Friday, March 6, 2009

Contango Disappearing Fast: Backwardation And USO Profits Next?

The recent run up in oil prices has resulted in some dramatic shifts along the crude curve. When we first discussed the contango effect (and some amusing risk free ideas as a result), the 12 month spread was roughly $25.

Today's NYMEX closing crude curve shows that relationship has collapsed to a mere $7, a 70% drop! At this rate we should get backwardation within the month. This should also help long suffering USO holders, as all the pain they suffered during contango will be a magnified profit under backwardation.

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2 comments: said...

I still think that if you have to take delivery, instead of buying 55 gal drums, renting an oil tanker is the way to go.

brokenleg said...

What is the logic behind why backwardation would manifest itself? Does that not suggest that traders think that oil is going down in the future? A bit of contango seems natural as there is a storage cost.