It’s time to revisit what the oil futures market is pricing in.
The data make for fascinating reading and, arguably, positive news for investors in energy stocks such as Chevron (NYSE: CVX) and U.S.-focused energy infrastructure ETFs like the Global X MLP & Energy Infrastructure ETF (NYSEMKT: MLPX)
Here’s what it all means to investors. Interpreting the oil futures data In theory, at least, futures prices should trade in “contango,” meaning that prices further out trade higher than near-term prices. This reflects the cost of storage, insurance, and cash tied up in holding it.
However, in practice, oil futures often trade in backwardation (as in the chart), whereby nearer-term prices are higher than longer-term prices. This is possibly due to a concerted preference to avoid the risk of a future price rise due to OPEC action or geopolitical factors by having oil to hand in the near term. Backwardation also occurs when a scarcity of near-term supply stresses the oil market, but it is expected to normalize over time.