The premium for later deliveries of crude oil may collapse as the spread between the first two monthly futures contracts follows a “stair-step” pattern, according to a technical analysis by Barclays Capital.
Crude for October delivery on the New York Mercantile Exchange is about 46 cents more expensive than the September contract, compared with 93 cents in early June. A chart of the narrowing difference presents a stair-like shape, that if continued may shrink the spread to as little as 7 cents, Barclays analyst MacNeil Curry said in an interview yesterday.
“This stair-step advance remains intact and I think we’ll see further narrowing,” Curry said by phone from New York. “The upside targets would be about minus seven, minus 11.”
The gap between the contracts has been converging since July when it recorded a “pivot low,” and the narrowing has been reinforced by its 21-day moving average, according to Curry.
The current market condition, in which later months are more expensive than near-term supplies, is known as contango and its reverse is called backwardation.
The stair-like movement will lead the spread “pretty close” to backwardation without causing the market structure to fully reverse, Curry said.
“We effectively were stair-stepping higher and the previous congestion lows were acting as support each time,” he said. “That’s the definition of an uptrend, where you have a series of higher lows.”
The September contract, which last traded around $77 a barrel in New York, may slump as low as $71.92 if it breaks through the support of its 60-day moving average, said Curry.