Slide 17 of 28
Notes:
- The futures market also reflected the incentives to build stocks in 1998 in both the petroleum markets as well as propane.
- When current prices are higher than prices expected in the future, the market is said to be in backwardation. This occurs during seasonal changes, when new supply is expected to be forthcoming, and when some temporary market imbalance, such as a cold snap, is causing a price runup. When the data are positive on this graph, we are in backwardation. There is a disincentive to build stocks when in backwardation, since future product prices are expected to be lower than current prices.
- When current prices are lower than expected prices, the market is in contango, which is shown by the negative values on the graph. Contango favors building stocks. A buyer can store product at the current price and sell it in the future at a higher price.
- Crude oil (blue shaded area) stayed in contango from about the middle of 1997 through 1998 -- Quite the reverse from 1996 when it was in strong backwardation for most of the year.
- Propane futures market patterns reflect product seasonality as well as unusual supply/demand imbalances such as in the fall of 1996. Normally during the winter, propane is in backwardation, but falls into contango for brief periods during the weak demand summer months.
- Like crude oil, the high over supply and high stocks in 1998 pulled propane into stronger contango than usual, further encouraging stock building. The high stocks and lack of a cold winter in 1998-99 could not lift the product into backwardation, like it usually would be during the winter months.
