Thursday, November 5, 2015

Black Swan Event: Oil On Verge Of Imminent Collapse

A "super contango" in the futures market put a floor under oil in 2009. That can't happen now because the oil glut has already saturated the futures market via arbitrage. Speculators tried to put a floor under oil, and in the process exhausted all storage capacity. The potential for a "super contango" no longer exists. The next leg down will be fast and brutal as the spot market is flooded by oversupply dragging down the entire term structure aka. futures, via arbitrage...

Aug. 6, 2015
CME: Waiting For Super Contango To Put Bottom Under Oil
The last major bottom in oil occurred back in early 2009 after the Financial Crisis. The 12 month futures spread "Contango" at that time was a colossal $22, meaning the 12 month future price was $22 above the spot price. Today the 12-month futures contango is $6.

The futures market has been putting a temporary floor under the oil price as oil was put into storage (see below). However, the spread has narrowed and it has become essentially unprofitable or even impossible to store additional oil.

Does this look like a "floor" in price?
U.S. oil storage and production over 35 years. The 2009 levels are circled in blue:
Production (red) and Storage levels (black) (days of supply, right scale) for U.S. Crude Oil over 35 years

Oil with all Commodities
In other words oil fell to the 2009 level, speculators stepped in and put a temporary floor under price. However, this floor (blue line) is fake and temporary, as we see from all commodities (red):

Oil volatility (red) with price
Price is trending down, now at 2009 levels. No panic. Yet...