Comments on: A Crude Conundrum

By: Grant

Grant — Fri, 31 Jul 2009 02:56:26 +0000

I figured Winston would chime in there, but guess not…

Yes, there is a huge misconception on the futures markets and what they represent in terms of actual future crude prices. The media doesn’t help things either, and they certainly don’t explain that fact outright.

Great explanation, hayek, thanks!

Grant

By: hayek

hayek — Fri, 31 Jul 2009 02:07:29 +0000

crap, no one like my question, i was busy yesterday celebrating the dump in oil prices ( yes i am short), and now i’m busy trying to cry myself to sleep after crude rallied nearly all its losses back.

that being said, i’ll answer my own question.

the price of futures beyond the actual cash mkt and effectively front month future are NOT AT ALL INDICATIONS OF WHERE PRICEES WILL BE.

the difference between the price of crude today and the price of the future in 6/9/12 months tells you how much it will cost to store crude oil bot today.

if the nearby future price is higher than the further out contracts, this tells you that people want crude oil now and no one will pay to store it.

this is a common misconception when people look at the futures mkts, hope this helps anyone who was ever confused

By: Hayek

Hayek — Tue, 28 Jul 2009 15:18:19 +0000

heres another quick question, does the price of the 2012 future tell us where oil prices will be in 2012?

By: Hayek

Hayek — Tue, 28 Jul 2009 14:55:54 +0000

totally agree, the ratio has blown out for the list of reasons you listed. FYI the worst way to play this trade is via the UNG and USO or whatever the short version of the USO is. prolly futures is the only way you can bet the ratio reverts, or try to find exposure to nat gas via equities while staying away from the oil heavy majors.

here is the ratio according to futures charts going out to 2017
NG CRUDE RATIO
2009 5.369 72.47 13.49785807
2010 6.779 77.95 11.49874613
2011 7.174 80.48 11.21828826
2012 7.319 82.57 11.28159585
2013 7.484 84.73 11.32148584
2014 7.629 87.03 11.40778608
2015 7.779 89.43 11.49633629
2016 7.924 92.52 11.67592125
2017 8.089 95.02 11.74681666