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We are not of the mind to make front running calls on economic data points, particular as it relates to releases from the Department of Energy, but we did want to highlight the current futures curve for Oil in advance of the 10:30am Weekly Petroleum Status report tomorrow. The curve is sharply in contango. The implications of this are that producers, and those who own physical oil, are overwhelming being paid to store crude. Just by rolling the futures, they can gain a nice profit.

The chart below outlines the steepness and deeply contango nature of the curve, which is supported by ample open interest liquidity. More specifically, the table below quantifies the profit to be made by storing and rolling over a futures contract on a monthly basis. Just three months ago, there was literally no profit to be made by storing and rolling over the contract. Currently, based on the curve, there is a ~14% gain to be made in one month and ~35% gain to be made for four months.

This shape of the futures curve is only one factor in our multi-factor Oil model, but it is currently painting a bearish picture for the balance of Oil’s supply and demand. The implications of the curve are, in effect, that in the short term the world is awash in Oil. Obviously, a number of factors can alter this oversupply picture very quickly, such as an OPEC that sticks to its production cuts or a reacceleration of global growth in H1 2009.

This data suggest that the DOE report for tomorrow should be decidedly bearish. If the report is not bearish, then as Keith would say look for Oil to “pop out of its hole” . . . in a big way.

Daryl Jones
Managing Director