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Why is the oil market in backwardation?

Why is the oil market in backwardation?

That market slipped into backwardation in November 2020, reflecting a supply shortage at the time, in the wake of the Organization of Petroleum Exporting Countries’ sustained production cuts. WTI prices rallied from $44 in late November to hit multi-month highs near $68 in March this year.

Is the oil market usually in contango or backwardation?

Looking later in the year, Brent futures remained in deep backwardation, with prices for immediate delivery higher than those for dispatch in November. Backwardation, in contrast to contango, signals tight conditions, discouraging storage.

Which commodities are in backwardation?

But urgent demand has flipped about half of major commodity markets tracked by the Bloomberg Commodity Index including oil, natural gas, copper, soybeans into backwardation.

Why is contango bad?

The most significant disadvantage of contango comes from automatically rolling forward contracts, which is a common strategy for commodity ETFs. Investors who buy commodity contracts when markets are in contango tend to lose some money when the futures contracts expire higher than the spot price.

How do you profit from contango?

One way to benefit from contango is through arbitrage strategies. For example, an arbitrageur might buy a commodity at the spot price and then immediately sell it at a higher futures price. As futures contracts near expiration, this type of arbitrage increases.

Why is backwardation normal?

Normal backwardation is when the futures price is below the expected future spot price. 4 This is desirable for speculators who are net long in their positions: they want the futures price to increase. So, normal backwardation is when the futures prices are increasing.

How do you make money from backwardation?

In order to profit from backwardation, traders would need to buy a futures contract on gold that trades below the expected spot price and make a profit as the futures price converges with the spot price over time.

What is the difference between backwardation and normal backwardation?

Backwardation: a situation where future price is low than the current spot. Normal Backwardation: a situation where future price is lower than the expected spot price. The term negative carry means backwardation.

What does backwardation mean for the price of oil?

1. Backwardation just means price of future oil is less than current oil. So, of course it is not a predictor of price rise! It’s the literal market saying future oil costs less, not more. 2.

What causes backwardation in the commodity futures market?

The primary cause of backwardation in the commodities’ futures market is a shortage of the commodity in the spot market. Manipulation of supply is common in the crude oil market. For example, some countries attempt to keep oil prices at high levels to boost their revenues.

Can a futures market shift between contango and backwardation?

A futures market can shift between contango and backwardation and remain in either state for a short or extended period. For example, let’s say the there was a crisis in the production of West Texas Intermediate crude oil due to poor weather. As a result, the current supply of oil falls dramatically.

Which is an example of the effect of backwardation?

Backwardation Example For example, let’s say the there was a crisis in the production of West Texas Intermediate crude oil due to poor weather. As a result, the current supply of oil falls dramatically. Traders and businesses rush in and buy the oil, which pushes the spot price to $150 per barrel.