Oil contango

[Jaydee]

what contacts is that?

WTI CLU0 (Sept) vs CLV0 (Oct)

 

[scose-no-doubt]

aug sep was v volatile

 

[Jaydee]

Yes, it was about 50% more volatile than the screen i originally posted. Sorry, don't have time to post a new screen of it right now.

 

[SanMiguel]

The crude spread between two consecutive months does change but not by a lot. See attached.

Can't see much of a change there
So, in theory if the Sept is at 80 and Oct at 81, they will converge?
However, the Sept contract takes into account financing, etc. and ends earlier.
Really can't see how this can be done without taking the physical stuff.

A gold contango might be easier.

 

[scose-no-doubt]

Can't see much of a change there
So, in theory if the Sept is at 80 and Oct at 81, they will converge?

Nope. It's not that simple.

Spot + x = 1st month
Spot + y = 2nd month

Obv the spot moves but the discount factors used to arrive at x and y are the quantum of various economic/relevant costs.

 

[SanMiguel]

Nope. It's not that simple.

Spot + x = 1st month
Spot + y = 2nd month

Obv the spot moves but the discount factors used to arrive at x and y are the quantum of various economic/relevant costs.

So, when traders go long on the current contract, short on the future, they take the financing into account? ...sounds complicated just for 40 pips or so.
Is there a way to calculate it?

Personally, the gold contango (if it ever happens, presumably it's not as frequent as the oil contango) seems easier as you can buy the physical to hold and then short the futures.

 

[Martinghoul]

So, when traders go long on the current contract, short on the future, they take the financing into account? ...sounds complicated just for 40 pips or so.
Is there a way to calculate it?

Personally, the gold contango (if it ever happens, presumably it's not as frequent as the oil contango) seems easier as you can buy the physical to hold and then short the futures.

But isn't that the same thing, since you need the cash upfront to buy the physical? It's not like financing is a concept that only applies to oil.

 

[scose-no-doubt]

So, when traders go long on the current contract, short on the future, they take the financing into account? ...sounds complicated just for 40 pips or so.
Is there a way to calculate it?

That's what I was trying to find out. Haven't really had much time to be honest. Someone suggested contacting the exchange for information on what the discount factor is comprised of.

Personally, the gold contango (if it ever happens, presumably it's not as frequent as the oil contango) seems easier as you can buy the physical to hold and then short the futures.

You have to store and then sell the physical to realise your gain. Major hassle, no?

 

[gooseman]

future price = underlying + cost of carry (IR, storage etc)

not that difficult a concept when you break it down.

 

[scose-no-doubt]

What do they use for risk free rate in the real world, goose?

 

[SanMiguel]

future price = underlying + cost of carry (IR, storage etc)

not that difficult a concept when you break it down.

So, the futures price should always be higher than spot?
cost of carry = ?
If so, how would you ever get a contango between spot and the futures price?

 

[scose-no-doubt]

Maybe there's going to be a drastic oversupply of oil in the next few months that means spot will be much lower than current levels

 

[Martinghoul]

What do they use for risk free rate in the real world, goose?

Probably OIS if you're a bank desk getting funded by your own treasury.

 

[scose-no-doubt]

merci

 

[scose-no-doubt]

Backwardation in Brent crude earlier today. Tried a spread trade on the US light (feb/jan) before US opened given the new positive outlook that seems to be manifesting itself given stocks rally and the fact that my trial long dollar/short euro demo portfolio got smoked yesterday.

Now trading inside my robbing broker spread of 6cents/bbl per trade but still offside by 10 ticks.

Conclusion:
These spread/contango type trades will very rarely provide opportunity for your average retail guy. Oh well. C'est la vie.

not really a shocking conclusion tbh.

 

[scose-no-doubt]

9 ticks

 

[scose-no-doubt]

7

 

[scose-no-doubt]

5

would probably be ticking blue if I had better quotes

What real market spread on US light futures?

 

[FX Bandit]

5

would probably be ticking blue if I had better quotes

What real market spread on US light futures?

Less than that. It's only four in the bucket shop.

 

[Paulie_5]

Aug/Sep US Light spread been tightening over the last couple of days. Renminbi?

Anyone have any information on actual components of cost of carry for any commods or maybe just some learning materials showing pricing methods? I'd be much obliged.

I haven't read the whole thread, but to give you an idea of costs for storing crude oil on a tanker :

A VLCC (very large crude carrier) holds 2,000,000 barrels of crude oil. This will cost you about $32,000 / day for 6 to 9 months.

A Suezmax (next size down from a VLCC) holds 1,000,000 barrels. You're looking at around $28,000 / day for 6 to 9 months.

So you're playing with very big numbers .... And that is in today's market where the shipping industry is on it's ar$e. Back in 2007, it would have at least double that, if not more.

This sort of business is usually done by the massive physical traders like Trafigura, Litasco, ST Shipping, Vitol etc ... Not something you want to play around with unless you've got a few quid ...