For the first few months of the year West Texas Crude Oil was in an extreme contango situation. In fact it got as high as 20% just four months out. Looking at the 4-month contango/backwardization in West Texas Crude Oil we can see that in just the past seven weeks it has dropped from over 15% to just 3.2%.
West Texas Crude 4-Month Contango/Backwardization
Most of the narrowing has happened in the near month futures, since over the past seven weeks the near month has rallied 27% and the 4th month only 14%.
Obviously the big question should be is demand really picking up? If so Oil should rise fairly quickly as we continue to see declining production as well as a decline in the ability to produce via the drop in rig counts over the last eight months.
Or is this a short term rise based on the notion that the economy is improving and this is just an extension of the risk trade? If so then oil is to be shorted as are many other commodities as the reflation trade is put on hold.
We try not to fight the market and right now it is obviously in bull mode as it has moved up 75% from its lows. That being said we tend to listen to the signals from economic indicators like capacity utilization, unemployment, and Fed minutes that show anything but an economic recovery.
West Texas Crude Oil
For now the trend is up and we are modestly bullish (that means we are flat) bulls. However over the next few months we would not be surprised at all to be changing our view to the bear side and going short as the lack of demand likely overtakes these sorry excuses for green shoots and the economy, and therefore demand, roll over.
Site Updates- Yesterday we installed Disqus to better interact with our blog readers. We welcome your views on energy, the economy, and any other financial topic.