Energy traders incorporate a wide variety of trading tools to estimate future values of crude and its refined products. No matter which commodity one is trading, nothing is more important than understanding whether current or future demand is being given a higher valuation for the given commodity.
Other than being lucky in guessing future valuations, how does a trader know right now whether current prices will likely go higher or lower? The answer is in looking at whether suppliers are bidding up outlying month futures and storage cost pricing. Ultimately these prices are driven by current vs future demand.
Crude outer month futures prices have been on the increase in relation to near month pricing. Traders use the term contango, not sure why but it is what is, to describe any commodity whose current prices are less than future prices. When prices spreads between near and outer months continue widening, near term prices are highly likely to continue falling.
Crude futures normally, or at least historically, will trade in a backwardation price structure. This enable refiners to refine crude as refined products prices rise. Refiners profit margins fatten in this type of environment. In contango, refiners find themselves in a shrinking profit margin due to falling refined product prices. This results in refiners delaying or reducing their crude purchases, hoping product prices may be higher in the future.
With the euro on the verge of collapsing below $1.27 support, traders will be wise to observe the widening or narrowing of crude the contango, as trading plans are executed over the next few months.
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