Home » Business » Alliance FX Capital Second Quarter Newsletter 2017

Where Are Crude Oil Prices Headed?

A Look at Recent Crude Oil Highlights 2016 was another banner year for crude oil headlines. U.S. and global stocks (SPY)(ACWI) hit new record levels. Phenomenal price action saw the front month future hit a multi-year low of $26.05 before recovering to the low-$50 range. Drillers dropped active rigs to levels not seen since 2009, when explosive U.S. production growth began, before turning around and bringing supply back online at a rapid clip, ending the year almost right where they started – proving the elasticity of U.S. supply.

Related to the rig count, U.S. production fell from last year’s record peak to levels seen near the start of the oil crash…before climbing again as year-end approached. And OPEC members pumped like crazy before agreeing to a landmark production cut that will take them back to where they were before they started pumping like crazy (and not even back to 2015 levels).

Finally, it is worth noting that open interest in the benchmark WTI futures contract reached an all-time high of over 640,000 contracts in the front month alone.

This front month WTI futures contract rose about 45% year over year (YOY).

However, “contango” was very strong during parts of the year, and the return on a position rolled 10 days prior to expiration rose only about 7%. (This is what oil investors actually realize after rolling positions or paying storage, insurance, and other costs to hold spot. The 45% return is not achievable and merely serves as a marker to show the difference in where people were willing to buy/sell between two periods.)

Other grades saw similar returns, though some interesting differences are worth noting. The Auspice Canadian Crude Index gained about 10%, Dubai Crude futures rolled 10 days prior to expiry gained about 28% and Brent Crude rolled 10 days prior to expiry gained about 29%.

(Brent spot prices were up about 52% and Dubai spot prices were up over 60%. Again, these returns are not achievable.) Contango was less severe in these markets which explains a significant portion of the out performance to WTI.

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