Back To Backwardation for Crude?

One quick look at the Crude oil market over the past five years – it’s easy to see the development of a $8-dollar range that’s made it tough for most energy traders (here’s the exception) to find returns.  We mentioned in our recent 2017 Outlook that the Oil market is poised for a breakout either higher or lower from this range…

crude-oil(Disclaimer: Past performance is not necessarily indicative of future results)

And it looks like the direction most funds are betting on is higher, as Bloomberg reports:

“For the first time ever, hedge funds hold more than a billion barrels of bets that crude oil prices will rally.”

Indeed, there’s always more opportunity in long trends (prices can theoretically go up an infinite amount) than short trends (which have the zero bound).


But while all these bets are piling up and Oil essentially goes nowhere, there’s another dynamic playing out worth watching. That’s the recent move of Oil into a slight backwardation, after years of Oil being in Contango (and even Super Contango, whatever that means, as dubbed by some reporters). Here’s Bloomberg again with the data:


Now, in our opinion – Bloomberg is off quite a bit in saying this is “bullish signal.” They can look at the chart in their own piece to see that the last time Oil was in backwardation, it was actually a sell signal, not a bullish one. But the shape of the curve, in our opinion, has less to do with the future direction of prices (after all, the futures are pricing in what buyers and sellers are willing to trade Oil for future delivery at today) and more to do with opportunities outside of the direction of Oil prices.

For one, this is good news for all those hedge funds holding a Billion Barrels of Oil (its almost like they have smart people there looking at stuff like this), as the cost to hold that bet (the roll yield) is positive in a backwardation market. So they’ll essentially get paid for holding this bet if the price curve retains this shape. Similarly, the ETFs we rail on again and again for being such poor trackers of the commodity their tracking because of the roll yield cost they pay – will have less of that drag on performance.

But the traders really watching this are the delta-neutral spread traders, or relative value plays, who make bets on the shape of the price curve – not the direction of prices. A move like this to a flat curve could cause them great angst, as they won’t know which way the curve is likely to head from here – or could be just what the doctor ordered in terms of a new trend in which to take advantage of. Only time will tell how that plays out, but a backwardated market brings all sorts of interesting investments out into play.

The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.