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The Best Commodity Trade For 2015 - Oil Cash And Carry: Minimal Risk, Huge Potential
Dec. 22, 2014 6:20 AM ET | Includes: BNO, CRUD, DBO, DNO, DTO, DWTI, FRO, NAT, OIL, OLEM, OLO, SCO, SZO, TNP, UCO, USL, USO, UWTI, XLE

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary

Backwardation and contango in crude oil.
June-December 2014 - a huge shift.
Cheap financing and storage equals opportunity.
Oil tankers set for a big year.
The big oil trade for 2015: risk-reward.

Oil prices have tanked. In June, NYMEX active month crude oil traded to the high price for 2014 of $107.73. Since then the price has gone south, trading down to a low of $53.94 basis February futures on December 16 and settling on Friday, December 19 at $57.13 - a drop of $50 or more than 46%. Those are the numbers that we see in snippets in the press, the numbers that most investors watch. However, understanding oil and uncovering opportunities in the crude oil market requires looking deeper.

Backwardation versus contango

Understanding crude oil, or most commodity markets for that matter, requires an understanding of term structure. Term structure is the relationship of the price of nearby crude to the price of deferred crude oil. Two terms used by commodity traders, backwardation and contango, describe the state of term structure.

Backwardation describes a term structure where nearby prices are higher than deferred prices. Contango is the converse, a term structure where nearby prices are lower than deferred prices. The term structure of prices in any commodity market yields important clues as to whether markets are in surplus or in deficit. 1/ of 5
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