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October cover


A look at the weak global crude price and how to monitor for changes
Cost Management Solutions    
Cost Management Solutions
Crude prices have been on a strong downtrend since June. Below are charts that show the drop in West Texas Intermediate (WTI), the U.S. benchmark, followed by Brent crude, the global benchmark.

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Crude prices have fallen because of a weak fundamental picture. On the supply side, crude production is growing, especially in the United States. Also, the Organization of the Petroleum Exporting Countries (OPEC) production has been up, primarily on the recovery of lost production from Libya. Libya’s production used to be 1.4 million barrels per day (bpd), but fell due to local militias taking control of production fields and export facilities. Production had dropped to about 200,000 bpd for a while, but has been climbing over the past couple of months. Libyan production is now running around 900,000 bpd.

On the demand side, weak global economic conditions have kept the growth in crude demand in check. Breakneck economic growth in China is slowing and Europe is flirting with going into a deflationary spiral or stagnation. The result has been a glut of oil in the Atlantic Basin, which has put a lot of pressure on Brent crude prices.

So, how long are these weak conditions going to last? No one really knows for sure of course, but right now the market is pricing as if it is going to be a while. This brings us to the key point of this Trader’s Corner. We are going to look at the forward price curves for WTI and Brent crude and see what they tell us about the condition of crude markets.

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In the charts at the beginning of this article, we showed a price history of the front-month futures contract for WTI and Brent crude. Currently, the front month futures contract for crude is November, so when prices are being posted on the news, it is the November price that is being reported. But crude is being traded further out into the future.

A chart like the one above plots prices beyond November and is referred to as a forward price curve. The curve above is plotting the future price of crude over the next year, through October 2015. This chart is plotting the forward price curve for Brent (gray) and WTI (green).

Note how different the curves are for each crude benchmark. Generally, WTI crude prices are going down with each month that passes. This is known as a backwardated price curve. In a “normal” supply/demand situation, the front-month barrel of crude is priced higher than the further out months. That’s because the front-month barrel is the one that is currently needed by the refiners. Therefore, it is more valuable in a balanced or tight supply/demand situation. Despite WTI crude prices falling, its futures curve has remained in backwardation because of the improving economic situation in the United States. In a two-week stretch from mid-May, propane prices dropped about 5 cents per gallon. Since propane was falling at a time crude prices were rising, it dropped in relative value to crude. A barrel of propane was trading at around 45 percent of a barrel of WTI crude at the beginning of May; a month later it is at 40 percent.

However, the U.S. economy is the exception at the moment, with most of the rest of the world’s economies struggling to pull out of recession, or in the case of China, dealing with a rapid downtrend in growth. Since Brent crude is the global benchmark, its forward price curve reflects the fundamental weakness of too much supply and not enough demand worldwide.

Its price curve shows prices for future barrels getting higher with each passing month. This forward curve is said to be in contango. This price structure suggests that, due to an overabundance of supply relative to demand, currently the nearby months are less valuable and are becoming discounted to the value of crude further down the line. The assumption of the curve is that the conditions causing the current soft prices will be resolved, and crude prices will return closer to “normal” at some point in the future.

How far out the contango goes gives us a clue on how long the market believes it may take for conditions to return to normal. The chart above shows the curve on Oct. 2. Note that the price of Brent crude remained in contango through the entire curve. Now, look at the forward curve for Brent below.

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This was the curve for Brent on Sept. 29. At that point, Brent was contangoed only through August 2015. In September and October 2015, prices became backwardated again. That was an indication the market saw conditions would perhaps return to normal in about 10 months.

This week the view became more bearish. Now, Brent does not become backwardated until December 2015. That means that, in just a couple of days, the outlook changed to conditions getting closer to normal in about 14 months. Now, we warn you to not get caught up in the 10 or 14 months part and count on global crude markets being soft for a particular period of time. More importantly, monitor how the forward curve is trending for Brent.

Whether we are crude buyers or propane buyers, monitoring the curve will help us be better buyers. Once winter influences are gone, propane prices will become much more attached to crude again. At that point, we want to know as much about the prospects for crude as we can.

Here is the application for this information/knowledge: If the Brent crude forward curve is becoming more contangoed, we would probably be less aggressive buyers for our future propane needs. However, if we see the Brent curve becoming less contangoed, then we would become more aggressive buyers for future needs.

A less contangoed Brent curve would tell us that crude traders are seeing the global supply/demand balance getting tighter, which would generally be more bullish for crude prices and therefore, possibly propane prices.


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It was a strong week for propane, as seasonal influences and a light build in inventory kept up the buying pressure. Crude was volatile, but the trend remained bearish with weak fundamentals the key driver.

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Last Week's Highlights
Seasonal demand had propane up, shaking off bearish inventory data the past two weeks. Crude prices were up, even though most news was bearish. It appeared money coming out of U.S. equities markets was finding a home with crude futures.
Propane shook off a major sell-off in crude to push higher. Crude prices plunged lower on a sell-off in gasoline on the day October gasoline futures contract was set to expire. Weak U.S. economic news and higher OPEC crude production added weight to falling crude.
The U.S. Energy Information Administration reported a lighter-than-expected build in U.S. propane inventory. Propane traded higher with support from the change to October pricing. Crude could not move higher, despite bullish crude and refined products inventory data.
An announced crude price cut by Saudi Arabia hit crude prices hard early, but they managed to rally back late. Propane gave up some of Wednesday’s gains early, but rallied back to finish up on the day.
Good trading volume for propane. Markets were volatile, but in the end, prices were little changed from Thursday’s close. Continued worries about oversupply in crude markets kept prices retreating.

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Cost Management Solutions LLC (CMS) is a firm dedicated to the analysis of the energy markets for the propane marketplace. Since we are not a supplier of propane, you can be assured our focus is to provide an unbiased analysis.

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