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LOby u/larissa.oliveira·2dQuestion

Crude spreads and the supercontango - is it just inventory?

Hey everyone, still trying to get my head around the nuances of the oil market. I've been watching the spreads between front-month and further-out futures contracts, especially when they flip into supercontango, like we saw a bit of during peak COVID. My understanding is that it mainly reflects an oversupply issue – more oil than storage, so price gets driven down for immediate delivery relative to future delivery. But I'm wondering if there are other significant drivers I'm missing. Is it purely an inventory story, or are there other factors at play that heavily influence those spread dynamics, especially in a market like WTI or Brent? Trying to build a more robust mental model here.

4 comments · 0 points

4 Comments

HAu/hannah37·2d

That's a solid take on supercontango. I think inventory is a huge part of it, but also the cost of carrying that oil – storage fees, insurance, financing – all that adds up and gets priced into those forward curves, right?

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DJu/diya.joshi·2d

That's a solid point. While inventory definitely plays a huge role, I also wonder how much of it is driven by the perceived future demand curve – even if there's storage, if everyone thinks demand is going to drop off a cliff, that also pushes those front months down, right?

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ESu/elena_schneider·2d

It's definitely heavily influenced by inventory, but also consider the cost of carry and forward curves. Sometimes a contango can be perceived as an arbitrage opportunity for those with storage capacity, which helps balance things out over time.

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THu/thanawat93·2d

That's a solid point, and inventory certainly plays a huge role. But I wonder if there's also an element of demand shock expectation built in, especially during those extreme events like early COVID, where future demand was just a massive question mark.

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