NEW YORK (Dow Jones)
Crude-oil futures rose to their highest level in nearly three months in heavy trading Monday, settling above $90 a barrel as a condition emerged in the market suggesting a supply squeeze in the near term.
The spread between the Nymex crude-oil contracts for the current month and next month turned strongly positive Monday, entering a state called "backwardation" in which it is more expensive to buy a commodity now than in the future. This condition is the opposite of the market's state for most of the time since the financial crisis exploded in September 2008, suggesting the supply-demand picture is tightening. It is a bullish signal for oil traders, stimulating long investment or, at a minimum, the closing out of short positions.
"We're going to start seeing people believe this is going to go higher rather than come back down," said Carl Larry, director of research and derivatives at Blue Ocean Brokerage. "Now that it's flipped over, you have a lot of those people who were holding out hope for a short market who are going to get flat or go long."
Data released last week by the U.S. Energy Information Administration showed continued slack demand for finished petroleum products, but also reflected low levels of imported crude oil and large draws on inventory, bringing oil stockpiles to their lowest level for the year.
"We haven't seen that in years in crude oil, and that is another positive step in the market," said James Cordier, a portfolio manager at OptionSellers.com. "This speaks to good demand for the market."
While backwardation is good for oil investors betting on higher prices, it may not be good for consumers at the pump if the condition becomes more steep and prolonged. Since it just emerged and could reverse itself, analysts are mixed about the long-term implication until the trend becomes more clear.
"It would suggest that supplies were tightening up and probably mean that gasoline prices are going to move higher," said Bill O'Grady, chief market strategist at Confluence Investment Management. Backwardation "implies that there's always bullish pressure there. My hunch is that at best it's meaningless, prices are high and stay where they are, or at worst you start to see prices lift."
Light, sweet crude oil for December delivery settled up $3.87, or 4.4%, at $91.27 a barrel on the New York Mercantile Exchange. Brent crude oil on the ICE Futures Europe exchange ended the day up $1.89, or 1.7%, to $111.45 a barrel.
The market was also rising in tandem with U.S. and European stocks and the euro, on what were seen as positive developments out of Europe, where finance and government officials are hashing out a plan to deal with the debt crisis that has weighed on markets for the last year and a half. Officials have said they are making progress, and the summit is scheduled to wrap up Wednesday, when French President Nicolas Sarkozy and German Chancellor Angela Merkel have said they will reveal their solution.
Still, some analysts are urging caution, suggesting the plan that will be put forth may be more of a temporary fix than a permanent, comprehensive solution.
"I think some people who aren't market observers are looking for some sort of big resolution in this week's announcement, and I don't think they're going to get that," said Brian Habacivch, a senior vice president at energy management company Fellon-McCord. "They're going to get a continuance...Maybe it gives everyone a sigh of relief for the next month or two, but it's not a resolution."
Front-month November reformulated gasoline blendstock, or RBOB, rose 0.4 cent, or 0.2%, to $2.6888 a gallon. November heating oil was up 3.71 cents, or 1.2%, to $3.0546 a gallon.
Copyright (c) 2011 Dow Jones & Company, Inc.
Copyright (c) 2012 Dow Jones & Company, Inc.
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