Why are crude oil futures traded on the Intercontinental Exchange (ICE) $30 cheaper, or almost $1 a gallon less, three years from now?
That just doesn't seem possible -- unless the oil trade is totally overrun with speculators and Fed-inspired, cheap-money risk investors.
On CNBC on Friday, I got into a discussion with an executive at one of the larger derivative brokerages about the amount of speculation and investor interest in the oil markets today. He made a number of good points, but one that he made that wasn't so good was in comparing the oil market to stocks. He claimed that current oil prices reflected risk in the market accurately because they are "forward-looking."
That's an old saw for equities traders and posits that stocks can react today to events and cycles that are still many months from taking hold. The equity market can be "forward-looking" and price in better or worse -- news that is only expected to happen, but hasn't occurred yet.
You can believe that or not -- it's not really the point. The point is that futures markets are not like stocks. For any company, there is one primary instrument to trade: its common shares. With futures you have monthly deliveries -- and you can trade in any of them of your choosing at any time.
In other words, futures don't need to be forward-looking -- they are, in fact, real forwards -- with an expiration date attached for every investment or hedge you choose. If you want to bet that something will happen three months from now or three years from now to affect oil prices, you need not buy "oil" or today's closest month to delivery -- you can buy or sell oil delivering exactly when you think it will happen.
Most investors probably don't even know this. But it is more than telling that futures for delivery in December 2015 Brent crude oil traded at the ICE are almost $30 lower than the spot price, which reflects global oil prices today at more than $125 a barrel.
One of three things is definitely going on here:
One, all of the oil analysts who are talking about increasing Emerging Market demand and dropping marginal supplies and continual long-tail geopolitical risks over the next several months and years are all wet.
Or:
Much of that $30 premium is composed of investment and fund speculation, driven by commodity indexes, ETF's and hedgies, collectively up over $300 billion nominal dollars, hiking prices and punishing consumers at the gas pumps.
Or:
December 2015 Brent crude oil futures are the most undervalued investment ever seen, and will make you a virtual fortune in less than three years, the kind you can retire on and never worry about your grandkids' grandkids' futures.
Spoiler alert: I have a lot of respect for oil analysts and their research, and also don't think you should bet the farm in December 2015 futures.
That leaves only one.
Here's the CNBC clip: