Crude Oil - 10/03/2022

ROLLOVER REPORT ON CRUDE OIL

• WHAT IS A CONTRACT ROLLOVER? A rollover is a procedure when futures contracts on certain instruments switch from the front-month contract, which is close to expiration, to another contract in a further-out month.
• EXAMPLE: For example, a crude oil futures contract at $115 with an April expiry, would close before it expires, and then it enters into a new crude oil contract at a rate of $110, which expires at a later date (May for example).
• WHAT IS A GAP? When one contract switches to another, differences in prices occur because different contracts hold different prices for the same underlying instrument. If prices did not change over time, the difference in our example would be -5 dollars ($110 (May) minus $115 (April)). Therefore, space appears on the trading charts when a rollover takes place. After the rollover, your instrument could hold a price of $110 rather than $115. The space between 115 and 110 is called a GAP.
• HOW OFTEN DO ROLLOVERS TAKE PLACE? Rollovers occur once a month during a weekend time. Rollover dates are available on the Fortrade Official Website. The next Crude Oil Rollover is scheduled to occur on March 13, 2022.

ANALYSIS (FINDINGS) ON CRUDE OIL

• Based on a sample of the last 14 months, Fortrade’s Research Department found that the downward gaps on Crude Oil tend to close on average in 13.71 days. In other words, the new contract price (May’s $110 in our example) might converge back towards its previous contract’s price (April’s $115) on average in 13.71 days.

Please note that past performance does not guarantee future results.

BACKWARDATION: Backwardation is a market structure indicative of trading sentiment in favor of oil prices being lower in the future compared to current prices. Table (I) depicts the current term structure of the futures market for Crude oil from April to December 2022. The table shows that the coming rollovers could bring wide gaps, in turn, could open additional opportunities for trading with crude oil, but also includes a high risk due to extreme market volatility in the commodities sector. Trading The gap for the May contract is not available since it is a currently active contract. It is also worth noting, the lower the prices are on the active contract, the wider the gap over the next rollover tends to be.

CURRENT EVENTS: Due to the current state of world affairs, including the War in Ukraine and the global economic sanctions of Russia, the Crude Oil market is in a state of steep backwardation. The March 2022 Rollover Gap is likely to be approximately $4.

SUMMARY: The findings in this report suggest that downward gaps from Crude Oil Contract Rollovers tend to close on average in 13.71 days. In addition, the current research found that the upcoming rollovers might provide higher than usual gaps, which in turn could open additional trading opportunities for the market participants, but also includes a high risk due to extreme market volatility in the commodities sector. According to Table (I), the price difference between the April and May contract (as of March 10, 2022) was -$3.75. Supposedly, if the market conditions did not change in April and the price difference between May and June contracts remained intact, there might be a negative gap of $3.75 when the rollover takes place on March 13, 2022. According to findings in this report, the gap may rally back to its April price in 13.71 days.

Table (I): Crude Oil Futures Contract Price as of March 10, 2022.

SOURCE: CMEGROUP.COM (Data as of March 10, 2022, 15:10 GMT)

NOTE: Prices are subject to change due to daily volatility.