Crude oil prices: Heading up or down?

Nauman Khan at InvestCapital wrote a brilliant note on crude oil prices that came out today. In addition to a number of structural questions focusing on supply and demand the heart of the note is in the comparison of future contract spreads between CL03, CL06 and CL10 (the 3, 6 and 10 month delivery contracts). In essence Nauman is saying that despite the run up to 86 today and possibly 90 by the end of this week, you need to look at the spreads between crude oil future contracts. The spreads do not support the run beyond 90. They point to the other direction.

Here is the excerpt from Nauman’s note.

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Figer-17 shows a snapshot of the spread between the spot price and futures prices of crude oil as of 01 Apr-10, and future spreads for a prior month average when crude oil prices were at USD147/bbl and then USD32/bbl.

Furthermore, we have also included average spreads for the prior month when crude oil moved towards

  1. USD100/bbl (25-Jan to 25-Feb ’08),
  2. USD120/bbl (7-Apr to 4-May ’08),
  3. USD50/bbl, heading towards USD30/bbl (20-Oct to 19-Nov ’08) and
  4. USD50/bbl heading towards USD80/bbl (19-Feb to 19-Mar ’09).

Crude Oil Future contract spreads


It is evident from figure that future spreads have some predicative power with respect to future oil prices.

Although future spreads at USD147/bbl stood positive. They however suggested a decline in the crude oil prices when at USD100/bbl and USD120/bbl, which eventually tumbled after touching USD147/bbl. Furthermore, when crude oil prices tumbled to near USD30/bbl, the run-up to the point shows an uptick in the crude oil prices particularly at USD32/bbl and USD50/bbl.

At present, the crude oil spreads stand at USD3.53/bbl (CL03), USD4.45/bbl (CL06) and USD5.28/bbl (CL10). Taking into account holding cost with regards to future spreads, the trend indicates that market participations see uptick in crude oil prices in the short-run but expects them to wane down in to reflect a more realistic picture of demand-supply factors.

Reactions, comments, thoughts?

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