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Is crude about to go higher?

Since hitting the multi-year low $33.87 measured by front month future contracts trading on ICE on 12/19/08, Western Texas Intermediate (WTI) light sweet has been stuck at a trading range between $34 and $48 so far this year. Today front month contract was closed at $33.98, almost exactly the same lowest level occurred two months ago. The most interesting question, intriguing many commodity and equity investors alike, is this the temporary bottom or just the beginning of another leg downward spiral to further unwinding excess bullish positions that had built up prior to the July peak last year. If we examine the current future term structure, we may come out with the conclusions that likely outcome in next few weeks WTI would go higher than lower. Since the term structure shifted from backwardation in late July last year to current contango, the spread between front month and 2nd month contracts has increased steadily. Today the spread reached highest level, about $8 (see Bloomberg chart below). Popular media provide some convenient and logical seasonal for current crude declining, such inventory buildup (highest seasonal level in last 10 years, but ironically the current inventory is below that last July, at the time crude reached all time high of $148), global economy melt-down and strong greenback etc. But the major driving force may be from commodity indexed ETFs and mutual funds "rolling" front month contract into next month causing this historical steepness in the front part of curve. It should not surprised that we are going to see some crude rebound in next week or so when the March contract expires at least in the shot term. After that, we would have to see how market can overlook current pessimistic statistics and look one step ahead.

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