Saw this on twitter

Looking at charts for 3month and 6month and 12 month say all Dec.. Does it make sense to gleam any information based on how high or low each goes?

For example:
3 month Dec spread.. just as high as May/June high of last year
6 month Dec spread..much higher than last May/June high
(both these are slightly sloping down in a channel)

12 month Dec spread.. much higher than last May/June high but also not sloping as much in a channel downwards compared to the 3 and 6 month spreads

12 month Z9 spread.. hasnt even reached last May/June high

Does all these kinda pattern analysis of any value? Will it lead to any trades?

CME :- [AUTOLINK]OPEC[/AUTOLINK] Output Cuts vs. Rising U.S. Rig Count

If this ratio holds, the 174 rigs added over the past four months could be expected to add 870,000 barrels per day to U.S. production

jokertrader 

Looking at charts for 3month and 6month and 12 month say all Dec.. Does it make sense to gleam any information based on how high or low each goes? For example: 3 month Dec spread.. just as high as May/June high of last year 6 month Dec spread..much higher than last May/June high (both these are slightly sloping down in a channel) 12 month Dec spread.. much higher than last May/June high but also not sloping as much in a channel downwards compared to the 3 and 6 month spreads 12 month Z9 spread.. hasnt even reached last May/June high Does all these kinda pattern analysis of any value? Will it lead to any trades?

For me it's all about relative levels not absolute levels. Looking to combine spreads that look high with ones that look low. Of course how you define "look high or low" is the key.

Kemp - Should [AUTOLINK]OPEC[/AUTOLINK] worry about contango and backwardation?

Goldman's strategy aims to "share growth" between OPEC and shale firms to avoid another repeat of boom and bust in oil prices ("Backwardation is the solution", Goldman Sachs, May 22).

The plan exploits differences in pricing behaviour between low-cost producers in OPEC that do not hedge and higher-cost shale drillers that hedge a substantial portion of their output.

Because they do not hedge, OPEC members' revenues are linked to spot prices but shale firms' earnings and access to capital are more closely linked to futures prices one or two years forward.

Since the end of 2014, Brent and WTI have generally been in contango, with futures prices higher than spot, which has meant shale hedgers have realised higher prices than OPEC non-hedgers.

More...

SMCJB 

For me it's all about relative levels not absolute levels. Looking to combine spreads that look high with ones that look low. Of course how you define "look high or low" is the key.

Just to get an understanding of relative value curves, here are some thoughts - looking for critique

We plot the forward curves of outrights - shows us backwardation/contango for outrights
but this is not going to help us understand relative value in spreads - just what market participants are expecting for outrights based on fundamentals.

now so how do we find relative value? I would think by plotting the like spreads meaning
plot 3 month spreads all on one chart
plot 6 month spreads all on one chart
plot 12 month spreads all on one chart
plot flys all on one chart

to see the relative value in each so they can be traded individually
So what i am thinking is

lets say i want to trade 6 month spreads..
a) first see the outright futures curve
b) plot June/Dec, Dec17/June 18, June 18/Dec 18 etc and overlay an outright price
c) see which curve is out of whack

am i on the right track?

SMCJB 

More Random Musings of a Spread Trader Crude curve is still in relatively steep contango. CLN5 trading approx $6 below CLZ8 (which is month 42) so ~15c/month. Normally you would expect contango to be steepest at the front, and hence butterflies to be negative. Well interesting last night the z5/z6/z7 butterfly settled -1c and the z6/z7/z8 butterfly settled +10c. The last time either of these spreads settled positive was back in Oct/Nov 2014 when crude was significantly higher than here, and of course was backwardated. The following scatter plot shows graphically how out of whack this is. Note CL_18 is currently CLZ6, CL_30 is CLZ7, CL_18 is CLZ8 Full Disclosure:- I am slightly short this Butterfly but do have hedges on against it

Hi SMCJB

I've followed your posts for quite a while, and with the rest of my study I'm also slowly beginning to understand and see the opportunities that forward curves present. Thank you!

I'm wondering where I can find out:
1. how to construct these butterfly "scatter plots" in excel (I understand constructing basic scatter plots, but not these butterfly ones of flys against flys)
2. how to interpret them,
3. and sourcing the data? (not sure if it's standard data from the DDE link from a charting package such as CTS T4?)

I've read through CurveAdvisor where it talks about the plots, but not how to construct them. All I need is the name of a textbook, a paper or author, or a hint where to begin looking would greatly help. I'm happy to put in the study to work this thing out.

Thank you

Adam

Regards scatter plots I understand double fly price vs time, and fly price vs time, but I'm having trouble getting my head around double fly price vs fly price. I'm guessing you would use time and sales data for the double fly and the fly, but I'm a bit stuck on this one.

I know this Q was aimed at SMCJB but I thought I'd help answer as he's covered a lot of ground on this subject and most of this can be answered without any specialist knowledge:

adam777 

1. how to construct these butterfly "scatter plots" in excel (I understand constructing basic scatter plots, but not these butterfly ones of flys against flys)

Collect the data for each fly (1) 18-30-42 and (2) 18-42 and plot them against each other in a scatter plot like you normally would if it was flat px vs time.

adam777 

2. how to interpret them,

Google will help as there is a lot to say. This may be a useful link: How to Interpret a Correlation Coefficient r - dummies

adam777 

3. and sourcing the data? (not sure if it's standard data from the DDE link from a charting package such as CTS T4?)

I use bloomberg, reuters is another option or direct from the exchange (CME)...there are several methods one of which would be to request historical data from your broker which would be the easiest.

jokertrader 

lets say i want to trade 6 month spreads.. a) first see the outright futures curve b) plot June/Dec, Dec17/June 18, June 18/Dec 18 etc and overlay an outright price c) see which curve is out of whack am i on the right track?

Well thats one of the things I do.
I have a spreadsheet that shows
- Forward Outright Price Curve + Forward Spread Curve + Forward Fly Curve + Forward Double Fly Curve
and it has these 4 charts for
- Monthlies, 3 Monthlies (HUMZ), 6 Monthles (M&Z), 12 monthlies (Z only)
for both
- outright price & daily change
although I must admit I don't look at/trade the 3 month curves much.