Here are the slides from the Intercontinental Exchange's "Oil futures forward curves: economics explained" (39 page PDF) and here is Izabella Kaminska with the takeaway that should be engraved on every trader's frontal lobe:After five years of low volatility and poor moneymaking opportunities in the oil market, traders have reopened an old playbook.They are taking advantage of a so-called “contango” structure in Brent crude, market jargon for when prices for future delivery exceed spot prices, by keeping oil in storage and banking on an almost risk-free profit when they sell it forward, or in time ahead.
Reports this week suggesting a Chinese buyer had chartered the world’s biggest crude tanker to store oil, got some market participants in a tizzy. It is still unclear if the Chinese were angling for a contango play in the traditional sense, of if they sought out the relatively low-priced oil for a better deal on crude that would ultimately wind its way into the country’s strategic reserves.
Either way, it is indicative of a broader phenomenon.
About 50m barrels of crude is being held on tankers in Saldanha Bay in South Africa and Asia, say analysts at London-based consultancy Energy Aspects, the highest level since the supercontango of 2008-2009....MUCH MORE
All together now: “The forward curve is not a forecast”
If you're interested she has a lot more at FT Alphaville, keyword contango.
We also have quite a few posts with the primer probably being "Commodities: Backwardation vs. Normal Backwardation".
