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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Market Contango Leads To A Dangerous Game In Oil

Crude Oil Futures

Sellers hit April Crude Oil futures for a sixth straight day on February 11, driving the market to nearly a fresh 12-year low. Huge supply and new forecasts calling for $20.00 crude over the near-term then a range bound trade into the end of the year were two catalysts cited by traders for the sell-off.

Traders are already pricing in more supply at the Cushing, Oklahoma delivery hub for next week’s inventories report. As of February 5, crude inventories in Cushing had reached an all-time high a little short of 65 million barrels, according to the U.S. Energy Information Administration. Private forecaster, Genscape, is already predicting a build of almost 425,000 barrels for the week to February 9.

Activity at the exchange also suggests that prices are headed lower over the near-term with most of the action taking place in the $25 put market. The chart indicates that given the current level of volatility in the market, it may just be a matter of days before these puts will be “in the money”. To those new to the futures markets, a put is an option contract giving the owner the right, but not the obligation, to sell crude oil at a specified price within a specified time. So this means that traders are so bearish that they are buying the right to sell crude oil under the current market price.

The thought is also the theme in the futures market where the spread between the March and April contracts in U.S. crude widened…

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