The Oil Drum

68 comments on Peak Oil Contango?

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jeffvail on March 25, 2006 - 10:58am

I have to disagree with you on this, as this entire discussion of contango and backwardation is a discussion of exatly when and why futures prices DO NOT remain a "running average of past prices MINUS what you would get by putting your money into bonds." Futures prices do, in fact, represent the market's expectation of the future equillibrium of supply and demand (price)--if they only represented today's price minus carry cost and bond yield, then they would always be in a formulaic backwardation, and this is definitely not what the price data actually shows. How, for example, would this "running average minus" maxim account for futures prices being higher in December 2007 than the spot price today? Just my opinion, but I think that some of the other commentary on this thread has done an excellent job of explaining the real mix between short-term risk and long term supply issues...

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PeakPlus on March 25, 2006 - 3:28pm

Yeah, sorry. Of course there's a premium for futures in the short term (about a year) - otherwise you would be in a deflationary world - buy tomorrow at a cheaper price than today, then you always buy 3-12 months in advance and sell at termin, month for month - a nice arbitrage...

But after that, it's a question of "investment" (speculation) and what's going to give you the most return on your money. In that respect, all investments must be equal. That's why the comparison with the bonds comes in.

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PeakPlus on March 25, 2006 - 5:32pm

Sorry again. I meant "sell at delivery date". German slipped in there somehow.

Anyway, the economist would say there's no free lunch - neither in the short term or in the long term, and the typical curve (Feb. 2005) demonstrates this wisdom.