MarketWatch reports on a peculiar situation developing in crude: super contango. Right before the July 2007 peak I blogged about how contango could cause oil to rise and rise beyond supply/demand, until the bubble bursts. Contango is normal for commodities markets, where the curve of spot delivery price to the next futures delivery price, and out towards later futures dates, is upwards sloping, reflecting the costs of storage and risk of demand fluctuation. Oil insiders play the "basis" between the spot price and the next futures price (and there are other bases for farther out futures). We now have a very steep contango, where the spot price to the next delivery is pronounced. The basis between Feb and July delivery is an astounding $15 or almost a 40% premium ($37 to $52). The basis at the just prior options expiration date, Dec19, between the expiring January contract ($33.87) and the February contract was $8.49, the widest contango between two successive months' contracts.

I was watching this, and on Dec22 the spot price got below $31, and then ran up in two weeks over 60% to crest $50. In the past week it has fallen to under $38. I have a friendly bet that before Obama's inauguration it will go below $28. Since the options for the Feb contract expire this Friday, it will probaby make or break that bet either Friday or the following Monday. Of course, a lot more can be made actually trading oil, but it is a very volatile commodity!

What is driving super contango is falling demand, an incredible over-supply, and expectations of higher prices this summer. The storage bins in Cushing, OK are rapidly filling up. I understand that many tankers are idling or coming very slowly, so more is stored on the sea. Does it make sense that prices will rise to the levels above $50 when so much excess crude is coming in? The curve seems more poised to collapse.