As oil continues its meteoric rise, the markets debate the reality of “peak” oil. Peak oil is the idea that we are reaching the end of natural oil supplies. So, some analysts and traders are convinced that oil prices will only go higher because demand will persist in outstripping supply. But, others have pointed to the market itself and noted that if the long-term fundamentals were predicting continued higher prices, then the back month oil future contracts would reflect this.

Well, a shift is starting to occur that may win the argument for the peak camp. Today, as oil hits another new all-time high, above $129 per barrel, the back month contracts are on the rise too. Normally, futures markets for physical commodities will display a “contango” price relationship, where contracts for further delivery are higher than the near months. This is usually a function of a market where oil for future delivery trades at a premium because producers have fixed costs for storage that must be priced into those contracts. But, the last few months have seen markets driven by the demand spikes in the spot and front month contracts. This forced those near contracts higher, while the back months drifted lower. Now that “backward” market is starting to shift back to the more normal contango pricing.

What’s the reason for this shift?

Some analysts and traders think that the market is recognizing the real possibility of supply disruptions. I spoke to expert oil analyst Phil Flynn from Alaron Research this morning, and he told me that oil traders may be taking a longer-term view here on the situation and instead of discounting the demand spikes by selling the further out contracts, the market is actually acting like it may “pay to put oil away.” In other words, if oil industry participants believe that prices will maintain at these levels, then they will gladly store it in hopes they can charge even more down the road. 

Oil traders capitalize on this by trading spreads. Phil also talked about the past few months where they were willing to buy the front months and sell the backs. Now, they are more likely selling the front and buying the farther dated contracts.

But, Phil has another interesting take on this shift that he will be here later today to discuss. Are high oil prices here to stay? And are these back month contracts the best forward predictor about tightness of supply? Be sure to join us at 3pm and we’ll hear what expert oil analyst and FOX Business News Network Contributor Phil Flynn has to say on these slick matters!

To see the whole interview with Phil Flynn, go to Options News, and click on the Breaking News tab.

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