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Hello everyone,
As you may have seen in the daily thread, I am very interested in oil right now. I thought I would write a quick post to discuss oil futures and share my ideas. For this post I'll be bringing up the first 6 oil futures contracts, from USOIL to CLGH027 (Mar2027).
As many of you know, we are in backwardation, a barrel of oil today costs more than oil in the future. This happens when there's an immediate disruption. Like the one we've experienced in the Strait of Hormuz, a strait that has been closed for a **very long time**. I don't personally see the supply. What I do see is a world burning it's reserves as fast as they possibly can in refiners running at full capacity. Diesel is soaring.
The SPR is down to 293.4 Million barrels of oil. That sounds like a lot. Except in reality they need congressional approval in order to draw below national defense limits.
[credit to u\/MarmotFullofWoe for the plot](https://preview.redd.it/r6b9a8zcutkh1.png?width=2100&format=png&auto=webp&s=6f693fbb7d7b34ccc8332e91b4bd6063b96da3ff)
Since the MOU went up in flames the SPR draws have started to creep back up in size. This week we were back to drawing 5.2 million barrels and the week before 6 million barrels. This is probably because the situation in the strait has re-emerged. That means we have 8-12 weeks before the SPR hits the floor.
That said, lets look at what the market actually thinks might happen. We are in backwardation right now. That's undeniable. What I want to suggest, and what I believe, is that the curve is going to uninvert or it is all going to rise. If the entire futures curve is rising that means there's a bullish market in the thing itself, oil, as a thing in the world is going up in price far into the future.
[Current Oil Curve](https://preview.redd.it/qdhgogzoxtkh1.png?width=1002&format=png&auto=webp&s=79b6082fe390d0260e33743ccdec8ae78598a98a)
When I look at these contracts, I see higher and higher prices. I see contracts that are rapidly approaching their "peak war" time levels. One of which has actually surpassed the front end price.
Basically, the market is coming around to the idea that the current supply picture is going to continue into the future, or get worse.
I say it could possibly get worse because if you look at the oil futures contracts, the deferred barrels, barrels in the future, are rising faster than the upfront prices.
There's an open question of momentum, does the back end of the curve continue to outpace and cause it to invert, or are we approaching a great flattening? Additionally, October barrels are being priced higher than the ones today. There's already one contract that's not backwardation.
What I am worried about, and why I have a position in oil, is that we could be moving into the following curve (numbers modified by hand as a suggestion of shape--not real value)
[Could this be the future?](https://preview.redd.it/nuclbv21ytkh1.png?width=1002&format=png&auto=webp&s=6ea9cd904ed4d1e5c5c9c73fb4df5fc95e29e9fd)
If this mess was getting resolved, you would see a front end collapse in prices. The market would say that the situation itself was becoming resolved. That situation would look like:
[Front End Collapse - The Issue resolved and supply is restored](https://preview.redd.it/ra6bdhdiytkh1.png?width=1002&format=png&auto=webp&s=dda9ef8e4a24579c16a24d1e465350fb8e220787)
In my opinion this is the anatomy of an oil shock and a potential crisis. It isn't the immediate backwardation that creates a problem, it's the structural repricing. It's the change in the futures curve of oil. If we were getting out of this, the front end contracts would crater and the back end just would start to flatten out (not saying long term, but that's what the moment would look like imo).
The ***problem*** is that the front end isn't collapsing. The back end is rallying.
Psychologically, a real oil shock (not a one time event) occurs in stages:
1. Shock (exiting here)
1. Strong backwardation in the curve -- worry about oil barrels today
2. Persistence (entering here)
1. Entire curve rises; back end out performs -- worry that the problem is going on too long; oil barrels tomorrow
3. Regime Acceptance
1. Flattening of the curve -- market contends with the idea that the problem doesn't normalize and persists
4. Future Scarcity / Structural Repricing
1. Back end rising through the front -- market sees a tighter, more expensive future (structural scarcity)
**TL;DR** **So what do I think? I think the oil market is in serious trouble. I've been following this trade since things kicked off, and I believe a second leg is forming. A leg that could get very out of control as an SPR hits the floor creating a "second" oil shock as millions of barrels once again get removed from a market where gasoline and diesel are very tight. I don't know exactly when this happens, but I believe it has started to happen because of the rising contract prices and their relative gains to one another.**
**I am looking for a significant event should the strait not happen. Personally, I think it is the most interesting and rare trade in the market today. We've never had an oil situation like this before. No one has any real idea what will happen. It could resolve, it could also get incredibly out of control. I think the market is sleeping on this because the required action for it to be true, is a crash. They would have to exit their positions in large numbers, but their greed keeps them in the market. Everyone is thinking that they will be able to get out before it happens.**
**I think this trade is probably very binary. So this isn't a recommendation to follow my trade. I do think though that everyone should be thinking about this oil issue and what it means as we move towards 2027. Things are going to get cold.**
**One last thought -- not all crude from the SPR is the same. We are drawing significantly more sweet crude than sour. So there's a lot of questions around where the real floor is for each type.**
[Credit: u\/Exciting-Fun-5435](https://preview.redd.it/y7f9g86l1ukh1.png?width=1080&format=png&auto=webp&s=35726303609b0717a55a292fe48392ad99f1c017)
One other thing to add about the SPR. These caverns are becoming increasingly unstable. These are not metal drums out in a field we are drawing from. They are caves of salt. We push water into the caves in order to push the oil out. Over the years, many of the support structures in these caves has dissolved away. There is a real potential for collapse. Read up on it if you didn't know about them. They are very interesting.
[SPR Salt Cave](https://preview.redd.it/wjmg5t3d3ukh1.png?width=339&format=png&auto=webp&s=3bd3a37e166e925c319f049eb2b7b614e8ba3282)
My position proof. I may try and roll my contracts into June, but I haven't decided. Either way this is what I am holding right now. I am planning on holding until there's real proof that this is resolved or a front end collapse happens. **I genuinely hope that we get out of this. It just doesn't look like we actually are.**
**USO 210c 3/19/2027 x126**
[My Position](https://preview.redd.it/tze48mwy0ukh1.png?width=1058&format=png&auto=webp&s=469f060d2c2bdbcfff6d8e872aed3e06278318ce)