Oils Well That Ends. . .Well

Source:

"The virulent crude oil contango. . .was halved Tuesday, a signal that inventories may be being drawn down rather than built up."

The virulent crude oil contango that's been both revered and reviledódepending upon your market stanceówas halved Tuesday, a signal that inventories may be being drawn down rather than built up.

Of course, there's a lot of money on the table, so traders could be forgiven if they just wanted to rake a few bills into their pockets by closing out their bear spreads. You sell nearby futures and buy deferred contracts in a bear spread; reversing the trade narrows the contango.

Last week, the quarterly NYMEX contango spiked to a record-breaking $15.21 a barrel. By Tuesday's close, the spread had been pared to $7.82. That reduced the potential cash-and-carry to 17%, so there's still bank money in the trade. The contango wasn't the only spread trimmed yesterday. There was a fair reduction in refining margins, too.

The vagaries of compounding in the doubly-leveraged SCO fund have more to do with this seeming pricing anomaly than anything else. Still, fund investors aren't looking at this gift horse's teeth.

Enjoy it for now. There's likely a lot more volatility ahead.

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