Thursday, October 11, 2007

Backwardation and Contango

Some time ago, a reader asked -

"The crude market seems to be trading back in (at least a mild) backwardation, which means lower inventories. How do you see this impacting on World Scale points/BDTI?"

My view is that the global supply chain for oil is in many cases up to 6 months long, so I typically try to average monthly and weekly figures into periods that are at least 3 months long. Short term fluctuations are just noise. Tanker rates are a matter of supply and demand. There is increasingly less oil being exported and more tankers in all segments entering the market. Even in the face of positive economic growth and supposedly higher demand for oil - the oil simply isn't there to move and their is an increasing glut of tankers. I would expect rates to drop, but there is hardly any room for them to drop, they are already so low.

The only mystery to me is why the valuations for the tanker companies/stocks continue to rise. The investors and the market must see something I'm missing, but I've yet to find what that is.

Here is a good discussion of the backwardation / contango issue :
Speculation and fundamentals in oil prices

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