The fixed income team at Credit Suisse have a good note talking about what's really driving WTI backwardation. Small hint, they don't think it's much to do with Egypt. They put the backwardation down to three things. First, there's genuine seasonal demand for light sweet crude, which is always strongest in the summer months. The trend started at least a month ago. Second, they believe there is a very strong possibility that a lot of the oil that's stored at the WTI delivery point at Cushing is not necessarily made up of high-quality, low-sulfur, light crude oil - which is what is being demanded by the market - but of a wider category of oil. Third, the WTI low-interest rate carry trade is being unwound. It's this that's worth your time: Beyond the fundamentals, recent changes in positioning also matter. For the last two to three years, just as the Federal Reserve drove investors to look ever harder for yield, WTI's steep contango provided a neat carry trade, allowing it to be a fairly steady provider of decent (if unspectacular) returns. Boiled down to the basics, investors were selling one year out time spreads, where the curve was relatively flat, and waiting for them to move into contango as the futures approached the prompt month, see Exhibit 13. Now that the WTI curve has flipped into backwardation, this trade no longer works and the remaining, perhaps significant, positions are being unwound. To do so, funds must buy the front and sell the back, further exacerbating WTI's backwardation. So, as we've noted before, a lot of the US oil that was being pent up in storage to take advantage of positive contango carry, is now likely to be released to the world. The destocking and backwardation is less about a short squeeze and possibly more about there being a sudden cost to hold commodity over cash. What happens next will depend on how easy it really is to find a better-yielding cash investment. It's also worth thinking about what definancialisation trends will do to those participants that have made a business out of collateralising and financing commodity stores the past few years. Though, perhaps even higher rates in China will absorb a lot of those commodities from the market, by collateralising them in warehouses - at least until the renminbi stops appreciating against the dollar. Related links: What have inventories got to do with QE? - FT Alphaville The rise of the real collateral "mining" business - FT Alphaville Should the Fed intervene in commodities?