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Can anyone explain why the CL June 2020 Contract is trading at $26.24 whereas the May 2020 Contract is at $20.08? Date and time as these contracts are currently trading 4/15/2020 at 3:12 p.m.
I have been trading CL for over a year now and have never seen such a price jump from one contract to the next. Is this normal? Why does such a large price gap difference happen?
There are a lot more qualified people here to explain this but real quick, the current structure is called contango. This is when there is an incentive to store the product with the intention to sell it later. For instance, if you had storage tanks, you could buy May crude at $20, stick it into your tanks and hope that when the May contract expires, you will be able to sell it higher wherever June is trading at that time.
This does not mean that as May approaches expiration, the spread will stay at -$6. Generally, the prices will converge closer to 0 but no one really knows. When April expired, the price on the last day opened around $24.75 but the last trade was at $19.84 vs $23.18 for May. A lot of system traders will bet that as soon as the next month becomes current, it will try to get to the previous contracts price in such situations (a type of gap fill trade). After April expired and when May became current, it quickly traded from around $23.18 down to $19.50 thereby filling the gap. But again, I have nothing to back up that says that this is the norm.
The price spread right now is larger than normal because demand has been destroyed due to the virus. Gasoline and jet fuel consumption is down approximately 50% and 85% respectively year over year at this time. Due to this demand destruction, you will see physical crude traders that have storage are the only ones buying crude oil at these cheap levels and storing it. But the majority of the traders dont have storage capacity and are selling it at whatever they can get. Most of these traders will sell May and buy June in the process causing the May price to drop more compared to June. And given the current situation, the gap between demand and supply is just too wide. Either crude oil production has to go down further and/or people have to start driving their vehicles and air travel has to resume to bridge that gap.
@Hulk
Does this mean to wait for the gap to "fill" before entering a trade with the June 2020 contract? The rollover from May to June is tomorrow at 12 noon. and frankly, the strange looking chart on the June contract has this one big bar at around 26.00 from 3:18 to now - 10:21 p.m.
Thank you kindly for the examples in the your feedback. This is really helpful information.
Not at all. I didn't mean anyone has to wait until the gap fill. Thats just an example of what some system traders look for and like I said, I have no means to back up the validity of those trades. It was meant to help answer your question on why the front spread is so wide.
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From https://www.eia.gov/petroleum/supply/weekly/pdf/figure1.pdf. Not the prettiest of pictures but you should get the picture. Cushing OK, the delivery point for CL futures is in PADD 2. PADD 1 is East Coast. PADD 3 is Gulf Coast, PADD 4 Rockies (not shown), PADD 5 West Coast (not shown). So PADD 2 and PADD 3, which are the two most important PADDs are filling very quickly and will hit full storage. No where for spot physical oil to go!
