One can tell a lot about the market by looking at the forward curves of futures markets.
So as an example, let’s look at the forward futures market for West Texas Intermediate (WTI) crude oil.
As of this writing, the WTI market is in a condition known as Backwardation, meaning that the price of oil for near-term delivery is higher than delivery for dates farther out in time.
It is not that unusual, as the shape of the forward curve is influenced by multiple factors.
What we see today is a steep drop in price that sellers are willing to accept for their product over the next couple of years.
Currently, the shape of the curve gives sellers an incentive to draw down reserves they have stored.
The long pandemic downturn was an incentive for oil producers to withhold their products from the market.
So those who could store it and wait for better prices after the turnaround (if they could find storage at a reasonable price) did so.
Many slowed and /stopped production entirely.
As of this writing on Monday, WTI crude oil for August 2021 delivery was trading at $73.84.
Some investment houses are predicting $100 WTI in the not-too-distant future.
But does the market agree with these bullish assessments?
If we look out to January 2022 traders are pricing $69.62, while August 2022 is at $65.63, and January 2023 is at $63.29 and two years out in August 2023 traders are pricing $60.71.
This is a steep backwardation as there is a drop of $13.13 between prices today and what sellers will accept for their product in 2 years.
It makes no sense to store oil in anticipation of lower prices and that is why the market exhibits large drawdowns from storage in this current environment.
It also makes no sense to invest in new capital and equipment until prices recover and a better return can be achieved.
Oil-related stocks have recovered and at times were re-opening leaders, but the prospect of lower prices have made them laggards versus the rest of the market over the last couple of months. Headlines news and OPEC meetings can drive stocks in the short term.
But without long-term visibility of higher prices that improve economic prospects for producers and service companies share price advancement will be difficult to achieve. Learn about and keep an eye on forward markets as they have a great ability to predict the prospects of an industry.
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