The Oil Drum

The following is from guest contributor Jeff Vail. Jeff is an intelligence analyst focusing on energy and infrastructure-related issues. He is a graduate of the US Air Force Academy and a former USAF Intelligence Officer. Jeff previously wrote on the The Oil Drum about the increasing violence in Nigeria.

He discusses an interesting phenomenon with respect to energy futures prices, that long dated futures are limited in how much they can go up (but not down) based on arbitrage principles. Because the price of distant oil futures quickly rise alongside spot market prices when spot markets are moved by short-term events, we can infer that major producers such as Saudi Arabia think that the future price of oil will be much higher than the price at which distant futures are currently trading. This provides further support to the theory that they don’t believe their own statements on their future production or on the future price band for crude oil. Jeff's post is under the fold.