By Jim Wiandt

There are some incredibly interesting and important issues around oil futures, as Matt Hougan points out. And with oil at around $130, conspiracy chatter has grown to a roar.

There are intriguing issues around contango and backwardation of oil futures and the crude oil market in general. And we, all of a sudden, with ETFs having entered the business of commodities investing, find ourselves at the center of it.

As a side note, Matt, nice job on explaining what backwardation and contango ARE.

First let me say that I am NOT a commodities expert (though I have played one on TV), so take the following as the conjecture of an outsider looking at the markets.

My first question would be — what are we to make of the historic contango and recent backwardation of crude oil futures? Matt mentions that supply may be catching up and taking the pressure off of the market and pushing the market back into contango. Well, here’s my everyman observation. What moves price? If you said supply and demand, you win $500 on the daily double.

So to me there are two kinds of supply and demand here. There’s the supply and demand for the physical oil to turn into gasoline and Vaseline and such, and more significantly of late, for INVESTMENT. And that can include all sorts of peripheral things, including playing the market, hedging exposure to energy, hedging currency or other risk tied to petroleum prices, etc. Obviously, the investment side can be more. speculative.

I don’t think it’s a reach to say that demand from the investment side has risen as demand for the actual black gooey stuff has risen. It’s a sort of self-perpetuating frenzy.

So intuitively, it makes all the sense in the world that futures would be rich vs. spot when the price of oil is going up. There’s more demand on the buying side, so that pushes the futures returns up, relatively speaking. So now with signs that the trend may be reversing, what does that mean? Well call me crazy, but I’d say it could mean that oil is due for a bit of a retreat.

Certainly a lot of pressure has been put on by the U.S. and other Western governments to increase supply and push down the price of crude. That doesn’t necessarily have the effect you might like if the investment tail IS to some degree wagging the crude oil dog. But as with anything in investing, the investing market does react to what’s going on in the real world. possibly to the effect of exaggerating trends and overpricing in future movements in the present.

Ah, but that’s a debate for another time. I guess my point is that maybe (hopefully) we may be entering a market of retreating oil prices, a stronger dollar, etc. But if there’s some kind of massive oil shock, all bets are off.