By Gregory Meyer in New York Published: March 9 2010 02:00 | Last updated: March 9 2010 02:00 Crude futures are doing a slow-motion backflip, stoking speculation about the next move for oil prices. The futures curve, plotted with prices of oil to be delivered in successive months, has flattened. Late last year, a barrel of US oil for immediate delivery cost $2.35 less than one due a month later. Today the spread is about 40 cents, approaching the narrowest in 1½ years. Several Wall Street analysts say the market is poised to flip even further, with spot prices rising above longer-dated futures for the first time since mid-2008. The inverted price pattern they envisage - called "backwardation" among economists - would signal a world in which oil demand catches up with supply after a severe, recession-induced lag. This would skim excess inventories from storage terminals. Backwardation could also increase the number of investors that put a record $68bn into commodities last year, helping keep benchmark oil prices above $80 a barrel. West Texas Intermediate touched an eight-week high of $82.41 yesterday. Futures patterns are affected by how much of a given commodity is in storage. If tanks are awash in oil, the market is less at risk of a supply shock and oil for prompt delivery is cheap relative to later-dated futures contracts, a pattern known as "contango". Conversely, low inventory levels make immediate access to oil very valuable, giving promptly delivered oil a premium. Spot prices moved into contango as demand collapsed in the recession. Unused oil strained tank capacity at locations including Cushing, Oklahoma, the delivery point for US crude futures, severely discounting the front of the price curve. Now there are glimmers of a change. Demand, still weak in the west, is growing in China, India and other emerging economies. The International Energy Agency predicts global oil use will grow by 1.8 per cent to 86.5m barrels a day in 2010 after two years of decline. "What you've got is a global balance that is tightening, and probably more quickly than a lot of people are expecting," says Amrita Sen of Barclays Capital. Oil markets are not tight yet, particularly in the US and Europe. Still, David Greely, of Goldman Sachs, anticipates global inventories will keep falling, changing price spreads and lifting crude into the $85-$95 a barrel range in the second half of the year. Oil traders say a popular recent bet was "calendar spread options", profitable if April crude loses its discount to May. Physical commodities merchants say forward and spot prices will slowly converge, though they do not see imminent backwardation. "We see the contango dissipating," says Ricardo Leiman, chief executive at Noble, the Hong-Kong based trader. A shift to backwardation would be important for investors in commodities. Since many passively trade expiring futures for later-dated ones, they have to pay a premium when the market is in contango. Backwardation instead means selling old futures for a small notional profit every month.

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