Thanks again Jeff - as before - the 2016 futures is leading the pack (not shown in graph). Was up $9.50 to $139.50 while front month was only up $2.00 to $129 - so there is $10+ of contango on the long end...

I think part of the shift relates to risk management ON THE PART OF PRICE MAKERS - what is the incentive to short (or sell) oil years hence -i.e. 2016 (to buyers-customers) at a discount to the spot price/front month in a tight market. The price maker has to sit on 7 years of "disruptions" and needs the price to fall just to be in court. As oil prices rise, nominal swings become bigger, and therefore a premium for long dated prices would be natural. Have been expecting this shift to kick in, above 100, for best part of 5 years. Think the curve should add 10 bucks per year (i.e. 150 front/220-250 back end). Issue of storage is lack of availability of storage facilities and oil tankers for movement of cargo.

But believe the real driver right now is pre-positioning for news flow coming JUNE

However, it will have a major impact on policy-makers and sentiment if sustained: market expects higher prices and therefore more inflation, dollar devaluation. Hoarding could be spurred by "cheap" front end versus expensive back end - could significantly boost short term demand and the front contracts.

My 2¢ worth:

In my opinion, we are looking at an accelerating net oil export decline rate, combined with a requirement for an accelerating rate of increase in oil prices, in order to balance supply & demand, as forced energy conservation moves up the food chain.

Let's take all consumers in all oil importing countries and break them into five groups, and then rank them by income. So, at the bottom of the bottom quintile, we have a poor Third World consumer. At the top of the top quintile, we have Bill Gates. As we go up the income ladder, the cumulative purchasing power vastly increases, which as noted, IMO, suggests a requirement for an accelerating rate of increase in oil prices in order to balance supply & demand.

I think that these two factors will interact--and are interacting--to produce the following oil price trend: $50, $100, $200, $400, $800 . . .

The question is the time period between the doublings.

Hello Jeffvail,

I hope contango will increase the Peakoil Shoutout* fandango in pubs.

* When your favorite yeasty beverage glass reaches half-empty--you shoutout Peakoil in recognition of finite limitations and maximum attainable flowrates.

I am constantly trying to make this a new cultural tradition. Please encourage others to participate. I can think of no better way to posthumously honor Marion King Hubbert.

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

I think that it's also worth pointing out that, while this has been a dramatic swing that must be apparent to traders, it has received virtually no coverage in the US press. The UK Telegraph and the Financial Times covered the story peripherally, but there has been no mention that I'm aware of on any of the network or cable news programs (including CNBC, which must require actively working to avoid the topic seeing as they talked about oil for hours today! A search of their website shows no use of the term "contango" during 2008)...

Is this ignorance on the part of the financial pundits, is it a belief that their audience isn't capable of understanding the discussion, a desire to not address the topic, or do they genuinely believe it isn't newsworthy (despite the fact that the UK press seems to feel otherwise)?

I wonder where our old friend Hal Finny (Halfin) is now with his constant theme of 'the market knows best'???

The far future months in the crude futures market always seem to reflect whatever is happening with crude presently. If you look back over what the futures "curve" was 5 years into the future, it's always about whatever trading was at that particular year, and was never much of a prediction at all up or down. The next time we get a snappy pullback, the oil bears may have the 5 year out price coming back down again. They may be just clueless as usual, these guys that set 5 year out price by however the wind is blowing this month. Maybe they're not really waking up to peak oil theory that much.

One has to wonder if the sharp change in pricing has anything to do with the conjecture that's been going on about a strike on Iran that I discussed here. The time frame would certainly agree - over the last month or so. That's one alternative explanation to that of all these people suddenly getting smart about peak oil theory in just one month.

I think that any time the market goes into contango, the answer is most likely a simple one. Large consumers want to lock in a price and have a known cost at whatever point in the future, and sellers are content to take the "market risk", or just accept whatever the prevailing price is at that time.

I cannot give any type of link for this opinion, but have plenty of experience in the psychology of the energy markets, and have felt that it is simply risk aversion on the demand side, and risk acceptance on the production side. Any producer today should be willing to accept the risk of selling a resource (I can't bring myself to refer to oil, gas, or any refined product as a commodity in this day and age) which is finite and depleting at market out there in the future. Small oil producers who I know have been burned by hedging and generally will not hedge - if we have a problem in the field, it becomes one at the bank if we are hedged.

So, IMHO, the contango pricing is caused by there being more buyers than sellers, and thus the price has been pushed higher at distant strike dates. Similiarly, I feel that there was a contentment among large consumers to be buying at market, since everybody else was, and as a result, we went into backwardation. Something has fueled the desire to protect themselves on the part of those consumers who are now going long, which tells me that the message on peak oil is getting greater acceptance.

Is it possible to get the volumes of these future contacts compared with "current" contracts? I'm wondering if the volume might be low and this is a tail-wagging-the-dog effect?

Alaron's Phil Flynn is on the case:

As oil continues its meteoric rise, the markets debate the reality of "peak" oil. Many analysts believe that the market has reached a point of peak oil, where the world is reaching the end of natural oil supplies--which means oil prices will only go higher because demand will persist in outstripping supply. But others have pointed to the market itself and noted that if the long-term fundamentals were predicting continued higher prices, then the back month oil future contracts would reflect this.

Flynn suggests that a shift is starting to occur that may win the argument for the peak camp. Today, as oil hits a new record high, the back month contracts for delivery up to eight years out are all trading higher. Some analysts and traders think that the market is finally recognizing the real possibility of supply disruptions, and that oil traders may be taking a longer-term view on the situation. Instead of discounting the near-term demand spikes by selling the further out contracts, the market is actually acting like it may "pay to put oil away." In other words, if oil industry participants believe that prices will maintain at these levels, then they will gladly store it in hopes that they can charge even more down the road.

Hello TODers,

Recall that the US Congress wants to sue the OPEC cartel. Is this info below just another sign of Peak Everything?

http://www.financialpost.com/story.html?id=527670
-------------------------
India accuses fertilizer makers of price fixing

...Complicating matters is the fact potash and phosphate deposits are concentrated in a few countries and produced by few firms, which are organized into three marketing groups, including Canpotex, which sells Saskatchwan potash on behalf of Potash Corp. and two other producers. While they have existed for years, Mr. Awasthi alleged industry consolidation had emboldened them - as well as players in the more fragmented nitrogen market - to raise prices too aggressively. "They are manipulating the market," he said.
---------------------------
For TOD newbies: I have posted many prior weblinks and discussion on I/O-NPK and sulfur, and how Peak FF's double-whammy upon this global process and supply chain will make fertilizers and food an incredibly contentious postPeak issue.

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

Unless I recall incorrectly, the crude oil futures curve moved to a full length contango in January/February 2007--largely as a result of the front months getting pulled down hard on the warm-weather event. It did not last long. Also, I recall the Curve got very, very close to another full length contango in Q3 2006. However, the contango(s) that I recall were not as strong as this one is now.

That said I have the following views about the Curve. 1. The term structure is both a reflection of views--but, also becomes an inducement of certain behavior. 2. The most interesting moments are right before and right after the passage between backwardation and contango, in either direction.

The current move to contango will induce the building of storage. And, when you consider this is the behavior that will be induced, you then realize how difficult it really is to sustain a full-length contango. After all, there is now a new buyer for the front part of the curve: the buy and store participant, who will seek to purchase near(er) months/years and then sell further months/years. This puts renewed upward pressure on nearer months/years, and new downward pressure on the farther years. That's makes contango hard to sustain...

...And so, the bottom line: if this contango can be sustained, it pretty much means one thing, and one thing only.

And we all know what that is.

Gregor

http://www.ft.com/cms/s/0/c2955660-2696-11dd-9c95-000077b07658.html?ncli...
Shortage fears push oil futures near $140
By Carola Hoyos and Javier Blas in London
Published: May 20 2008 19:06 | Last updated: May 21 2008 00:52

Fears of a shortage within five years propelled long-term oil futures prices to almost $140 a barrel on Tuesday, further stoking inflationary pressures in the global economy. Investors rushed to buy oil futures contracts as far forward as December 2016, pushing their prices as high as $139.50 a barrel, up more than $9.50 on the day. The spot price hit a record $129.60 a barrel.

Veteran traders said they had never seen such a jump and said investors were increasingly betting that oil production would soon peak because of geopolitical and geological constraints. Neil McMahon, of Sanford Bernstein, said: “Peak oil views – regardless of whether right or wrong – are seeping into the market and supporting high prices.”

All this talk of prices, and no mention here of demand destruction as prices climb. Within the time frame of 2015 presumably the futures markets are factoring that in and assuming that demand will remain high. But shouldn't we assume that a spreading global recession results from increasing prices for oil? And doesn't that moderate the price?

Or perhaps the calculations of futures traders already include that? I find it unlikely that they do... or if they do, they would appear to place that oil price induced recession further out, and at a higher price point than they predict for 2015.

A global economy in a recession induced by high oil prices might hit a series of bumps going down... as global demand destruction reduced prices to a point where recovery began.... and then recovery leads to bidding up prices until marginal producers are squeezed by energy prices into bankruptcy again, producing new recession.... only to begin growth again at a new lower price point, temporarily made possible by low global demand. Each time the recession recovery is smaller and returns the planet to lower level of net economic activity because the oil available for that activity is continually declining in availability.

I call this the bumpy descent, and I'm surely not the first person to describe it. (I'd be curious who has articulated this, if anyone knows.)

The deep problem with this scenario is the structural effect of repeated recessions.... each time on a reduced energy supply base, and each one leading to a oil price escalation that creates a new crisis and a new recession. It would be a bumpy way down.

We've spent 150 years watching energy fueled expansion, but have very little experience with a decade long energy descent process. The shape of that curve is fascinating to speculate on.

A bit of irony- look at the first paid ad on the column to the left..

For posterity: http://img337.imageshack.us/img337/2963/todlolsx7.jpg

Contango
Contango is actually a good thing to smoothe the peak. If you have oil to sell and you will be getting more money now for a late delivery than for an early delivery, oil will be preserved for the years to come. This is why actually speculation is a good thing.
I agree that contango will not exceed the market price for storage. You do not have to include cost of money, because with futures only delivery but not payment is delayed.
Contango also means that heavy oil users have to pay the real price. In the past airlines were able to buy future oil contracts at a huge discount. Now they have to pay the real price.

Steady Price Increase and Bubble
Due to peak oil, oil prices will be going up. But at the same time the price will be much more volatile. With all that increasing media attention I expect that a bubble is created on top of a steady climbing oil price. This bubble will burst some time in the next months to years. When this bubble bursts prices will temporarily go down significantly but will rebound to a level far beyond current prices in the long run.

Surely we must view this occurrance as a good thing?

Think of the positive benefits:

1. Oil Company investment plans: those oil companies dithering on whether or not to gamble on the next big project will now see that the project will not come to fruition amidst a collapse in oil price. Cantango will give the green light to many projects that would otherwise be shelved.

2. Renewables: in a world of expensive oil all the substitutes suddenly take on new meaning. If my 'solar-PV-Gigawatt' thingy is only economical at prices above $100 then no one is going to invest in it if they think prices are going back to $50...

3. PO Credibility: high prices focuses attention on the underlying problem -our innefficient XYZ (societal structure, transport, methods of manufacture, living, recreation, etc, etc, etc.). In a world of cheap energy "no one gives a sh*t", in a world of expensive energy things become more precious and savored...

Now, how do we get gas prices down to a buck a gallon again? :o)

Nick.

Oman 1M above $143
http://www.upstreamonline.com/market_data/?id=markets_crude

WTF is going on?

Oh this is fantastic, it is the peak oil tipping point. I have waited for this event for years. I've pasted some oil price related quotes from some articles I read earlier this decade.

"Once the physical peak happens and physical production begins to decline, there will be no way to maintain any form of price stability. Prices will begin to spiral upward, out of sight." - Mike Neligh

"Prices simply measure states of mind. This means that economists issue opinions on opinions. In short, economists are pollsters with an attitude." - Jay Hanson

"In fits and starts prices will rise and then fall, spiralling upward because of real shortfalls in the distribution system, or in anticipation of shortage, then dropping as over-speculators take a bath, only to rise again and then fall again, but with prices always rising further and falling back slower as supply constricts." - Winston Smith

"A gap opens up between the need for oil and the reduced quantity actually flowing. Prices are set by the marginal barrel of oil sold to a market which cannot get enough." - David Fleming

"With supplies at very low levels throughout the world and diminishing prospects for large new areas of production, it will soon become clear that world oil supplies will decline irrespective of price. As the calls for OPEC to increase production become deafening, the world will soon wake up to the fact that OPEC is already producing at maximum capacity and there is nothing that can be done to increase production or keep it from falling." - Bill Powers

"By the time you get to about 2015, you reach the point where demand is far outstripping production, by several million barrels a day. Prices will go through the roof, and this will absolutely kill economies in the process." - Jamal Qureshi

Petroleum is the dominant energy source for the transportation network that undergirds the global economy, and the planet's most plentiful, most versatile, most transportable and most efficient energy source. In a very real and measurable sense the price of every other energy source we have floats on a "subsidy" of cheap petroleum." - Winston Smith

"The fear for Washington will be that not only will the future price of oil not be right, but the currency might not be right either. Which
perhaps helps explain why the US is increasingly turning to its second major tool for dominating world affairs: military force." - Coílín Nunan

"It will puzzle economists. The economy will slow down but the prices of everything will keep on rising. We will then rediscover the age-old truth: money is not a real thing; it is only an accounting device. Congress can't print oil and they can't repeal the Second Law of Thermodynamics." - Winston Smith

"The end of this decade could see spiraling food prices without relief. And the coming decade could see massive starvation on a global level such as never experienced before by the human race. Under a die-off scenario, conditions will deteriorate so badly that the surviving human population would be a negligible fraction of the present population. And those survivors would suffer from the trauma of living through the death of their civilization, their neighbors, their friends and their families. Those survivors will have seen their world crushed into nothing." - Dale Allen Pfeiffer

On the other hand. Petrobras ( now the worlds 6th biggest corporation by market value) is supposedly spending $30 Billion on 40 new Deepwater rigs to fully exploit the Tupi and associated fields 3 miles down off Brazil. Plan this to happen around 2015 - 2017. Wonder if we'll get there. Maybe they see plenty of profit at $500 per barrel about that period??

Jeff,

this is academic, I admit, but correct me if I'm wrong. Definitions in italics to differentiate from colloquial use.

(1)
Market is normal, when the futures curve for that market shows the price of contracts of later maturity as higher. In your first image, this would be the 19-May and 20-May graphs, which show the price of contract for future maturities rising as a function of time (e.g. the longer the maturity, the higher the price). Those are normal futures curves. Curves earlier (those in the graph) were inverted. These definitions are always done with a 'snapshot in time' of a futures market (and not from a period of time advancing).
Ref: http://tinyurl.com/5prwbk

So, correct statement is that Oil futures market have gone from inverted to normal.

Image from Investopedia

(2)
Prices are in contango when the prices of contracts decrease as time goes by (i.e. they fall to the level of expected future spot price). This is not the same as normal futures curve, as that looks at the price of the futures at various maturities in one point in time. Contango is when the actual price of maturities fall over their lifetime (we have to measure it at various points in time). As you conveniently have several snapshots in your image, we can also say that the prices of all maturities graphed have NOT fallen, but have risen throughout their plotted lifetime change (9-Apr -> 20-May). Example: look at Dec'10 maturities which have increased in price from relative price differential of -12USD @ 9-Apr to c. +3USD @ 20-May. This means that their price has risen over their lifetime, the exact opposite of contango, also known as normal backwardation (not same as plain backwardation).
Ref: http://tinyurl.com/5prwbk

Image from Investopedia

Again, a correct statement would be that for crude oil futures with maturities from Dec '08 to Dec '15 the prices are in normal backwardation in the current market situation.

Caveat emptor: I am not an economist, not a futures expert nor do I play one online.

Is it really as easy as looking at the current price and future price to determine contango vs backwardation vs something else? Here is a good article which explains the terms and that it is not that easy: http://www.investopedia.com/articles/07/contango_backwardation.asp

Perhaps like many of the Peakniks here with (apparently) a even more realistic view of the future oil price scenarios than the professional futures traders, I have had the guilty pleasure of making some good oil-related stock investments.

Of course, as this article suggests, I would have done better by investing in futures, or options on futures.

Below is an interesting comment from Jim Kingsdale regarding his strategy using futures options and LEEPS:

http://www.energyinvestmentstrategies.com/2008/02/23/my-crude-oil-future...

The way I have implemented the strategy is to own options on
long term futures contracts. Specifically, I have concentrated
on contracts expiring from late 2012 through late 2015.
I own calls on contract with strike prices in the range of $100 to $120.

The advantage of owning options on futures contracts rather than
the contracts themselves is, obviously, that the downside risk is
limited to the price you pay for the options. So if something should
happen to cause the oil price to plummet to, say, $75, the option price
will decline but not anywhere close to the decline that will be experienced
by the value of the futures contract itself. This is important in
part because it allows the option holder to hold on to his option
through what will no doubt be a temporary decline in the oil price.
When the price eventually recovers and goes on to $150, $200 and
beyond, the option holder will maintain her position. That is why this
is an investment strategy, not a speculation strategy

The way an investor can make the specific decisions on which instrument(s)
to buy is, like anything else, to do some comparison shopping. Find out the
price of options at various strike prices and various expiration dates. Then
decide which option(s) suit your risk/reward tastes.

If you do not understand the paragraph above, do not feel dumb. It is
simply a matter of experience. In that case, you can achieve similar
results by buying long term options called "LEEPS") on stocks that
are ETF’s that represent the price of oil. For specific trades,
consult your stock broker. If he does not know what you are
talking about, you may need a new broker. Any reputable brokerage
firm should be able to offer these products.

If you want to pursue the options on futures strategy but do not
presently have an account at a firm that trades futures contracts
and options on futures contracts, you will need to find such a firm
and open an account. Information on futures firms is easily available
on the net, or you could ask your current stock broker for a
recommendation. If you have a "private client" relationship at a
bank or investment firm, they should also be able to solve this
problem for you in one way or another.

His strategy seems pretty low risk. Any critiques or suggestions re this?

Cheers,
-- Mike

Evolutionary psychology and peak oil:
A Malthusian inspired "heads up" for humanity.
http://drmillslmu.com/peakoil.htm

To me, this is the first good evidence that I have seen that we may be witnessing a bubble in oil. Note that I said "may".

I have spent the last six months explaining to folks how you can't have a bubble in the front month contract (outside of variability in physical storage which, in the case of oil, is fundamenmtally negligible), so don't give me any not possible to have an oil bubble nonsense.

Ask yourself what a bubble in oil would look like on the futures market.

The front month cannot be significantly tampered with by speculators to any significant degree, it is relatively tightly tied to the quantity demanded at the price. However, speculators can definitely move more distant contracts away from the fundamentals, particularly over short time periods. There can be a speculative bias in these contracts.

The proposition that there has been a tipping point in market awareness is in some ways a reasonable one - the futures market would be behaving in a similar way. In fact, i cannot imagine a way to distinguish it from a bubble in long dated oil futures. But I think it is definitely more reasonable to suspect a bubble in distant month futures rather than a tipping point in awareness.

To make it clear, I do not think there is a bubble in the front month, or at least, it must be very small. However, it is very hasty, in my opinion, to declare the behaviour of this market to be indicitive of a tipping point in awareness. Think of it this way. Which do you think is more likely?

a) A whole lot of people with a whole lot of money all figured this thing out or became convinced over the last few days. Has there actually been any new evidence which is that convincing? New evidence?

b) People have seen or heard about people they know who have made a killing in the run up over the last 15 months by buying and holding oil futures, and they figure they want some of that action too.

In a lot of ways the two scenarios are similar. One similarity is that they are both stories about a tipping point. The key difference, however, is how the holders of distant futures will react when we see the next example of typical volatility in the downward direction. If you need some help convincing yourself that b) may in fact be the more likely answer, have a look at the oil price movement over the past 15 months. It is a trend followers dream. Classic bubble juice. In any case, of the two tipping point stories, the bubble tipping point is a phenomena which is commonly observed.

WTIC at Stockcharts.com

If people are not seeing the distant contracts as potentially a bubble, it may be because they have been seduced by the (correct) "can't have a bubble in the front month" argument, and incorrectly generalized (possibly unconsciously) to the distant month contracts.

Good luck all with the trading.

I'm not always the best person at interpreting things, so in Westexas' UK/Indonesia/ELM chart above, are we to take the negative year-over-year changes in net exports in year 1 as indicating a fall from year 0? Meaning that at the most recent production peak, net exports were lower than the year before?

Can someone update the chart with today's (Wed 5/21) closing prices? There was a large jump in the front month. I'm curious if it was across the board.

Another perspective...

The Energy Report
Phil Flynn
pflynn@alaron.com
May 21, 2008

The Energy Report for Wednesday, May 21, 2008

Has the market finally priced in peak oil.... again? Welcome back to the world of oil market contango where the far out futures are trading at a higher price than the front end of the market.

One of the reasons why we keep hearing that oil has made this unprecedented and historic run is that the world was running out of oil. Of course you had to wonder if that was indeed the reason, then why in heavens name were the further out futures contracts trading as much as a ten dollar discount to the front month contracts. The far out futures months, which are supposed to have mystical powers of predicting the future, were actually signaling lower prices in the far out future ignoring the buying frenzy that was basically confined to the front end of the crude oil curve. If the world was running out of oil then why was it cheaper next year as opposed to this year? If we had less then shouldn't it cost more? Well that was at least until yesterday when the market,, after the fronts wild bull ride, somehow decided that yes indeed we are running out of oil and it decided that officially - I guess - yesterday.

What use is this for the normal human being? Seeing that until yesterday the market was in backwardation (a phenomena where the front month futures contracts trade at a premium or higher price to the back month futures) one must wonder if this signals just more wild bullishness to come or should we worry that the change is a sign that at long last a top is near in the front end of the oil curve. Because let's face it, if the backwardation signaled a falling market as oil futures rallied almost $50 a barrel from the low, perhaps the switch to contango could signal the opposite.

When I got bullish oil when we were trading the twenties my critics said you can not be bullish oil because we were in backwardation and the far out futures are signaling lower prices. If you believed the backwardation you would have been bearish when you should have been bullish. The same was true for recent times. So maybe the change to contango is a significant sign that perhaps we are closer to the end of the run at least in the front end of the market. What it also could be signaling is that right now that demand for oil is much weaker than expected.

Oil supply is plentiful and the truth is demand is lousy here in the US yet stronger than expected growth numbers in Europe and business confidence in Europe is showing that they have been shielded somewhat by the strong Euro. Still that may not matter as the market is betting on more dollar weakness. Oil got a boost by the fact that the June contract was expiring and inflation fears are gripping the globe. The dollar got pummeled on the perception that inflation wary Europe would not cut rates putting further pressure on the weak dollar. Of course in a weird way that may fuel more inflation as the weak dollar is actually a major cause of a lot of the inflation in the first place. If Europe stays behind our curve it is the classic catch 22. The bottom line is that if Europe raises rates it will hit the dollar harder thereby driving up commodity prices putting more pressure on over all inflation. Europe’s tough stance on inflation may actually create more inflation.

So if the world is indeed running out of oil and oil producers cannot keep up with demand then what is one to do? Ah yes, that’s the ticket! Sue OPEC! That’s right! That would be your first and brightest thought. Well at least that’s what the US House of Representatives Brightest thought was. The House passed a bill that would subject OPEC oil producers to the same antitrust laws that US companies to follow. Now all we have to do is get the OPEC boys to come to court and watch those oil prices come tumbling down.

What can stop the raging bull? Maybe nothing but maybe today’s oil inventory report will bring back a sense of normalcy to the market place. Once again the key will be distillates but also the market might freak out if we see a drop in gas supply again. I do not think we will see either. Then the next thing to watch for is profit taking ahead of the Memorial Day weekend!

Did anyone see this yesterday?

Exploring the Skyrocketing Price of Oil
Senate Judiciary Committee - Full Committee
http://judiciary.senate.gov/webcast/judiciary05212008-1000.ram

Does anyone know how to save this webcast? maybe it'll contain something useful, haven't listened to it all yet.

This article mentioned something interesting relating to another testimony, about futures with no expiration date - which allow electronic hoarding:
http://www.larouchepub.com/pr/2008/080520london_loophole.html

I don't really understand futures very well, but futures having no expiration date seems odd... is there any truth in it?