Why is there so much difference (sometimes) from one month's oil contract to the next month's contract?

Question

For example, the just-closed contract for February delivery ended at something like $51-$52 a barrel, but the new contract for March delivery is already at $55 a barrel. If the February contract could have been extended, do we think it would also be at $55 +/-? Or is there something dynamic about these contract cross-over dates that leads (often) to these rather major price swings?

As a layman observer of the oil markets, it's disconcerting to think "well, prices are great" when February contracts trade around $51, but then just a day or so later, have to realize the replacement contract for March is up $3 a barrel or so. Help!

Answer 1

Economists would like you to believe that price is a product of supply and demand as of a specific time. OPEC controls much of the oil resource and subsequently has the ability to reduce supply in order to bid up prices. The supply demand argument does not work in the oil business, or any business where supply can be restricted in order to control the market price.

Another industry legendary for its ability to control prices is the diamond business. Both oil and diamonds have great availability, but because both industries are tightly controlled by a relative handful of suppliers, prices are largely a product of market manipulation.

Answer 2

Because the contracts tend to end at the end of months. Most contracts are not on a monthly basis, however they do start on the first. So as prices gradually go up your looking at the delta inflation ratio from a combined crude oil task force. However once a large number of contracts are renewed at a higher price, you'll see a dynamic S graph type shift in world oil prices. Hope that helps.

Answer 3

The oil companies do try to manipulate the markets, and so do the large financial institutions that participate in them.
It's all about making money, whether the price goes up or down doesn't really matter to some.
Also, think about weather, middle east unrest, OPEC to some degree, Russia, and yearly usage and demand curves.

Answer 4

The answer is simple, supply and demand. Current supply and demand of futures contracts; and anticipated future supply and demand of the underlying commodity.

Steve C is speaking nonsense, the "supply demand argument" works perfectly in the oil business -- what he seems to have trouble grasping is that OPEC and a lot of other factors AFFECT supply, and a lot of factors AFFECT demand. Not a difficult concept.