Too many speculators in crude oil?

Recently UU read an article published in the Taiwanese press in which one of Formosa Petrochemical's executives remarked that current crude oil prices are unsustainable. He pointed to the backwardation in crude's forward curve as evidence that the market no longer expects the price of crude to rise in the future. Intrigued, this blogger decided to take a look.



Indeed, crude's forward curve shifted from contango to backwardation between June and July. It is interesting to note that even after adjusting for the dollar's fall in recent months, the price of crude across the entire curve has increased.

Given current market conditions UU believes that oil may be worth a punt a or two in the coming months. Since the recent trend in OIH diverged from crude, UU shorted 30000 shares on Monday morning at an average price of $189.82 per share. That trade has worked out well so far. He will also look to put on some shorts in crude if crude jumps irrationally upon the release of inventory number -- this blogger now believes that low inventory numbers indicate lack of desire to carry inventory in the face of future declining prices rather than tight supply.

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