Thursday, June 28, 2018

WTI Surges Into "Deep Backwardation" -- John Kemp -- Oil Futures Page -- June 28, 2018

Oil Futures Page 

Contracts, futures: light sweet oil

For newbies, and I hope I have this correct: when it comes to a commodity like crude oil that "should" deplete / become scarcer in the long term --
  • contango is the normal state of affairs: the price of oil should go up in the future, all things being equal, since global oil should deplete over the long term; "contango" -- come dance with me; a pleasant experience;
  • backwardation: is not the normal state of affairs; oil is getting cheaper in the future, not because there is going to be more oil in the long term, but there are geopolitical, economic, strength of the dollar, chokepoints, manmade, etc., reasons for the price of oil to be going down in the near future; barkwardation -- it even sounds unpleasant;
Updates

July 4, 2018: see a new comment -- You know what else? No one will want to hold or store crude with oil prices in backwardation. It would be like putting money in the bank and have the bank take 2% out every month. 

July 2, 2018: see new comment, again about futures -- very, very helpful --
Here's a better way of viewing that "deep backwardation" than looking at each contract separately: https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html.
There you see August oil quoted at $74.66, September oil at $72.38, October oil at $69.08, and so forth all on the same page, quotes being updated as I speak...
What that means in practical terms for a producer is that although the price of oil may be quoted at $74 today, they can only contract for their future oil output at the futures price given for the month they expect their production to start...
June 29, 2018: I've brought the comment up here for easier access/browsing --
John Kemp is comparing future's contracts.
One can find pricing for August oil, what's currently being quoted at this link: https://www.barchart.com/futures/quotes/CLQ18/price-history/historical
Here is the pricing for oil contracts for February 19:https://www.barchart.com/futures/quotes/CLB19/price-history/historical
In those URLs, CL is for WTI. Q or B is the month code, and 18 or 19 is the year
to get futures prices for Brent.
To go from WTI to Brent, simply swap a "CB" for "CL", so for Feb 19 Brent:https://www.barchart.com/futures/quotes/CBB19/price-history/historical
I've probably made it more confusing, but those are the kinds of spreads he's graphing.
June 29, 2018: I replied, suggesting that "waiting for those Permian pipes to get built" -- that's at least a year from now, I would suspect. Bullish for US shale operators in the Bakken. And the reader replied: Yes and also for the Eagle Ford (that gets LLS pricing).

June 29, 2018: this comment from a reader was received overnight --
With regard to the graph, you have the correct understanding.

I think the way JK displays it is a little funky since a "backwarded" strip curve (of all the months prices) slopes down and contango slopes up.  

But JK shows backward (down sloping future expectation) as "up" in his chart.  Don't know if this is him or whole industry but it seems illogical.   Also contango (pricier over time) is the "normal" situation if everything were ideal (natural resources deplete over time).  So up for contango makes more sense on a graph than below axis.

As far as DUC completion, there's really not much spare frac capacity out there (in ND) and also the level of price was pretty high, regardless last few months.  Not much DUC backlog left also...just normal inventory.

I think the big insight is not really on DUCs (in Bakken).  When you look at price, it is the market waiting for those Permian pipes to get built...at which time WTI will go down.  Permian is the dog and WTI price (and the Bakken) are the tail.
Original Post

From this post back in May, 2018:
First some definitions, and comments, some taken from the article, "Crude oil the next five years":
  • backwardation describes a market where spot and near-dated futures trade above longer-dated futures [higher prices today vs lower prices tomorrow]. The term structure is downward-sloping. An upward sloping term structure is called contango. Sometimes, part of the curve trades in contango and part of it in backwardation. In an environment of low inventories, the market typically trades in backwardation, and vice-versa. 
Now, look at the graph John Kemp posted today:


It's easy to see the delinking of WTI from Brent.

I "understand" how the y-axis is determined but don't understand the correlation with contango and backwardation. I'm probably the only one that can't figure this out. Whatever.

Backwardation, from the definition above, suggests that the surge in the price of WTI today (this week) will eventually turn around (decline).

In a perfect world, one would assume operators would complete some DUCs "today" and sell the oil at spot prices.

Again, I'm way beyond my headlights. I really don't understand this part of the oil sector.

Here's the link to the "Canada's Syncrude system" reference:  Canada Loses 10% Of Its Westen Canadian Production Due To "Technical Difficulties," As The Kuwaitis Would Say -- June 27, 2018 mentioned by John Kemp in the graphic above.

From wikipedia:
  • The crude oil tanks around Cushing have approximately 85 million barrels of storage capacity.
Here's the current storage at Cushing:



Speculators, talking heads, GS analysts, others, can really make the oil market move but in the big scheme of things, does anyone really think that US oil companies can't respond with more oil if necessary, and certainly right now, there's no shortage of oil to drive WTI up 13% in one week.

By the way, if the dollar were not so strong, the 13% WTI surge would have been greater. A strong dollar mutes the price of WTI. 

History of SPR withdrawals at this link
  • 2005 Hurricane Katrina: 30 million bbls
Currently, Cushing is at 30 million bbls in storage. If President Trump could magically move 30 million bbls overnight to Cushing -- pushing storage to 60 million bbls -- it would still be well below total Cushing capacity, and, would still be less than the 70 million bbls back in late 2016, during the Saudi Surge.

So, now with that bit of background, I can put a little better perspective into all that talk about President Trump possibly releasing SPR oil this autumn before the mid-term elections to keep the price of gasoline down. 

The last day of the summer driving season is early September (Labor Day weekend); the election is early November, two months later.

6 comments:

  1. he's comparing future's contracts...
    this is pricing for August oil, what's currently being quoted: https://www.barchart.com/futures/quotes/CLQ18/price-history/historical
    here's pricing for oil contracts for February 19:
    https://www.barchart.com/futures/quotes/CLB19/price-history/historical

    in those URLs, CL is for WTI Q or B is the month code, and 18 or 19 is the year
    to get futures prices for Brent, swap a CB for the CL:
    https://www.barchart.com/futures/quotes/CBB19/price-history/historical Feb Brent

    i've probably made it more confusing, but those are the kinds of spreads he's graphing

    ReplyDelete
    Replies
    1. Much appreciated. I've brought your comment to the main body of the blog. You've helped readers with this before. I may have to have a stand-along page or stand-alone post for futures just to make it easier for folks to be reminded of CL, CB, etc.

      Delete
    2. here's a better way of viewing that "deep backwardation" than looking at each contract separately: https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html
      there you see August oil quoted at $74.66, September oil at $72.38, October oil at $69.08, and so forth all on the same page, quotes being updated as i speak...

      what that means in practical terms for a producer is that although the price of oil may be quoted at $74 today, they can only contract for their future oil output at the futures price given for the month they expect their production to start...

      i should have looked for that kind of futures page to start with...i have just become habituated to just looking at one or two months, so that's what i posted here in my initial attempt to explain Kemp's graph..

      Delete
    3. Well, it's "official," now. This will be the page where I track comments regarding oil contracts, futures, backwardation, and contango.

      Thank you for the great link. That link is now at the sidebar at the right, and it is also at my "Data Links" page.

      Delete
  2. you know what else? no one will want to hold or store crude with oil prices in backwardation...it'd be like putting money in the bank and have the bank take 2% out every month...

    ReplyDelete
    Replies
    1. You are so correct; that is what perplexes me about all the DUCs and so few reports of DUCs being completed. I am eagerly looking forward to "frack season in North Dakota" which should have started a month ago and will continue through November.

      Delete