Q re Pricing of crude oil future

[options-george]

Hi all,
a question regarding a trade in crude oil futures! I've read through several of the 'energy' threads here and some of the associated links but could not find an answer to my question.

I have been trading equity and interest rate options for several years but this is my first crude oil trade.

A couple of weeks ago I bought several CFD contracts for the Feb US crude oil contract and paid $41.50. This traded down to the $35 area, and due to the expiration of the contract, my broker (CMC Markets) rolled my position into the Mar contract. Thus for now I have incurred a $6.50 loss on each contract. The Mar future is trading around $42.

What explains the $7 difference between the Feb and the Mar contract?
What expains the $3-$4 difference between the Mar and Apr contract?

Is the price difference essentially a time value component of the futures' value just as options contain time value that decays away? In other words, if (theoretically) nothing happened at all concerning oil supply and oil demand for the next month, would the value of the Mar contract also move from $42 to $35 over that 1 month?

Or is the difference in value simply reflecting the expected spot prices for the expiration dates for the Mar and Apr contracts?

If traders are anxious to dump the front-month contract close to expiration, is it generally a good idea to roll from the front-month to the next month several days ahead of the expiration date - (OMG I have really given away money on this oil trade well )

Any comment would be very appreciated. Let me know if I need to clarify my question further if i need to supply more information about the trade.

George

 

[Achilles]

As energytrade says in this thread, rising inventories are the main reason for the large price difference

Inventories at cushing (delivery point for WTI crude) are full to the brim (check out DOE weekly energy stats) so front month WTI contract has nowhere to go on delivery and thus heavily discounted to both brent and March WTI.

a news story from last week confirms it

OIL FUTURES: Crude Falls Below $34/Bbl On Rising Inventories


By Brian Baskin
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Crude futures fell sharply Thursday as weak demand continued to force oil into storage, pushing up against capacity in some areas.

Light, sweet crude for February delivery traded $2.88, or 7.7%, lower at $34.40 a barrel on the New York Mercantile Exchange, after falling as low as $33.70. Futures are at their lowest point since Dec. 19, when the front-month contract reached $32.40 a barrel. Brent crude on the ICE futures exchange traded $1.28 lower at $43.80 a barrel.

Front-month oil prices are being pressured by the lack of available storage at the contract's delivery point in Cushing, Okla. Inventories are still thought to be rising, as demand weakens faster than the Organization of Petroleum Exporting Countries cuts production.

February crude expires on Jan. 22, increasing the pressure to sell futures now in order to avoid taking delivery where there is little free storage. The market is likely to continue to be pushed lower by the situation at Cushing until refiners in the U.S. Midwest increase runs, or producers reduce output even further.

"It's going to be difficult over the short term to have storage levels come off substantially," said Harry Tchilinguirian, senior oil analyst with BNP Paribas.

The February contract is increasingly isolated from the rest of the oil market, however. Brent trades near a $10 premium, and oil available in the physical market also trades at a large premium.

Front-month February reformulated gasoline blendstock, or RBOB, recently traded down 5.28 cents, or 4.5%, at $1.1149 a gallon. February heating oil traded down 2.58 cents, or 1.8%, at $1.4373 a gallon.


-By Brian Baskin, Dow Jones Newswires; 201-938-2062; [email protected]


Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: Dow Jones NewsPlus - Login. You can use this link on the day this article is published and the following day.


(END) Dow Jones Newswires

January 15, 2009 12:20 ET (17:20 GMT)

 

[Papa Lazarou]

I'm not sure if you're referring to the heavy discount at the moment, or asking about the curve in general.

I'm trying to be helpful, not patronising so if you already know this please forgive me! Crude oil is physically storable commodity, and therefore has a cost of carry. This link explains contango quite well... Contango - Wikipedia, the free encyclopedia

 

[options-george]

Thank you for both of your helpful replies. They were much appreciated!