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commodity spreads
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commodity spreads

  #51 (permalink)
Market Wizard
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PropArb View Post
If you look at the energy complex the past few years, the front month to second month and most of the other prompt/ near term calendar spread differentials ( esp. Pairs) you can overlay onto the front month flat price future price action. Now, this is not a constant, and it is not universal, even within the energy complex on a historical basis.


lsandersj View Post
I'm not sure of what you mean with" you can overlay onto the front month flat price future price action. Now, this is not a constant".

I didn't want to answer this at the time you asked as it was PropArb's original comment. Due to the lack of a current response though I believe that PropArb was saying if you were to chart the prompt month and most prompt spreads on the same chart (ie overlay them) you find that they move with a reasonable correlation. This may not be the case in other markets but it traditionally is in crude, and to a slightly lesser case most energy markets.

The following chart shows the daily change in CLQ4 (which is currently the prompt month) and the daily change in the CLQ4-CLU4 spread for the last 3 months.

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Notice the equation of the regression line << y = 0.0576x - 0.0123 >> This means for every dollar CLQ4 moves we expect CLQ4-U4 to move almost 6c EXCEPT that each day the spread also moves down 1.2c. This is because the crude spreads have recently shown the tendency to collapse as they near expiry.

For example look at how CLQ4 and the Q4-U4 spread tracked in April and May

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But looked what happend in June
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It may look like the relationship completely broke down in June but it didn't. The spread still moved with the market but the downward trend overpowers/shadows the relationship, as the spread now loses on average 2.6c/day.

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See how Q4 and the Q4-U4 spread track when we detrend the spread data by adding 2.66c/day back to the spread...
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*Just realized that excel used real dates on some of the x-axis so some of the charts are slightly distorted by the fact that Fri-Mon shows as 3x x-axis width as other days due to the inclusion of Sat & Sun.

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  #52 (permalink)
Trading Apprentice
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Very interesting charts, suggests a strong correlation between nearby spreads and price for Crude oil. I would guess that the correlation decreases for a commodity where the nearby spread approaches full carrying charges, to a point where the correlation approaches zero, assuming that full carry is not breached. Possible to chart such a relationship i.e. nearby spread close to full carry ? Corn spreads may provide an example. Thanks.

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  #53 (permalink)
 Vendor: www.cannontrading.com 
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Trading Spreads


Hi All,

I am a Broker with Cannon Trading Co, (full disclosure) I personally trade a system based on seasonal spreads in energies, grains, meats, metals, financials, currencies etc. There are several companies that research the seasonality and suggest the proper risk rules and execution. Without getting into specifics, I have been very impressed.

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  #54 (permalink)
Trading Apprentice
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The new crop bean spreads over the pas week provide an example of reduced corrrelation between the price of the nearby and the spread. Flat price of X has dropped approx $1.30 while the X/K has lost approx 10 to 15 cents. This is what I was trying to suggest above, that the correlation between the nearby and the spread will approach zero as the spread approaches full carry. The spread simply has nowhere to go (assuming full carry is not breached. I have only seen it happen a couple of times and for good reason).

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  #55 (permalink)
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SMCJB View Post
I didn't want to answer this at the time you asked as it was PropArb's original comment. Due to the lack of a current response though I believe that PropArb was saying if you were to chart the prompt month and most prompt spreads on the same chart (ie overlay them) you find that they move with a reasonable correlation. This may not be the case in other markets but it traditionally is in crude, and to a slightly lesser case most energy markets.

Well done and spot on !

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  #56 (permalink)
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brentf View Post
With respect to the nearby month and fundamental analysis, the correlation between the deliverable stocks and the open interest is the single most important influence on a grain spread. In a situation where stocks are perceived to be tight and deliverables negligible, (as in the case of he N/X beans), the nearby will invert. The size of the inversion is correlated to the severity of the shortage.Essentially the market is willing to forgo carrying costs on order to secure supplies for the immediate future. In a case where deliverable supplies are adequate/burdensome relative to the open interest. the nearby will typically trade at a discount to the deferred months. In this case the market is unwilling to pay more than carrying costs to secure supplies. This is the case for 2014/15 bean spreads as inventories are replenished. Moving forward with the 2014/15 bean crop, the market uses the carryout as a proxy for deliverable stocks. Right now the market is using something close to a 350 carryout (125 this year). enough to keep spreads at a carry.

Going back to the N/X bean spread, I suggested that it would weaken as first delivery day approached, the shortage of deliverable stocks was well documented but given that funds were long half the open interest of the nearby, there would be less deliverables required than at first blush. Also, beans imported from SA increased the deliverable supply.

Regarding the open interest, how do you determine the ratio of buy interest and sell interest, or are you just looking at the total OI?

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  #57 (permalink)
Trading Apprentice
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Hi. I would like to participate in some chat about spread trading to share ideas etc. I trade spreads 5 months

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  #58 (permalink)
Patience my young padawan
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Difference between Backwardation and Premium

I have a very basic general question on spreads.

If the nearby contract sells for more than a distant contract sometimes it is said that there is an immediate/urgent need of buying a commodity hence prices would go up.

BUT when you look at a calendar list of an instrument and distant contracts sell for less means that the Commodity / Instrument is in "Backwardation" and prices tend to fall.

Question:
Which of the two should I believe or how do you differentiate between a Backwardation scenario from a Premium scenario?

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  #59 (permalink)
Market Wizard
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It's (not surprisingly) not that simple.

Many commodities have extremely seasonal supply and demand profiles, and their forward curve often reflects that supply/demand profile rather than any indication of absolute price strength or weakness. If we don't fill storage when supply>demand we won't have enough of the commodity in storage when demand/supply. Hence the forward curve has to reward you to store the commodity. But if we have too much of a commodity in stock, the curve will move to a point to correct that imbalance. Economists try to explain this by talking about the Convenience Yield. (eg energy commodities, new crop/old crop etc etc).

Saying that when prices move they obviously do tend to effect prompt contracts more than deferred contracts. Hence in a bull market the front often outperforms the back.

Other commodities have forward curves that have very well defined (and arbitragable) carrying costs (eg precious metals, currencies, equity index's).

There is also the phenomenon called the "roll yield". While I'm not sure that backwardation/contango are reliable indicators of market direction, I do believe that there are effective trading strategies that take advantage of the roll yield.

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  #60 (permalink)
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Stock-to-use ratios


@brentf do you know a good source for historical stock-to-use ratios ?
Are you subscribed to a service providing you with this information?

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