Oil: Goldman Says Lower Syrian War Risk Offset By Rising Backwardation

Brent is almost always backward but now the curve is steeper and the cost (negative = profit) to roll contracts forward is over 16% annualized.
Book that and take the rest of the year off.

The WTI backwardation is not the usual state of affairs and is something I should probably come back to.
From the Contango Report:

Current Annualized Cost
-10.43%
Annualized Cost 1 Week Previous
-6.17%
Historical 09/06 5YR Annualized Roll
6.39%
Contract Months:
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

CONTANGO WATCH: As September kicks off, WTI reversed its trend of recent weeks, widening by more than 4.25 percent.

ROLL COSTS: Investors net 10.43 percent annualized to roll front-month WTI contracts, up from a net of 6.17 percent.

BOTTOM LINE: Backwardation

And From ZeroHedge:

What is offsetting the drop in crude prices following Obama's latest embarrassing backtracking from his "blow things up first, ask Congress later" peace track? According to some, it is this note from Goldman which suggests oil price pressure from an improving geopolitical picture will be offset by rising backwardation.

Rising backwardation offsets a negative price view
Although geopolitical risks dominated the market flows in late August, oil and gold prices have since returned to mid-August levels as the likelihood of international military intervention diminished in early September. More generally, commodities returns since we last published in mid-July have been mostly flat as weather-driven declines in agriculture and natural gas offset gains elsewhere. This flat headline number, however, masks the real shift in commodity markets which has seen significant increases in the backwardation of the forward curves in oil, which still remains strong despite the September 9 sharp headline-driven sell-off.
This rise in backwardation in oil, in our view, is not driven by the events in Syria, but rather by increasingly tighter fundamentals that are a result of the production shortfalls in Libya and Iraq against improving Chinese demand. Despite our view for modest price declines over the next 3 and 12 months, this strong positive carry is expected to offset these declines, leaving returns mostly flat over the next year. Accordingly, we are maintaining our neutral recommendation on commodities....

...We prefer the frontend of the curve over the backend
With tight oil inventories supporting record levels of backwardation in the oil market forward curves, buying deferred oil contracts is an attractive investment proposition even if oil prices stay where they are or even fall slightly. The question then becomes where on the forward curve one should position themselves to maximize returns. The answer to this question comes from looking at relative size of the spreads across the forward curve, or “butterflies.” When the magnitude of the timespreads in the front are larger than the magnitude of the timespreads in the back, it argues to roll the frontend of the forward curve as opposed to buy the backend.

For example, even after the September 9 sell-off, the front timespread on Brent is $1.35/bbl versus the next month out at $1.28/bbl while at a year out it declines to $0.70/bbl. This suggests that by rolling the very frontend of the forward curve the returns would be greater than simply buying one year out. Specifically, rolling the frontend over the course of one year would generate nearly 15%, all else constant, while buying one year out and holding for a year would only generate a 8% return, nearly half the return from rolling the frontend of the forward curve....MORE

Brent

Current Annualized Cost
-16.22%
Annualized Cost 1 Week Previous
-17.25%
Historical 09/06 5YR Annualized Roll
-2.82%
Contract Months:
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

CONTANGO WATCH: Brent narrowed its steady backwardation by more than a percent this week, while its five-year average historical roll cost for this date remains relatively low.

ROLL COSTS: Investors net 16.22 percent annualized to roll front-month Brent contracts, down from a net of 17.25 percent.

BOTTOM LINE: Steep Backwardation