Futures spreads give crude oil prices a leg up

Even as oil drops, a shift in the way crude is being valued across future months points to surprisingly strong support for crude oil prices.

Market participants see the so called spread between crude oil futures contracts as a rough indicator of how tight supplies are. Currently, benchmark futures, which represent delivery in November are trading at discounts to December crude futures that are the smallest in almost a year. This indicates that many believe oil demand will soon pick up and eat into stockpiles that soared to multidecade highs during the trough of the global economic downturn.

Light, sweet crude oil for November delivery on Friday settled 87 cents, or 1.2%, lower at $69.95 a barrel on the New York Mercantile Exchange. December crude fell by the same amount to $70.33, or a 38-cent premium to November.

It was a different story when prices were falling earlier this year and spreads were widening to historic highs above $8: At that point, oil traders were desperately unloading contracts for near-term delivery because the demand outlook was so grim.

“The spreads are acting as support,” said Darin Newsom, a senior analyst at DTN, a market information service in Omaha, Neb. “They’re showing there’s commercial strength out there that isn’t registering in the news or might not be showing up in some [inventory] reports.”

Oil fell 8% in one week in late September on the back of official U.S. petroleum data that showed a surprise boost to commercial crude-oil inventories, leading some analysts to dust off predictions that prices could plunge from their perch of $70 a barrel.

Despite that notable weekly decline, prices held around $66 a barrel, at the lower end of a three-month-old trading range. As long as spreads stay slim, oil prices are unlikely to drop much further and probably will bounce back quickly if they do, analysts say.

Tags:  crude oil prices, futures