Monday, March 7, 2016

Rule #1: Parabolas Always End Badly

Oil is not rallying, oil is in an historically unprecedented glut. However, the cost of carry is rallying along the entire futures curve, further steepening the curve. Bulltards think it's bullish, when it's the exact opposite...buying high and then selling low with known losses ahead of time, is never bullish...

At expiration last month, the December-March spread guaranteed a 30% loss in 9 months for anyone buying December. The current one month negative yield roll of -5% is -80% annualized. "That's so fucking bullish". 

Suffice to say that putting excess oil in storage tanks and assuming that will clear a supply glut, is a jackass strategy for jackasses. The futures market has artificially supported the spot market, but that game is ending, amidst a dwindling supply of cheap storage. 

"I'm glad I paid top dollar for the upper deck, avoid all the hoi polloi"

The steepening of the curve means that the glut has reached the futures market in the form of higher cost of carry. The world is running out of cheap storage space. As we see below, the contango spread is going vertical, which is the opposite of bullish, because it takes demand out of the market, since unhedged buyers are GUARANTEED losses, as the futures roll forward towards expiration.

And suffice to say none of this futures-market chicanery does anything to alleviate the monthly mark-to-Cushing price "discovery". A discovery that is realized along the entire futures curve. 

9-month spread (March-December)