What the SPR Refill Means for Oil Futures
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Longer-Dated Futures Prices

At the back of the curve, the concept of perceived support or a “floor” isn’t a new one.  Longer-dated oil futures prices have often been bound by the perception of the marginal cost of oil production needed to balance the market. This can create less volatility in the forward futures prices. 

For most of 2015 through 2019, the world’s longer-term oil needs were expected to be met at around $50-$55 per barrel. Oil futures prices falling below these production breakeven levels would bring in producer buying – that is, covering hedges – providing stability to longer-dated futures prices.  Opportunistic traders at hedge funds or commodity trading houses may also choose to step into the market and buy futures near these levels. 

But expectations for long term oil prices can shift. From 2009 to 2013 analysts largely expected that oil prices of $80-85 were needed to create sufficient investment in new oil projects to offset declines and meet growing global demand.  But an underestimate of U.S. shale production and increased stability in Middle Eastern supplies led to a sharp reset in this level. During 2015, the five-year-forward price of crude oil dropped to a low of $50. The spread between prices for nearby delivery and these longer-dated values flipped from positive $20 per barrel to -$15 per barrel as inventories began to build and expectations for high inventory persisted.  

WTI Spread

Stability in longer dated crude values can mean greater volatility for crude oil spreads, and a unique opportunity for traders.  Crude oil futures spreads offer lower margin: a spread position can require only 10-20% of the initial margin of an outright futures position.

The U.S. government as a new buyer of forward crude oil adds a fresh dimension for futures traders to keep an eye on, and adds new prospects for asymmetry in prices and oil spreads in the coming years. 

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