Saturday, April 18, 2009

The Curve of Forward Prices

An article containing some good explanation about what the forward price curve represents can be found at Here is an excerpt:

Looking at the prices of long-dated oil futures can be useful as they provide the best tradable indication of the future expected price of the commodity. While long-dated futures contracts are traded less frequently than their near-month counterparts, the December contract is an exception as speculators and producers attempt to lock in or hedge oil exposure for year-end.

Oil producers use the futures prices as a key benchmark for domestic production, using the contracts to hedge current inventory or using the price to evaluate potential exploration projects.

"The forward price of crude oil is a combination of the need to fund existing stock levels and trading flows, which in turn embody price expectations," said Lawrence Eagles, global head of commodities research at JPMorgan.

While long-dated futures contracts are still much higher than the near month, a situation described as contango, the forward curve has been flattening out recently as traders have adjusted expectations after weeks worth of data from the Energy Information Administration, an Organization of Petroleum Exporting Countries meeting and bulk shipping statistics. As the curve flattens, the long-dated contracts fall at a faster rate than the near-month contract, or the near-month contract rises faster than those further out. A year-end rally could be thwarted by continued weak demand and burgeoning supplies. Oil demand is forecast to fall to the lowest level in five years, according to the Energy Information Administration. U.S. crude oil inventories are at 18-year highs.

No comments:

Post a Comment