Looking for a floor in oil markets? Check the contango

Friday, December 12, 2014

(Reuters) - Oil traders searching frantically for an end to the deepest price rout since the 2008 financial crisis should forget about OPEC policy, U.S. drilling rigs or interest rates. At least for the moment.

Instead, according to some physical traders and analysts, they should be scouring their screens for what is likely to be the best leading indicator of a price floor: a deep contango, a market in which immediate delivery prices are cheaper - much cheaper - than futures in the months ahead.

When the discounts for prompt crude become large enough, traders can make money by buying crude to put into storage, which would finally give the market some support. The contango is not there yet, traders say, but it's close.

Anthony Starkey, manager of the oil analytics team at Bentek Energy in Denver, reasoned that the market is close to a bottom by the fact that some U.S. producers are reconsidering or scaling back their capital investments next year. "I think these are signs that we're nearing the bottom," he said. "The cutbacks in capex will lead to production cuts."

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