The Forward Curve: Want an 11% Yield? Give Oil a Try

Because if there’s one thing over which there’s growing consensus in the oil market, it’s that the forward curve is more reflective of $100-a-barrel oil than the current price.

The spread between the nearest two December contracts hit a premium of $10 a barrel this week. The only other time this century it has been so strong was in 2013. When more immediate prices are pricier than later ones, it is called backwardation and is normally viewed as a bullish indicator.

“Crude backwardation remains relentless,” said Keshav Lohiya, founder of Oilytics, noting that the last time spreads were this strong WTI was above $100. “Either structure is too pricey or flat price is undervalued, our guess is the latter.”

The strengthening curve comes at a time when increasing numbers of analysts, traders and investors are once again talking of the prospects of oil prices returning to $100 a barrel. That possibility is being supported by an energy crisis that’s boosting demand for petroleum to be used for power generation, and steadily decreasing stockpiles worldwide.

In the case of WTI, though, the strength has been compounded this week by a sharp drop in inventories at the U.S. storage hub of Cushing, Oklahoma, where oil futures are priced.

The market could be just weeks away from Cushing effectively running out of crude, JPMorgan Chase & Co. analysts including Natasha Kaneva said in a report. If nothing changes at the storage hub, WTI front spreads may spike to record levels and into a “super-backwardation scenario,” they said.

Wagers on market structure show up in traders’ positioning figures too. In WTI, one group of speculative investors is holding the largest position in spreads since 2008, according to Commodity Futures Trading Commission data.