweeping and conclusory statements, e.g., that the trading of the "underlying metal ... [and] ETFs ... are the province of opportunistic Weak Longs - many of them long-term Gold haters," are incredulous.
Maligning traders by name-calling isn't the hallmark of cogent argument. Where's the factual foundation for your contention?
A Holiday Gold Sale? [View article]
If you looked at the trader data, you'd find that exactly's what happened in the last reporting cycle. Producers, processors and dealers lightened up on their net short positions by the same degree that hedgies and other institutional accounts unloaded longs.
That leaves the market weaker, not more bullish. And it's NOT so unusual.
The December contract is used by commercials to manage inventory risk ahead of the Christmas season. They'll typically offset futures ahead the delivery month to transact their bullion in the cash market.
If you'd been around trading ring awhile you'd know that.
Merger deals, real or rumored, don't drive gold futures. The r-squared coefficient of the GDX and GDXJ portfolios to spot COMEX over the past year has been just 47%. No one who understands statistics would impute causation from that. In either direction.
If you'd been around the trading ring a while, you'd know that, too.