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Oil Spreads Trading at Historically Unrealizable Levels

Outright oil prices have continued to rally this year as economies recover from impaired pandemic levels, however calendar spreads have been unable to realize their bullish intent. In fact, calendar spread structures have continued to disappoint into expiration.

In some respects this is less about a failure of the front-month contract heading into expiration and more about a handing-off of strength to the next contract, which narrows the front spread into expiration.

The close-knit nature of 1-month spreads relative to moves in flat price may not reveal a useful pattern. Towards that end, when we lengthen our spread analysis to incorporate more time into the picture (6 or 12 month spreads vs 1 month spreads), the pattern becomes more visible. The pattern being that bullish sentiment is portrayed through calendar spreads until expiration. In both cases (the Dec/Dec 12 month spread and the Dec/June/Dec front vs back condor spread) are prone to follow market sentiment and rally along with flat price only to fail as expiration approaches.

At the moment, both of these spreads are approaching levels that have been UNREALIZABLE in the past.

What does this mean going forward?? Are we likely to see spreads break historical records to the upside before pulling back into expiration, or will we finally realize historical highs in backwardation? To unpack this we start with inventories. First we break the year down in to the first half versus the second half and then compare the changes in these 2 periods over time and also against their 5-year average (ex 2020), highlighted in yellow below.
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