John Kemp points out in a Reuters article that hedge funds are betting that markets are rebalancing and moving toward backwardation… These traders are using calendar spread options or cso’s to reflect this view (http://www.reuters.com/article/oil-options-kemp-idUSL5N1FH4OP ):
“Hedge funds and other money managers have amassed net long positions equivalent to 160 million barrels in calendar spread options on the New York Mercantile Exchange (NYMEX).
Fund managers have amassed a net long position equivalent to 80 million barrels in physically settled calendar spread options (tmsnrt.rs/2jZ9D1H).
They have also accumulated a net long position equal to another 80 million barrels in financially settled calendar spread options, according to an analysis of regulatory data.
Fund managers will make money from their net long positions if the price of nearby oil futures contracts rises relative to longer-dated futures contracts as the oil market rebalances.”
Here are his charts:
The value of the calendar spread option is based on the front spread of WTI futures which is based on the price of WTI crude oil in Cushing, Oklahoma… Additions to storage capacity, the reversal of and construction of pipelines to take oil away from Cushing and the ability to export US produced crude support the spread… OPEC success will also eventually help reduce oil in storage… Additional pipelines bringing oil into PADD II or specifically into Cushing will keep the spread depressed… And, finally, hedge fund length in futures contracts will also have a negative effect on spread values as rolling positions equate to selling the front month and buying the second month….
Owners of storage facilities who hedge are on the same side of these trades as they are effectively short the spread (storage owners profit in times of contango, lose in times of backwardation)… To hedge, they would be getting long the spread, too… Who is on the other side?
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