Hi O, sure happy to expand on this, first of all Dennis Gartman does really fantastic work; he's the real deal.
I was kind of surprised by his being fairly blaise about The extreme contango nature of the crude futures forward strip.
for those just tuning in I was commenting back on Dec 4th
Message 25228548
btw, I was looking at the forward strip on Nymex crude, It pricing crude move upward into the $50, $60 and $70's.
That was a pretty rare forward price structure. The Market has a completely different opinion on what's going to happen to crude over the next several months and several years...
Market has voted that Crude will be go up in price.
my post was on Dec 4th....
Bloomberg comes out with an article on this on Dec 8th
Message 25235325
Bloomberg points out that with crude forward prices being so much higher, they illustrated how one of the foward contracts was selling for a 36% premium and thus Royal Dutch Shell and several of the other majors could earn an 11% return after storage, cost of capital etc by buying spot crude and loading it on the VLCC (Very Large Crude Carriers).
Now why That's a big deal is that the biggest Commercial Energy companies are doing this and they are the ones who are providing the selling at @ 36% premium ....
Traders who bought oil at the $40.81 a barrel on Dec. 5 could sell futures contracts for delivery next December at $54.65, a 34 percent gain. After taking into account storage and financing costs investors would earn about 11 percent, according to Andy Lipow, president of Houston consultant Lipow Oil Associates LLC
MY POINT IS SINCE IT'S the worlds big commercials who are providing the sell side volume in Dec of 2009 etc, where would the price be with out the big commercials doing all that selling these substantially higher future prices levels. It would be even higher if the commercials where not sitting their on the sell side, see what I mean?
So who is buying those long dated contracts?.
Obviously the hedge funds and specs where way too short, and low and behold... crude vaulted from 40.56 up to 48 in the ensuing few days. And today Crude was up $4.40.
Anyway Kudos to Andy Lipow for his analysis. his write up got lots of global coverage when I look at the google search on it.
lipowoil.com
and for a very insightful perspective that this type of Arbitration is not as easy as it might seem FTAlphaville points out the bucolic town of Cushing OK is the point of delivery for WTIC West texas Light Sweet Crude
The West Texas Intermediate oil contract, based on delivery in Cushing, Oklahoma, is good for 300,000-400,000 barrels per day. The storage capacity in Cushing is about 20.5m barrels. The trading volume on which that is based is between 500m and 600m barrels per day. If you are going to manipulate the price, you would think about doing that in Cushing.”
the below link is too a tremendously insightful post that I highly recommend.
v2.ftalphaville.ft.com
It highlights several salient points, one of which is It’s worth remembering, less than 1 per cent of Nymex light sweet crude contracts go into actual physical delivery
(My observation; that highlights the fact that all markets are based on perception and thus mass psychology, the psychology of crowd behavior. And Since all prices are determined by perception, confidence in the system is essential..... JP)
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