Crude Oil Term Structure: Winners And Losers

by: Sammy Pollack

The crude oil term structure has moved to a mostly backwardated state. Backwardation has a positive impact on some oil related securities and a negative impact on other securities.

Futures Prices

WTI Light Sweet Crude Oil

Feb 2012: $101.35
Mar 2012: $101.51
Apr 2012: $101.80
May 2012: $101.99
Jun 2012: $102. 20
July 2012: $102.38
Aug 2012: $ 101.45
Dec 2012: $100.77
Jul 2013: $ 98.55
Nov 2013: $ 97.47
May 2014: $95.49

Brent Crude Oil

Mar 2012: $110.66
Apr 2012: $110.57
May 2012: $110.45
Jun 2012: $110.27
July 2012: $110.06
Aug 2012: $ 109.76
Dec 2012: $108.15
Jul 2013: $ 105.15
Nov 2013: $ 103.53
May 2014: $101.22

As you can see, both Brent and WTI are in backwardation over the long term. This is not the natural term structure for oil. In theory, oil should be in contango because of the storage factor and interest rates. For example, oil for delivery in May should cost more than oil for delivery in April because the oil must be financed and stored for more time. Oil is in backwardation primarily due to the tensions in the middle east. Further action on the part of Iran could easily send oil sky rocketing higher. While critical, the market views the Iranian situation as temporary. In the long run, the market is pricing in the potential for alternative fuels and increased oil production in the U.S. and Canada.


The major beneficiaries of the oil term structure are the oil futures ETFs. The largest and most popular oil futures ETF is the United States Oil Fund. (NYSEARCA:USO) According to its prospectus,

"The investment objective of USO is for the changes in percentage terms of its units' net asset value ("NAV") to reflect the changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the price of the futures contract for light, sweet crude oil traded on the New York Mercantile Exchange."

This means that USO is constantly "rolling" out of the front month contract and into the next month. When the oil market is in contango, this phenomenon leads to loses for USO as the fund if forced to pay a premium to roll its contracts. USO is benefiting from a lack of contango in the near dated futures because USO can roll its holdings over without paying much of a premium. In the future, if the term structure remains the same, USO will actually be able to roll over its contracts for a lower price. Other ETFs that will benefit from the same phenomenon of reduced contango are ProShares Ultra Crude Oil (NYSEARCA:UCO), and United States Brent Oil Fund (NYSEARCA:BNO)

Another major beneficiary of the term structure are the airlines. Airlines such as Southwest (NYSE:LUV), JetBlue (JBLU, Delta (NYSE:DAL), United Continental (NYSE:UAL), and others who hedge fuel cost are able to do so at a lower price in the future. Instead of paying a premium to own oil in the future, these airlines are actually able to lock in prices for the future that are lower than current prices.

Adversely Affected

The companies that will be negatively impacted by the crude oil term structure are oil producing companies and oil tanker storage companies.

Oil producers such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), BP (NYSE:BP), and other companies included in the Energy ETF (NYSEARCA:XLE) are looking at lower prices in the future. For these companies to lock in sales for the future, they will be forced to take a lower price. Even if these companies do not sell their production forward, the super high oil prices appear to be a short term phenomenon.

Oil tanker storage companies are hurt by the term structure because there is no incentive to store oil for any period of time. Some of the most affected companies are Nordic American Tanker (NYSE:NAT) and Frontline (NYSE:FRO). These stocks have performed very poorly thus it appears the unfavorable terms structure is priced into these names already.


The oil term structure is good for some securities and bad for others. Betting on the ETFs instead of the oil companies is the better way to play oil right now. If the "middle east" premium were to come out of the market and oil were to go back to contango, then the stocks woulb be better plays than the ETFs

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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