"For leading U.S. shale oil producers, $40 is the new $70."
I was wondering what is keeping oil above $30, which has been tested multiple times in the past month...the answer lies in the "contango spread" between future delivery contracts and the front month price.
The spread between the December 2016 and March 2016 contract just widened to $11/barrel whereas in January it was at $5.5/barrel. That increased spread allowed speculators to step into the market to store crude via arbitrage.
However, the spread is continually widening, and oil volatility is trending with the spread, as the crude overflow hammers the spot oil market...
To put things into perspective, the contango spread at the bottom in 2009 was $21 on a 12 month basis...
WTI Crude (black). Volatility (green). 9 month spread (red):
Reversing the spread (front month - back month), shows the correlation to oil price and also shows the accelerating rate of widening.
It took a doubling in the contango spread to gain back half of the losses since December, not a great ratio...
Two separate markets have emerged...
March (red) versus December (black):
(NYMEX crude which is slightly lower than WTI)
