The Rest of Energy Contango

In the prior post, crude oil forward curve shape did not appear to have any ability to predict future return and thereby refuted a popular assertion that “backwardation is bullish” or, conversely, “contango is bearish”.

This post will look at the balance of the energy sector futures: heating oil, natural gas and the reformulated gasoline contracts.  As with crude oil, let’s look at the forward curves on the last day of the prior five years (12/31/2007 to 12/31/2011) and the curve as of our current reference date, 12/13/2012.

Below are the forward curves for the NYMEX No. 2 Heating  Oil futures contract.  Note the undulating effects of seasonality from winter demand.

For example, the leftmost blue curve, showing  the 12/31/07 trade date, has spot at $2.6531 per gallon, Feb08 at $2.6444 and so on out to the Nov10 contract at $2.4436.  In short, the 2007 futures curve is in downward sloping backwardation.  According to conventional wisdom, the backwardated curve is an indicator of higher prices.  A quick look at the year-end 2008 heating curve shows heating oil $1 lower.

 

While 2008 is definitely NOT a typical year, quick looks at the other years shows poor results using curve shape as a predictor, summarized below:

2007 backwardation then sharply lower in 2008

2008 contango then sharply higher in 2009

2009 contango then higher in 2010

2010 contango then higher in 2011

2011 backwardated then higher in 2012

2012 backwardated then ? 

Heating Oil Conclusion: Curve Shape is NOT a predictor of future returns.  

To round out the energy complex, note the following curve charts and corresponding conclusions:

 

 

All Natural Gas futures curves were contango and then all lower!

RBOB 2007 backwardated then sharply lower in 2008

2008 contango then higher 2009

2009 contango then higher 2010

2010 backwardated then higher 2011

2011 backwardated then higher 2012

2012 backwardated then ? 

Conclusion: Throughout the entire energy complex curve shape does not appear to be a predictor of future returns.

Next post will consider the metals and agricultural markets and then look at commodity index rolls, in general.