Here is a Chart Approach that Works to Test Spreads
Below you will find one simplistic method to check spreads in various commodities and even in gold and silver, assuming you can use graphic programs to manipulate images. Normally I would reveal methodologies such as this only to paid GSUL members and Founding Members of The Metal Augmentor, but I’m hoping some of you will appreciate my sharing this by helping create similar charts for other commodities. If there is interest from enough of you to create more of these charts, please leave comments and I will walk you through how to do it as well as split up the commodities between the “volunteers”.
Note that in the case of Crude Oil, I was able to find a historical instance of 56% annualized contango in the spread between the December 2001 and March 2002 futures that existed during the summer of 2001. I’m not sure this is the highest level that was reached but it seems extreme enough for our purposes. Currently, the contango between the December and March futures is about 8% annualized. Although this is small compared to the summer of 2001, please keep in mind that Crude Oil was mostly in backwardation or very small contango for much of the past several years as the below charts demonstrate.
Actually, it is more appropriate to look at the March 2009 and June 2009 spread when comparing the current period to the summer of 2001 (when the 56% annualized contango took place). This is because we want to be about 6 months in advance of the first contract in the spread. In other words, during the summer of 2001 the December 2001 contract was 6 months ahead and as of October 2008 the March 2009 contract is 6 months ahead. When we calculate the contango between March and June 2009, we find that it is roughly 9% annualized, still a far cry from 56%. Here is one more important point. Although the timing is more accurate when using the March/June futures, the results are not adjusted for seasonality and therefore we need to be careful not to use such data in isolation to make our conclusions.
NOTE: Click the charts to enlarge.
October 24th, 2008 at 12:34 am
Tom,
Count me in.
October 25th, 2008 at 4:53 am
Tom. I would be intersted in helping. I am especially interested in Natural Gas and Oil but would be willing to work on any commoditty.
November 10th, 2008 at 10:54 am
Tom,
Esignal and others are supplying standardised gold and silver charts. (symbol SI #F)
The problem is to find a common platform to overlay this chart with spot prices, or to import the standardised futures chart into the platform.
December 2nd, 2008 at 4:47 pm
[...] the June and September 2009 contracts) is now over 20%. As I noted in a late October posting, when contango for the major commodities starts to approach historic levels, we should expect that [...]