Position now for $300 a barrel oil

[Matter-Eater Lad]

NEW YORK (MarketWatch) -- Human beings are a predictable bunch and we tend to wait until things get to a painful crisis mode before taking drastic action.

My question is why does it always have to get to that point?

Take the most recent run-up of oil prices, when crude hit $147 a barrel and gasoline was trading around $5.

As prices reached nosebleed levels, the general public was in a great deal of pain and they acted accordingly. There was an outcry for more alternatives, more refineries, conservation, infrastructure investment etc. Everything from clean-coal technology to nuclear was on the table.

 

Fast forward to today, with crude prices at around $38 and gas back below $2, and it's a very different picture. No pain means no gain in solving the problem.

Let me be clear, though. That problem hasn't gone anywhere.

$300 crude not far off

While the global recession and credit crunch have severely impacted global demand for energy, it's only temporary. The problems propelling oil prices to $147 haven't gone away. The patient is, at best, in temporary remission.

Traders are seasick from the oil markets lately; the volatility has been so extreme. Aside from the obvious macro-factors, what else is driving the abnormally large swings in crude oil?

It's called "contango." Contango occurs when futures prices are higher than current prices. The scenarios are not uncommon, but the recent spread widths are extreme by any measure.

For example: the April 2009 crude oil contract is around $38.10 -- while the April 2010 crude contract, crude for delivery a year from now, is trading at $50.26. That's a $12.16 spread.

 

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