| To: energyplay who wrote (75876) | 12/4/2006 9:02:38 AM | | From: smh | | | | EP,
Thanks for the informative reply. I saw your participation in discussion of some exotic elements and thought you might add some perspective to the concerns raised in the REE article. You exceeded my expectation, but then you remind me of someone who posts on the biotech threads who seems to be able to speak authoritatively on just about everything. You are in the same league.
SMH |
| | Big Dog's Boom Boom Room | Stock Discussion ForumsShare | RecommendKeepReplyMark as Last Read |
|
| From: SuperChief | 12/4/2006 9:24:11 AM | | | | | | Crude Oil Rallies, but a Widening Contango Could Lead to a Collapse in Oil Prices During 2007
by Nadeem Walayat - December 03, 2006
As crude rallies to $63, we take a look at the effects of backwardation and contango on the commodity markets such as crude oil. Knowing and allowing for these in future price trends can make the difference between profits and losses even if you get the market right on price direction.
Firstly, what are backwardation and contango?
Backwardation is is where the cost of a commodity in the future is less than it is nearer to the present. backwardation is not normal, and suggests that supply side insufficiency. Contango is how the markets operate normally, where the price of a commodity in the future is higher than the price of that commodity nearer the present, though the degree to contango varies significantly due to speculation.
Up until quite recently crude oil had been at or near backwardation ! Which meant those long of crude oil, i.e. expecting crude to rise, benefited as the future price of crude oil was close to or lower than the spot price, so you had two effects, you had the up trend in crude oil, and you had the effect of backwardation resulting in a gain as the future delivery month moved closer to expiry.
But now crude oil future prices have widened significantly into contango, where future prices are much higher than the near month, i.e. January Nymex futures are currently at $63, whereas someone going long of say Aug 07 crude oil, would pay a price of $69 , what this means is that crude oil would have to rise to $69 just to break even, if the contract was rolled forward into August 07.
The effect this has on the market is to drive up inventories for refiners and producers, as the stock would be worth more at a future date. So producers can can sell their current stock say worth $63 for August delivery for $69, locking in a profit of $6 in some 8 months.
So even as we expect crude oil to rise towards $70 by August 2007, given the switch in the market to contango, this is no longer as profitable a trade as it was during the run up to $80, when the market was in backwardation. As traders buying and rolling the near months forward on expiry will pay the price for contango in the difference between the closure of one months price and the opening of the next months contract price, which at $6 amounts to some 10% on the price of crude oil. So crude oil would need to rise by more than 10% for a trader / investor to break-even.
What does this mean for crude oil during 2007?
It means that the continuing build up in inventories of crude oil for future delivery, rather than being rolled over, will at some point be delivered, and as and when that happens (probably sooner rather than later), it will lead to a sharp sell off in crude oil prices! Even if the decline is temporary.
So the opportunity brewing for traders are not on the longside but on the short side sometime during mid 2007. As and when the inventories lead to crude oil being dumped on the market when the contango starts to contract significantly, which will further drive spot AND futures prices lower, leading to speculators such as hedge funds also dumping their positions, it is not inconceivable that crude oil could fall as low as $40, in a state of backwardation (higher spot, lower futures). Which would once more set the stage for long positions in crude oil. Until then being long of crude oil is definitely not as profitable as it looks on face value! This possibly also holds true for other commodities that are in contango i.e. such as Gold where Dec 06 is at $644, but Dec 06 is at $682, therefore producers can sell current gold for a 6% profit, as they hold on to and build inventories.
In summary the key point I am making is - Look for a markets in contango to short, and look for markets in backwardation to go long on. To take advantage of contango, look to invest in the producer rather than the commodity itself i.e. an oil company or a gold miner.
Nadeem Walayat
MarketOracle.co.uk |
| | Big Dog's Boom Boom Room | Stock Discussion ForumsShare | RecommendKeepReplyMark as Last ReadRead Replies (3) |
|
| To: SuperChief who wrote (75887) | 12/4/2006 10:19:59 AM | | From: Wyätt Gwyön | | | | Look for a markets in contango to short, and look for markets in backwardation to go long on.
that is a rather simplistic analysis. gold has been in steep contango for most if not all of its rise, so that analyst would have gone bankrupt by shorting gold from around $300 per this strategy. with crude, some of the best money was made AFTER it went into contango.
also, i believe there are physical limits on crude inventory? i mean, you can't just store tens of millions of barrels in a plain old warehouse can you? it would seem to be very expensive to put massive amounts of crude into tiny barrels as opposed to storing them in a tanker or whatever massive containers they use at refineries.
unlike gold, which can be stored easily, you require expensive facilities to store crude. so, at some point we should expect that crude storage capacity will be maxed out and from that point onward contango cannot increase inventories, and must be considered to be some other kind of price signal.
however, the analyst is right that a switch from backwardation to contango changes inventory dynamics radically, a point which has eluded those who expected crude to tank on YoY inventory rises. |
| | Big Dog's Boom Boom Room | Stock Discussion ForumsShare | RecommendKeepReplyMark as Last ReadRead Replies (1) |
|
| To: SuperChief who wrote (75887) | 12/4/2006 10:44:26 AM | | From: elmatador | | | | Saudi oil minister: markets “significantly” oversupplied suggesting Opec’s largest producer supported the idea of reducing output further.
Edmund Daukoru, president of Opec, lent his support to a production cut ahead of the next meeting of the cartel scheduled for December 14 in spite of the recent rally in crude prices. “The price is firming somewhat, but against a weakening dollar, and there is still a lot of excess volume out there” said Mr Daukoru to reporters in Abu Dhabi on Monday. |
| | Big Dog's Boom Boom Room | Stock Discussion ForumsShare | RecommendKeepReplyMark as Last Read |
|
| From: - with a K | 12/4/2006 10:55:58 AM | | | | | | Crude Oil Rally Should Carry into 2007
- Stocks are Leading the Way -
from ChartWorks:: published by Institutional Advisors
Bob Hoye
Technical observations of RossClark@shaw.ca
December 2nd, 2006
The seasonal low in Crude Oil appears to be in place. The higher low in the CCI(20) index followed by a move through zero should be the precursor to a five to eight week rally, a pause and then a continuation to the upside into March-April.
321energy.com |
| | Big Dog's Boom Boom Room | Stock Discussion ForumsShare | RecommendKeepReplyMark as Last Read |
|
| To: SuperChief who wrote (75887) | 12/4/2006 11:07:56 AM | | From: MIRU | | | | | The backwardation or contango in oil is not like soybeans, it is more like gold - i.e., contango is bullish (of course gold never goes to backwardation because there is way too much aboveground supply) In other words oil is unique in the term structure of futures contracts and comparisons with other commodities backwardation or contango are likely to lead to wrong conclusions. |
| | Big Dog's Boom Boom Room | Stock Discussion ForumsShare | RecommendKeepReplyMark as Last Read |
|
| To: Ed Ajootian who wrote (75883) | 12/4/2006 12:18:59 PM | | From: excardog | | | | WHT ..... FWIW just spoke to the company "finally" The acreage in Hill County is right next to the EOG stuff. They have had trouble with a drill rig but have third one on site and it's drilling as I type this. Big seller appears to be gone. Insiders own about 40%. The CFO seemed pretty up front IMO. Bottom line is Hill could be a big deal for a small company such as this. Luck to all
Scott
Sean J. Austin
Vice President & Chief Financial Officer
3131 Turtle Creek Blvd., Suite 1300
Dallas, TX 75219
214.522.8990 x 1117
469.916.1401 - fax
713.825.9591 - cell
sjaustin@westsideenergy.com
www.westsideenergy.com |
| | Big Dog's Boom Boom Room | Stock Discussion ForumsShare | RecommendKeepReplyMark as Last ReadRead Replies (2) |
|
| To: ChanceIs who wrote (75856) | 12/4/2006 12:22:57 PM | | From: Dennis Roth | | | | Pelosi: Our Coasts Need Lasting Protection from Oil and Gas Drilling
news.tradingcharts.com
WASHINGTON, Dec 4, 2006 (U.S. Newswire via COMTEX) -- Speaker-designate Nancy Pelosi released the following statement today on news media reports that President Bush is considering lifting the presidential moratorium protecting Alaska's Bristol Bay from oil and gas drilling:
"The Exxon Valdez oil spill in 1989 showed the world the devastation and destruction that oil spills could have on Alaska's fragile waters. Under intense pressure from an angry public, Congress did the right thing by placing Alaska's Bristol Bay under a moratorium; President Clinton later also signed an executive moratorium. Oil spills would devastate Bristol Bay's prolific fishing industry, Native American communities, tourism industry, abundant marine life and diverse and endangered wildlife.
"The American people paid $95 million to buy back leases from oil companies to ensure that Bristol Bay would be forever protected from devastating oil spills. Yet this week, with the stroke of a pen, President George W. Bush is expected to reverse progress and turn back the clock by lifting the presidential moratorium. Allowing oil drilling to go forward in Bristol Bay puts our precious environment at risk. Allowing new oil company leasing of these lands is an insult to all taxpayers who have helped protect them.
"Our domestic oil supplies are valuable but limited. We should not sacrifice our marine ecosystems, robust tourist economies, and fishing communities for the sake of extracting every last drop of oil from American soil.
"Our fragile coasts, from Alaska to California to Florida, require greater protection than a mere presidential moratorium that can be easily lifted. Lasting protection under the law is essential. So is a comprehensive plan that builds our economy around clean, homegrown, renewable energy sources and exciting new technologies.
"While the Bush Administration dances to the oil companies' tune, Democrats intend to achieve energy independence within 10 years."
usnewswire.com
Brendan Daly or Jennifer Crider, 202-226-7616, both of
the Office of Speaker-designate Nancy Pelos
Copyright (C) 2006, U.S. Newswire |
| | Big Dog's Boom Boom Room | Stock Discussion ForumsShare | RecommendKeepReplyMark as Last ReadRead Replies (1) |
|
| |
