Thursday, February 5, 2009

Oil Contango in % Terms: Major Move in Crude Inevitable

The oil contango is obvious and well commented on.

In past I have pointed out that the contango is unsustainable with current trend economic growth - either the oil contango is correct and we briskly move to trend growth GDP, or the contango moves to normal backwardation and then some.

In 1990 to 1992 we had a period of contango as crude speculation centered around Desert Storm. At the same time the economy was entering a shallow recession.

The contango for one year expressed in % of the front contract was this in 1990 to 92:

The weekly unemployment claims for the same period peaked at 509,000 in 3/91:

One can see that the oil contango, expressing speculative forces, had to come back into line with the economic growth reality and whats more so was depressed as speculative positions were liquidated and a large backwardation occurred.

An interesting plot is a regression of the contango for 1 year in % of front contract versus weekly unemployment claims. While the boundary is fuzzy to say the least - it is clear that from 7/86 to 1/98 no contango was sustainable past 450,000 weekly claims:

A recent plot of the same relationship from 2/07 to 1/09 shows the bizarre speculative forces still keeping the oil contango in % terms high:

The current oil one year contango in terms of % of front contract:

Current weekly unemployment claims:

It is pretty hard to not perceive a major move in the oil contango occurring shortly - or we suddenly spring upwards with growth in 2nd Q 09 GDP. Take your pick. The oil move to come is about $15. My bet is it occurs in the forward dropping which will also require spot oil to drop as well, though not as much.

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