Friday, May 23, 2014

Another Market Promising No Hyperinflation

Crude oil futures. The December 2022 contract offers oil for $81.48 per barrel. That's $20.96 cheaper than the front month price!

That's an IRR of -2.7%, if you buy a barrel of oil today, short a futures contract, and wait for delivery. Another way to put that: the oil futures market says that a dollar will buy 2.7% more oil every year, compounded, from now through December 2022.

The treasury yield for 8.5 year paper is 2.3%, so the combined rate of return is 5%!Who says yields are low?

Sitting in treasuries can be expected to buy you 5% more oil - more BTUs - every year from now through 2023, compounded!


John said...

Very important post and great analysis, but I would rather go long the crude oil in backwardation and profit from the surprise upside in crude prices as shale proves to be a fickle lady, and decline rates begin to bite.

CP said...

That's fine - just pointing out that real yields may be higher than people realize!