Scrolling through Twitter is not for everyone, but if it's the kind of thing you’re into you’re likely to come across many tweets that make no sense. A few weeks ago one of them said this: “Curve Crunch: WTI flips to contango. Backwardation banished!”
What could this mean?
— Laura Blewitt (@laurablewitt) June 16, 2017
It turns out WTI is an abbreviation for “West Texas Intermediate” crude oil. Welcome to the strange language of international oil trading.
“It’s definitely its own language,” says Laura Blewitt, a reporter for Bloomberg News who posted the tweet. “If I didn’t know what contango meant I might think it’s a dance move or something from Argentina.”
What contango means is pretty simple. It’s when something will cost more in the future than it does today. It’s the way trading normally works.
“That’s because basically you have to pay to store fuel or oil," Blewitt says, "and so that’s why it’s a little bit more expensive in the future months."
And what about backwardation? It’s when the market is backward, for instance when things like oil cost more now than they will in the future.
“When the market is suddenly super tight and there’s little supplies on hand," Blewitt says, "that’s when you move into backwardation."
There was one more word Blewitt wanted to get to because it’s pretty common, but a lot of people don’t really understand it. That word is arbitrage.
Basically, it’s a fancy word for an opportunity to sell something where supply is scarce and demand is high. You got a lot of oil. There’s no oil up the street. Sell your oil up there for more money.
“As traders, all they want to do is make money, right?” Blewitt says. “So any time they see that open opportunity to sell their supply into a higher valued market, they go for it.”
Finally, why should you care?
Well, this is the language of the people who influence how much you pay at the pump. So, Blewitt says, it might be worthwhile to take note.