There must be some financing issues, as storage is still below the top of the five year historical average, unless a bunch of storage was destroyed or converted or the data is bad.

The data may be bad, and Verleger seems to suggest that demand is much lower than the EIA, IEA, or OPEC have inferred, which has the effect of lengthening the days covered by crude already in storage. However, he still seems to suggest (from reports) that there is more in storage than has been reported, meaning that the data is flawed … a not unusual estimation in the oil business.

Still, I suspect there is more storage out there … and that if Russia does as it announced it would do yesterday and coordinate production cuts with OPEC on November 17, then prices should recover if the total cut is 2.5 mb or more. The announcement coincides with a narrowing of the full curve contango which began two days ago.

As for the contango/backwardation argument it is true that contango is normal for a commodity that is non perishable and oil is of course in that category. The spread is historically wide right now and the reason, as someone else mentioned, is that financing is bascially not available for the traditional storers of oil, i.e. refiners, etc. That being said, there is a profit to be made in the contango market. The spread is wide enough now that you don't need much financing to make the trade profitable. The problem is that storage is very hard to come by, especially in Cushing. I know; I've been trying to find it for the last month. I have access to financing but I don't have access to storage – at least not yet. When I do, I'll be doing the trade. Others already are by leasing tankers:http://www.bloomberg.com/apps/news?pid=20601109&sid=axA8bIBUfvLI&refer=news
My only problem right now is that I'm not big enough to lease a tanker and need the Cushing storage which may not become available.

I don't think the commodity super cycle is over because I don't think the dollar is done going down. A good way to anticipate a rise in commodity prices is to watch the Aussie and Canadian dollar versus the US dollar. There is academic research that shows that those currencies move before the commodities with a lag time of anywhere from a couple of weeks to a couple of months.

Full disclosure: I'm long gold and started buying a commodity index today. And I was a seller in March and July last year.

Contango is the norm because you always have a choice between buying something later or buying it now and storing it for later. There is storage cost and opportunity cost of capital, so the forward price is normally going to be higher than the spot. When oil was at $150, it would not have been surprising to see backwardation, reflecting the fact that very strong forces were at work to increase supply and reduce demand.

It’s pretty much like the yield curve. Normally it slopes up. When it slopes down, we say it is “inverted”. Backwardized is synonymous with inverted. Neither is the norm.

Demographics don’t mean squat for commodities. The world’s population has doubled and doubled and doubled again over history and always commodity prices remain nothing but cyclical. Indeed, for all of history, the real, inflation-adjusted price of commodities has fallen over time because of massive technological improvements that have lowered the cost of production.

EVERY time there is a boom people say, this is it, this time we are really running out of the planet’s finite amount of XXX. The way you can see that is not true in any given cycle is to simply look at whether all the commodity prices are moving together. Is the world going to just happen to run out of oil at the same time as it runs out of copper at the same time it runs out of iron, zinc, aluminum, platinum, gold, and corn? Nope. If and when we are ever REALLY running out of something, that price will rise independent of what other materials do.

Note that all the iron, copper, aluminum, gold, silver and other metals that have EVER been “produced” on this planet is still here. If we have to someday “mine” metals out of landfills, we will, but for now there is plenty that is easier to get to in other ways.

The commodity that really is being in some sense destroyed as it is consumed is hydrocarbons. But the carbon molecules are still here. Who knows what technology may eventually be able to do with them. In 100 yrs you could have solar or nuclear or tidal or geothermal powered factories that extract carbon from the air and reassemble it into fuel, if hydrocarbon fuel has not been completely displaced by then. People living in a temperate Siberia will start to protest the global cooling effect of taking all that carbon out of the air…

(Crops of course are destroyed as they are consumed, but they are different from the extracted commodities in that they are “renewable” – and no, we are not running out of land on which to grow them, nor fertilizer with which to feed them, nor water – all the water that has ever been on the planet since humans have been here is still here – perhaps not as conveniently located as we might like, but it is here)

It doesn't matter if the asset is a physical asset or not. What you said could have been said of commodities or other physical assets such as real estate at any point in the past few thousand years. I know I'm oversimplifying your argument (supply & demand changed over various periods) but the point is the following:

What matters, as value investors would say, is the price! The key question is whether oil at, say, $50 is overvalued or not? It's down 50% from its $140 peak; but it is also up around 500% from its low of around $12. If the price is too high, fundamentals can be positive and yet the price will just stay still or even drop (i.e. fundamentals "catch up" to price.)

Most people forget that oil demand growth was positive all throughout the 80's and 90's yet oil prices kept going down. Partly it was because of increased supply but mainly it was becaues the price in the early 80's was too high (i.e. oil was overvalued.) If one is bullish, they better be sure that the asset isn't overvalued regardless of how positive the fundamentals seem.

So the current contango is a function primarily of spot prices getting smashed because credit is unavailable to store. It’s an equity risk, now, and demands an equity return.

Could it be a sign that the crude bull market is over? Who knows. Forecasting future prices from the shape of the current curve is as stupid as forecasting future prices based on outright prices. Chance of being right is 50/50. I’ve seen contangos lead to a recharge in the spot price (ie, it can go either way).

By the way, any discussion of crude without looking at natural gas is a deficient analysis. Gas production in the lower 48 increased 8% year over year, an increase that has no historical precedent. (It’s due to new technologies unlocking preveiously uneconomic basins. Should sound familiar to anybody who understands commidities). Worldwide, LNG will double in the next five years, an increase that’s financed by NOCs and is pretty much locked in. All those BTUs will have an impact on all energy prices, whether now or later.