CLJ5 is probably the weakest liquidly traded energy contract. It's weak vs the rest of the curve (as illustrated by the flys), vs Heating Oil (Heat crack out $5 in last month), vs RBOB (RBOB crack out $6 in last month) and vs Brent (Very wide WTI_Brent spreads).
Last week I highlighted how the prompt J-K-M butterfly had made a violent move and the prompt butterfly was trading at levels not since crude was still north of $100. Over the next few days the fly dropped even further before snapping back over the last few days.
Obviously we have an extremely high stock situation in the US, especially at Cushing, which when combined with the upcoming refinery maintenance schedule creates the potential implication for even higher stocks. Then it turns out that BP had problems at their Whiting Refinery outside of Chicago last week which combined with the generally weak outlook for CLJ5 gave us the violent front month and front fly move that we saw.
Interestingly, as the JKM fly has started to recover, the KMN fly has started to drop. Even on a day like today where the market was up strongly, backwardation increased, and 6 of the 7 front fly's increased, but the KMN fly still dropped. It is now trading at the lowest levels the 2nd month fly has traded at since crude was over $100. Could just be perceived weakness in J spreading to K but it's not. Over the last 10 days the KM spread has been not much weaker than most of the other front 8 spreads. MN on the other hand has been the strongest spread in the prompt 12 months of the CL curve (in the last 10 days).
Switching directions slightly, when CLJ5 was on it's low's today, Brent-WTI was trading $12. Given the current cushing stock situation it's not surprising that WTI and Brent are detaching. Interestingly though as WTI rallied $2.50 off of the lows, Brent barely moved and the Brent-WTI spread dropped to $10.
I'm not sure what this all means - I wish I did. Just trying to paint a little more of the fundamental picture to go along with the technical one.
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Day trader has to be very nimble. Anyone getting caught while sleeping at the switch, can get hurt. As the following excellent write up points in the short term CL prices can do lot of things. There are lot of different opposing forces, traders involved in CL. Our job is to be on the right side when we take a trade, wether it's for next 10 minutes, hour or a day etc.
"$20 Oil Rears Its Ugly Head
Comment Now Follow Comments
As the petroleum industry enters the historically weak second quarter with U.S. crude inventories at highs, the very real possibility that the price will drop sharply from current levels must be considered. Ed Morse of Citibank has suggested $20 is a possibility, and many others agree that a lower price could be in the cards, even if not that low.
It is always worth repeating that oil prices, in the short run, can go almost anywhere, very low or very high, depending on market conditions and the thinking of traders. But at some point, real barrels dominate the equation, mostly when inventories are very low or very high. The latter case usually results in lower prices to the point where either OPEC acts or people start buying into the market, thinking the price has gone too low. Except when there are barrels without a home.
Normally, this would mean tankers slow-steaming or sitting idle, increasing the amount of oil at sea (an inventory which is poorly estimated). This can easily absorb half a million or a million barrels a day of supply for a time–if the market is in contango (which is, if the price on the futures market rises enough to cover the cost of storing oil now and selling it in the future.) Reportedly, as much as 50 million barrels of crude was in floating storage at the end of January, although the amounts are said to have dropped.
In theory, as current storage fills up, the cost of renting tankers will rise and a larger discount is needed to encourage buyers to store oil. Given the current market, this almost certainly means the near contract declines rather than that the later contracts will rise.
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And globally, there are a lot of unusual holes for crude oil to wind up in. During the 1998 oil price collapse, unaccounted for crude became known as “missing barrels,” or Knappsters, after Dave Knapp of Energy Intelligence. At any given time, the discrepancy in the data is as much as 2 million barrels a day, meaning either supply, demand or inventories are not correctly reported. Which means that the present surplus could change faster than expected. The Chinese could easily add storage tanks for their strategic petroleum reserve and buy up distress cargoes to fill it. (Data on Chinese inventories and storage capacity are poor.) Iran could, as in the past, hold onto shiploads of oil waiting for higher prices.
The monkey wrench is the U.S. ban on crude oil exports, yet another example of a dumb U.S. regulation that has become difficult to revise. The discount on West Texas Intermediate crude stored at Cushing, Oklahoma, is now $10 compared to the price of Brent, representing enormous economic loss to U.S. oil producers, their employees and the relevant state and federal budgets.
The operative question is the storage curve: can increasing amounts of storage be found for U.S. crude without driving up the cost of tankers? It is likely that the contango will increase this spring, assuming no action from OPEC, but whether the price craters to $20 depends very much on whether traders perceive that the market glut will be persistent. That, I am less sure of, but if you have to listen to me or Ed Morse, you’re usually better off listening to Ed.