Oil markets are currently in severe contango, as anyone who has looked at a
NYMEX screen can observe. Today’s settlement price for February 2009 WTI was
$37.59/bbl, or some $19.58/bbl below the closing price for December 2009 WTI.
February 2009 prices are more than $20/bbl cheaper than February 2010 and if
you go out as far as December 2016, you find a WTI settlement of $77.23, nearly
$40/bbl above the cost of spot crude these days.
The contango reflects a scarcity of storage, but all signs point toward
more tanks getting filled. Once that happens, cash prices could head to the
$30/bbl first quarter 2009 target that Goldman Sachs put on WTI earlier this
winter. That in turn could hasten a further disconnect between distressed near-
term prices and far-forward dated prices that reflect expectations of an
economic recovery and more stable supply.
The road to a super-contango is not a smooth one, the company notes, and
indeed oil bears were spanked pretty severely in early 2009 when crude briefly
soared to $50/bbl. The investment house clearly believes that the factors that
brought about the early 2009 rebound were temporary, however, and do not
represent the “foundation for a sustainable recovery in prices.”
The temporary or transient factors that led to the rally included:
–Fighting in the Gaza Strip. The higher tension in the Mideast provoked
thoughts that the conflict could widen, but concerns about the trouble
spreading to Iran or other oil producing countries reflect “low probability”
events.
–The saga of Russian cut-offs of natural gas to the Ukraine and some
eastern European countries. Goldman estimates that even if the dispute is not
resolved, fuel-switching could only account for about 100,000 b/d of oil demand
at most.
–Index rebalancing or re-weighting. Some of the early 2009 bounce higher
was attributable to some money flowing into commodity funds, and more
particularly, some additional crude purchases for funds like the Standard &
Poors’ GSCI index and the Dow Jones AIG index that increased the percentage of
money allocated to WTI crude. Goldman Sachs observes that a majority of index
money is going toward investment in “enhanced strategies.” The translation to
the unsophisticated observer — the buying is concentrated much further out in
the pricing curve, so it is unlikely to prop up currently distressed crude
contracts.
The outright price performance targets for Goldman haven’t changed —
researchers have held to a $30/bbl first quarter 2009 target with a $65/bbl
year-end number tied to more stable inventories in the second half of 2009.
But in the meantime, the investment house says that the world needs to get
used to huge day-to-day swings. Price volatility will remain high and “skewed
to the downside” the company warns. Stability comes only after prices are
forced low enough so that production shut-ins take place. The Goldman research
team does not expect a decline in volatility in the next few months.