[entropyfails]

How about this definition?

Backwardation: A market that feels supplies are infinite and hence prices fall forever towards 0.

Contango: A market grounded in the reality of future declines and the economics of storage costs.

Thus, over a long enough timeline, all markets will tend towards contango (as we have a limited amount of “stuff” in the universe) but their initial growth phase will be in backwardation.

Note that this may not be the final contango of oil depending on if we can ramp up supplies over the next few years. As some point, contango will be the ONLY mode of oil future markets, until the Mutant Biker Zombies begin their reign and eat all the traders. *laugh*

[PenultimateManStanding]

Sure, that's a good overall picture, I'm convinced. But how do the storage shortages translate to contango right here and now in the short run? Why does a lack of storage translate into higher prices for future oil as opposed to the price for buying oil right now? (unless of course future oil does have to be stored in tanks)

[rogerhb]

$this->bbcode_second_pass_quote('PenultimateManStanding', 'W')hy does a lack of storage translate into higher prices for future oil as opposed to the price for buying oil right now? (unless of course future oil does have to be stored in tanks)

[entropyfails]

$this->bbcode_second_pass_quote('PenultimateManStanding', 'S')ure, that's a good overall picture, I'm convinced. But how do the storage shortages translate to contango right here and now in the short run? Why does a lack of storage translate into higher prices for future oil as opposed to the price for buying oil right now? (unless of course future oil does have to be stored in tanks)

[PenultimateManStanding]

$this->bbcode_second_pass_quote('entropyfails', '
')Am I missing something?

[PenultimateManStanding]

$this->bbcode_second_pass_quote('PenultimateManStanding', '
')
$this->bbcode_second_pass_quote('', 'L')ooking back say four years ago, before the tripling of assets under management by commodities hedge funds, many of these markets were in “backwardation”. That is to say, the price of oil, for example, in future months was lower than it was in the active, nearer month. And why not? After all, if the same oil could just as easily be left in a free storage facility called “the ground” rather than being pumped up and piped into a metal tank for which the owner would pay interest and storage fees, would this not put a lid on the amount of capital someone would want to commit to buying crude oil?

[entropyfails]

$this->bbcode_second_pass_quote('PenultimateManStanding', '')$this->bbcode_second_pass_quote('entropyfails', '
')Am I missing something?

[Dreamtwister]

$this->bbcode_second_pass_quote('rogerhb', 'J')ust like paying for your Christmas meal in April, it does not mean the meal is cooked now and put in the freezer for 8 months.

[PenultimateManStanding]

$this->bbcode_second_pass_quote('entropyfails', '
')
F = C + N + S

[entropyfails]

$this->bbcode_second_pass_quote('PenultimateManStanding', 'W')hy buy futures if the spot market is cheaper? Couldn't one avoid the expense of storage by taking the S function out of the equation, i.e. there is a premium to keeping the stuff sitting around in a tank, so don't build tanks. I think we are in agreement that any current contango is driven by matters of broader importance than the scarcity of storage, and that in fact the scarcity of storage is a result of new felt interest in storing oil, not the other way around. (Interesting models with the t(1,0) etc.)

[PenultimateManStanding]

$this->bbcode_second_pass_quote('entropyfails', '
')Want a scary thought? If S will forever decrease (as more people build tanks), and N forever increase (as oil becomes more scarce), it becomes almost FREE to build storage tanks and hoard. EVERYONE will want to get in on that game. Heck, even I want to get in on that game after this post. *laugh*

[entropyfails]

$this->bbcode_second_pass_quote('PenultimateManStanding', 'Y')ikes! Probably the costs of construction will rise to put a damper on it. I could see the construction industry dropping to nothing. Plus, the price adjustments to a hoarding atmosphere would be pretty big I bet. Who knows, the crystal ball darkens.

[Marklar]

So what do you think? How much have the speculators added on to the "true value" of oil?

Something I have wondered. If the US government were to raise taxes on commodity speculation, would it have much of an effect on the price of oil?

[MrBill]

$this->bbcode_second_pass_quote('Marklar', 'S')o what do you think? How much have the speculators added on to the "true value" of oil?

Something I have wondered. If the US government were to raise taxes on commodity speculation, would it have much of an effect on the price of oil?

[Doly]

$this->bbcode_second_pass_quote('MrBill', '
')Then I would tax anyone who buys shares in companies that produce things or government bonds to pay for schools & hospitals at 99% because they might also go up in value to the benefit of some at the expense of others. In fact, I think saving & investing of all kinds is nothing short of criminal behavior that provides no benefit at all to society. Why do we need it? Let us ban all markets, including barter. No prices, no price inflation. No one would be better off than anyone else. Each must provide for their own needs and no trading goods for services or vice versa. That would teach those good for nothing speculators and profiteers. They would have to get off their backsides and do some work for a change.

[MrBill]

$this->bbcode_second_pass_quote('Doly', '')$this->bbcode_second_pass_quote('MrBill', '
')Then I would tax anyone who buys shares in companies that produce things or government bonds to pay for schools & hospitals at 99% because they might also go up in value to the benefit of some at the expense of others. In fact, I think saving & investing of all kinds is nothing short of criminal behavior that provides no benefit at all to society. Why do we need it? Let us ban all markets, including barter. No prices, no price inflation. No one would be better off than anyone else. Each must provide for their own needs and no trading goods for services or vice versa. That would teach those good for nothing speculators and profiteers. They would have to get off their backsides and do some work for a change.

[turmoil]

I had a feeling he was being sarcastic...

[Marklar]

I'm not saying that they should tax traders more. I ask that because I fear that a politician in the future may view that as a quick temporary fix kind of like Bush relaxing environmental regulations. Wrong to do and doesn't really solve the problem at hand.

And I bring up the topic because of the article here titled "Blame oil traders for prices says Shell"

Article

[Pops]

Mr. Bill you almost have me convinced (and I know this is your sole purpose in life ) that markets and speculators in particular are a good thing or at worst have no effect on prices but let me pose a simplistic scenario and hopefully you can fill in the gaps in my limited knowledge of how markets work.

Lets say I make corn flakes and know I’ll need 100 pounds of corn in 6 months. Along comes a big late snowstorm, which is sure to have an impact on the crop and the price.

Knowing this I decide to lock in my 100 pounds of corn now – but seeing an opportunity to make a profit so do many others and that speculative interim demand (for lack of a better term) really jumps the price.

So corn that had been $1 before the storm now costs me $2 and the price continues on up to $3.

But, low and behold the storm wasn’t as bad as thought and the price starts to drop as speculators that bought on the way up take their profits and 6 months hence the price winds up at $1.99 to the people like me who actually take delivery and knew from experience that was about where it would finish.

So I understand from some of your previous posts that since I’m the guy with the most experience in the market and the one who really sets the price in the end I don’t get hurt and it’s only the speculators taking money from each other.

I guess the question in my admittedly little mind is what was the benefit of the extra liquidity in the market; except to the company that makes the ant-acid the farmer takes because he sold his crop early at (what seemed for a time anyway) the ridiculously low price of $1.98?

(don’t be harsh now )

[MrBill]

$this->bbcode_second_pass_quote('turmoil', 'I') had a feeling he was being sarcastic...