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Friday, August 28, 2009

Oil's Long-Term Premium to Fade as Supplies Fall, Merrill Says

Friday, 28 August 2009

The price difference between short and long-term oil futures, which drove investment banks and oil companies to hoard crude on board tankers, will narrow further as inventories in developed economies shrink, Bank of America’s Merrill Lynch unit said. In January the amount of oil stored at sea climbed to the most in at least two decades as traders profited from a so- called contango structure where future prices are higher than those for contracts closer to delivery. The spread between front-month futures and those for delivery in a year has since declined 73 percent.
“We expect a modest seasonal draw in total crude oil and petroleum inventories” in developed nations during the fourth quarter, Francisco Blanch, Merrill’s head of commodities research, said in a report dated Aug. 26. “The term structure of crude oil prices should flatten further over the next few months.”
Crude futures in New York for settlement in October this year are $6.75 a barrel cheaper than those for settlement in October 2010. On Jan. 15 they were $24.45 a barrel cheaper.
The volatility in crude prices declined to about the same level as before the bankruptcy of Lehman Brothers Holdings Inc. last September, Merrill’s Blanch added. Implied volatility, a gauge for predicting future swings in price, is also likely to abate, he said. West Texas Intermediate, or WTI, has traded around $70 a barrel over the past month on the New York Mercantile Exchange.
“In commodity markets, price volatility is mainly a function of stock levels,” Blanch said in the report. “With a more balanced outlook for oil fundamentals and with other asset classes starting to price in an economic recovery, implied volatility in WTI crude could soon drop.”
Source: Bloomberg