As we trudge along until the OPEC meeting in late November, traders will be closely monitoring the contango in both the crude oil and distillate markets to determine future price paths.
A contango is present in a market when future prices are more expensive than current spot prices. Presently, the WTI crude oil market has a $0.34/bbl contango. This spread has narrowed considerably over the past few weeks (traded around $0.60/bbl before) because traders are finding less storage for their future oil sales, a sign that the physical markets are tightening. Basically, the market is telling you to sell your crude oil now rather than later because storage costs make it too expensive to hold. However, this may change significantly once we get definitive information about what each OPEC member’s oil output will be cut to – even though OPEC produced its highest monthly amount ever this past September at 33.75MMbpd.
Conversely, the distillate contango market has continued to stay about 2 cents positive. This strong contango implies that the market is well supplied. It encourages pipeline shippers to hold product and sell at a future date at a higher price. The trajectory of this contango curve most likely won’t be determined until we enter the U.S. winter season and temperatures dictate the demand for heating oil. If it’s cold, more demand will make the front end of the curve stronger and likely shrink the contango as the season ends; the front end would move up faster than the back end of the curve.
At writing, November WTI trades $50.07 and December trades at $50.41. November ULSD trades at $1.558 and December trades $1.5788. Happy contango watching!