Saturday, January 17, 2009

Traders Playing Pricing Futures for Oil Profits

By Mark Shenk

Jan. 16 (Bloomberg) -- Crude oil rose in New York for the first time in three days as traders purchased contracts in an attempt to profit from higher prices in future months.

Oil for delivery later this year is more expensive than for the front month, allowing traders to lock in gains. The February contract, which expires on Jan. 20, is trading at a $6.06 discount to March, down from $8.14 yesterday. Investors who made bets that February oil would fall further closed out their positions today, an action called short covering.

There’s “short-covering ahead of the Tuesday expiration,” said John Kilduff, senior vice president of energy at MF Global Inc. in New York. The discount of February oil to March touched a record for the contracts yesterday, “so it was due for a bounce.”

Crude oil for February delivery rose $1.11, or 3.1 percent, to settle at $36.51 a barrel at 2:47 p.m. on the New York Mercantile Exchange. Futures declined 11 percent this week and 60 percent from a year ago.

There will be no floor trading in New York on Jan. 19 because of the Martin Luther King Day holiday.

The price of oil for delivery next December is 58 percent higher than the front-month contract. This structure, in which the subsequent month’s price is higher than the one before it, is known as contango.

The oil market may have also increased because of rising equity prices. U.S. stocks gained for a second day as investors snapped up shares in the Standard & Poor’s 500 Index trading at its cheapest valuation since 1991. The S&P 500 added 0.8 percent to 850.12.


“The oil price and the equity markets are hostages to people’s perceptions about the economy,” said Adam Sieminski, the chief energy economist at Deutsche Bank AG in Washington. “On the days when we think we’re starting to hit the bottom of the economy, the oil market and the equities markets go up.”

Crude-oil inventories at Cushing, Oklahoma, where West Texas Intermediate traded on the Nymex is stored, climbed 2.5 percent to 33 million barrels last week, the Energy Department said on Jan. 14. It was the highest since at least April 2004, when the department began keeping records for the location.

“Increasingly, the front month futures contract is trading in relation to supply and demand at Cushing, Oklahoma, as opposed to the global demand picture,” said Tim Evans, energy analyst with Citi Futures Perspective in New York.

OPEC agreed to a record 9 percent cut in supply targets at a Dec. 17 meeting to reverse the plunge in oil prices, which have dropped more than $100 a barrel in New York in the past six months. The group’s next scheduled meeting is on March 15.

Brent crude oil for March settlement declined $1.11, or 2.3 percent, to $46.57 a barrel on London’s ICE Futures Europe exchange.

Demand Forecast

Prices dropped earlier after the International Energy Agency said that global demand will decline for a second year, the first back-to-back contraction since 1983.

The IEA, which advises 28 nations on energy policy, cut its 2009 forecast by 1 million barrels a day on expectations the economic outlook will deteriorate. The agency estimates consumption will shrink 0.6 percent to 85.3 million barrels a day. OPEC, the U.S. Energy Department, JPMorgan Chase & Co. and Deutsche Bank AG have already said demand will fall this year.

“The IEA numbers certainly highlight how weak the economy is and the impact on demand,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “The IEA report is joining a chorus of very bearish numbers.”

Higher Volume

Volume in electronic trading on the exchange was 428,966 contracts as of 3:49 p.m. in New York. Volume totaled 652,858 contracts yesterday, up 37 percent from the average over the past 3 months. Open interest yesterday was 1.26 million contracts. The exchange has a one-day delay in reporting open interest and full volume data.

Oil may fall next week, according to a Bloomberg News survey. Seventeen of 35 analysts, or 49 percent, said futures will decline through Jan. 23. Twelve respondents, or 34 percent, forecast oil will rise and six said there will be little change. Last week, 41 percent of analysts expected a gain in prices.

To contact the reporter on this story: Mark Shenk in New York at

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