Back in July, I released my oil price forecast for the third quarter of this year, predicting where prices would be at the end of September.

And by 2:30 p.m. EDT (the close of crude oil trading) on Friday, Sept. 22, the U.S. oil price was almost exactly in the range I’d predicted.

It settled at $50.66 a barrel, up 1.6% for the week and 6.8% for the month.

Meanwhile, the more international Brent oil price was already higher than the prices I’d predicted more than two months ago.

Brent came in at $56.81, 2.5% better for the week and 9.3% for the month.

But oil prices aren’t about to stop here.

The thing is, you won’t get an accurate forecast on financial cable news shows – they don’t understand, let alone talk about, how the “spread” I’m going to show you works.

On the other hand, once you know how the spread works, you’ll be able to tell for yourself where oil’s going to go; no need to suffer any more cable talking heads.

And, even better, you’ll be able to get yourself in a position to make oil profits long before the “other guy” realizes what’s going on…

How to Be Your Own Oil Price Forecaster

WTI (or West Texas Intermediate) is the benchmark rate for futures contracts written in New York, while Brent serves the same purpose in London. These are the dominant standards against which actual consignments of oil are priced worldwide.

However, since both are sweeter (containing less sulfur) than over 70% of the trades made each day, most global transactions are settled at some discount to one or the other.

Of the two benchmarks, WTI is a slightly better grade and has a higher trading volume, leading to more liquidity.

However, Brent is used more often as the base of international contracts.

Of even greater interest are WTI prices as portrayed by the “NYMEX Strip.” That is to say, the average of the daily settlement prices for the coming 12 months’ futures contracts on the New York Mercantile Exchange (NYMEX).

This is regarded by insiders as the most accurate price for crude oil futures contracts struck in New York. You can find it easily online, although the TV pundits would certainly prefer you didn’t…

While the “near-month” price (i.e., the price for the next month) is given when the WTI price appears as a bug in the corner of your TV screen, futures contracts are traded for months further out, stretching several years.

Trading volume is generally highest for contracts with closer expiration dates.

However, merely referring to the price 30 days from now is not usually the most accurate way to determine where oil is heading.

That’s where “the strip” becomes valuable…

Oil Is in Contango, the Price Floor Is Strengthening

The most used (and most traded) is the 12-month strip.

This tells us at any point during the trading day what the average price is for contracts bought at the same time for each of the next 12 months.

For the past week or so, the strip has been telling us that the effective price for WTI is about $1.50 per barrel above the next-month price given for WTI. In other words, the closing price of $50.66 for Sept. 22 translates into an effective strip price of $52.16.

The reason for this is something called “contango.”

This is the situation in which the current price is lower than the price for contracts that end further out into the future. (When the opposite conditions prevail, this is known as “backwardation.”)

In other words, buying oil for delivery at the end of this month is cheaper than buying oil for delivery in months after that.

Currently, the contango extends out through at least May of next year. This means the undergirding – the “floor” – of the WTI pricing range is strengthening.

As I have noted on several occasions, it’s the floor of the range rather than the ceiling that tells us what’s really going on with oil.

A similar situation emerges with the Brent strip, although there the contango is less pronounced, coming in at about $0.75 per barrel above the next-month price for the 12-month strip.

Nonetheless, that moves the effective price of Brent at close on Sept. 22 from $56.81 to around $57.56.

This shows how crucial the strips really are…

Why the Brent-WTI Spread Is So Important for Investors

For the past month, the spread between WTI and Brent has been increasing. In fact, it’s now at historic levels.

This spread is the difference between near-month WTI and Brent (the figures you see reported each day).

The most accurate way to gauge this difference is as a percentage of the WTI price, since Brent trades at a premium to WTI.

Brent is also more sensitive to global supply and demand balance flows.

It picks up signals faster than WTI, owing to its more frequent use in trades worldwide and its greater vulnerability to geopolitical events.

As I noted a month ago in Oil & Energy Investor, for the first time in two years, this spread has exceeded 8% for four consecutive daily trading sessions.

At the time (Aug. 25), I also said that the last time this happened, it came at the end of a significant trend in which the spread expanded to a double-digit percentage difference, with early September 2015 comprising the end of the cycle.

Two periods of major pricing advances occurred during that trend. Admittedly, these pricing spikes emerged from low price bases.

But by the time we reached the end of the cycle, prices were about the same as they are today.

All of this shows that a rising spread, when it happens early, is a sign of oil prices moving higher.

Well, the situation is even more pronounced now…

Why Oil Prices Are Heading Up

The spread has exceeded 10% for 11 of the 15 trading sessions between Sept. 1 and Sept. 22.

Further, the daily average of 10.2% percent during that stretch is greater than in any equivalent period since mid-July 2015.

All of this means we are likely to see another strengthening of oil prices moving forward.

This is not going to result in some frantic race to $70 a barrel or beyond.

Today’s market has more known extractable crude than a few years ago, especially in the United States.

However, with the OPEC production limits extending into next year…

And with producers like Venezuela, Nigeria, Libya all unable, for a variety of reasons, to produce as much oil as they want…

The International Energy Agency (IEA), the U.S. Energy Information Administration (EIA), and even OPEC are saying a genuine global oil balance is forming.

And that’s all we need to make some nice profits.

— Dr. Kent Moors

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Source: Money Morning