Thursday, July 25, 2013

Gartman on Oil Backwardation: "Tap the Strategic Petroleum Reserve Now"

From Yahoo Finance:

Gartman: Government must tap the SPR right now
Dennis Gartman, founder and publisher of The Gartman Letter, has a plan that could net the federal government billions of dollars and lower oil prices while not threatening the long-term strategic oil supply.
For nearly four decades, the US government has been storing millions of barrels of oil along the Gulf Coast. The Strategic Petroleum Reserve (SPR) is now made up of nearly 700 million barrels of oil worth approximately $73.2 billion.

Meanwhile, in the oil markets, contracts on West Texas Intermediate Oil for September 2013 delivery are trading around $105 per barrel. But, for September 2014 delivery, that contract trades slightly above $93, a $12 discount. When contracts for a future date trade at a discount to near-date contracts, it’s called backwardation.

And, it’s not just one year’s worth of contracts. Looking at every delivery date for the next eight years, far-dated contracts trade at discounts to nearer-dated contracts at almost every point. Its lowest point is December 2018, where contracts are down near $80 per barrel, a $25 discount to the today’s oil prices. [See chart below.]
Crude oil contracts (by delivery date)