Last August, I wrote a blog entitled, “Did you just ask me to dance the Contango?” It explained, in detail, oil prices being in Contango – the “situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity” (according to Investopedia).

Fast forward to today…

Everyone is talking about oil prices.  Specifically, the price of oil hitting the mid-$50 per barrel range for WTI and over $60 for Brent; according to Bloomberg Energy as I write this, WTI Crude Oil is at $54.74 per barrel, a 0.81% increase, and Brent Crude Oil is at $60.70 per barrel, a 0.35% increase. These prices also mark great price points thus far in the year.

CNBC put out an article today entitled, “The oil market just did something it hasn’t done for nearly three years,” where it discussed that the WTI calendar spread for the next six months has moved from “Contango” into “Backwardation.” The CNBC article states that based on Reuters data, the 6-month spread for WTI has slipped from Contango into backwardation for the first time since November 20, 2014 (Brent crude moved into backwardation earlier this year).

To me, it still seems like we may be talking about dance moves…

Let’s break this down:

• According to the previously mentioned CNBC article, “Backwardation is when the current price of oil is higher than a future cost of oil. It is seen as a sign of higher immediate demand. Conversely, Contango is when the futures price of oil is higher than the spot delivery price.”
• Another CNBC article entitled, “US crude oil fails to take out 2017 high as a ‘cruel’ month for energy market begins,” provides that backwardation indicates the market is tightening – backwardation means “prices for future delivery are less expensive than contracts to ship oil at an earlier date.”
• According to Investopedia, “Backwardation is the opposite of Contango.”

It is all linked to supply and demand. According to Investopedia, “[t]he primary cause of backwardation in the commodities’ futures market is a shortage of the commodity in the spot market.”

CNBC’s article explains, “[t]raders have less incentive to hold crude in storage because they stand to make more by selling it immediately. It also prevents U.S. shale drillers from locking in higher future prices with buyers, which tends to rein in their production.”

The takeaway is this – the price of oil may have moved from the hokey pokey to the two-step. The good news is that regardless, oil prices are still dancing.

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