contango

[blazespinnaker]

"A condition in which distant delivery prices for futures exceed spot prices, often due to the costs of storing and insuring the underlying commodity. opposite of backwardation. "

Basically, the future price is significantly greater than the spot price, such that you can almost buy oil and store it and automatically profit.

Unfortunately, contago has pushed up production to the point that we're almost at 95% storage and perhaps in 4-6 months, there will be no more room to store oil.

Thesis: sharp declines in oil prices are coming when that happens (or soon after).

[blazespinnaker]

Re: contango

(courtesy of bloomberg radio)

I really recommend everyone to watch/listen to the bloomberg radio/videos on bloomberg.com. Great stuff

[jk]

Re: contango

"A condition in which distant delivery prices for futures exceed spot prices, often due to the costs of storing and insuring the underlying commodity. opposite of backwardation. "

Basically, the future price is significantly greater than the spot price, such that you can almost buy oil and store it and automatically profit.

Unfortunately, contago has pushed up production to the point that we're almost at 95% storage and perhaps in 4-6 months, there will be no more room to store oil.

Thesis: sharp declines in oil prices are coming when that happens (or soon after).

your 4-6 month interval brings us to dec 06-feb 07. we are left with several variables: hurricanes, winter temperatures, geopolitics. if all 3 remain relatively restrained then, yes, it looks like prices could go down. oh, 4th variable- economic slowdown. that might reduce demand too.

[Finster]

Re: contango

"A condition in which distant delivery prices for futures exceed spot prices, often due to the costs of storing and insuring the underlying commodity. opposite of backwardation. "

Basically, the future price is significantly greater than the spot price, such that you can almost buy oil and store it and automatically profit...

Not quite ... it's the futures price that is higher than the spot price. The actual future price is something different altogether. By the time that date arrives, the spot price in general will be different than that "predicted" by today's futures price.

[blazespinnaker]

Re: contango

your 4-6 month interval brings us to dec 06-feb 07. we are left with several variables: hurricanes, winter temperatures, geopolitics. if all 3 remain relatively restrained then, yes, it looks like prices could go down. oh, 4th variable- economic slowdown. that might reduce demand too.

Yeah, it's interesting with supply coming on as well and a possible recession, the future price might dip quite a bit.

[blazespinnaker]

Re: contango

Not quite ... it's the futures price that is higher than the spot price. The actual future price is something different altogether. By the time that date arrives, the spot price in general will be different than that "predicted" by today's futures price.

The future price is in a probability range which is currently predicted by the futures market. It is likely but not necessarily going to be the value predicted by the futures price (which is a contract price that is a small % of the actual price).

When I say the future price of oil is going to be X, I am really shorthanding for the likely price of oil in the future.

Cheers,

blaze.

[blazespinnaker]

Re: contango

Not quite ... it's the futures price that is higher than the spot price. The actual future price is something different altogether. By the time that date arrives, the spot price in general will be different than that "predicted" by today's futures price.

Just for fun, I fully implemented a futures exchange market. It was a lot of fun, writing contract settlement and the entire set of logic for posting trades. Great stuff

[Finster]

Re: contango

The future price is in a probability range which is currently predicted by the futures market. It is likely but not necessarily going to be the value predicted by the futures price (which is a contract price that is a small % of the actual price).

To the contrary, it's quite unlikely that the actual future price will be the same as that "predicted" by the futures price. The futures price is merely the market's best guess. It is often pretty close, but financial markets are inherently uncertain, and the likelihood that even the best guess of the market will turn out to be exactly right is quite small.

[blazespinnaker]

Re: contango

not contrary at all, we're saying the same thing.

peace