Monday, 7 December 2015

Oil to stay low for a long, long time, according to traders

Crude oil slid nearly 3 percent on Friday, as Organization of Petroleum Exporting Countries (OPEC) refused to cut production levels despite an ongoing supply glut that has pressed down mightily on prices. And at this point, traders don't appear to see crude oil rising back above USD 50 per barrel any time soon. With the most widely traded Brent crude contract trading just above USD 40, the first futures contract that shows oil above USD 50 expires in the second half of 2017. 

Crude oil for December 2017 delivery (which is more liquid than other far-in-the-future contracts) is trading at just USD 51 per barrel. Futures contracts don't reflect pure expectations of where that commodity will trade; they also reflect things like the costs of storing that commodity, the extra price that users will pay to have access to the commodity for convenience reasons, and prevailing interest rates. 

Yet the crude oil futures curve clearly reflects expectations that the commodity's plunge below USD 50 is not a short-term phenomenon. "The futures curve is telling you that the market is totally oversupplied, and will remain so for a long time," commented Andy Hecht, a commodities trader and the author of How to Make Money with Commodities. The latest bad news for crude came on Friday, when the OPEC decided to take a "wait and watch" approach to production levels, rather than taking action as oil prices continue to plummet. 

That spelled bad news for oil bulls who may have been hoping the oil cartel might signal a policy shift.

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