CL spreads in 2005

http://economics.about.com/od/theoilsupply/a/oil_futures.htm

The Price of Crude Futures as of August 18th, 2005

Delivery Date - Price

Sep '05 - $63.25
Oct '05 - $63.85
Dec '05 - $64.88
Sep '06 - $64.42 - wow diff between sept 05 and sept 06 is 15 cents for the current month CL contract ,

asr: I think reason being CL moved from $30 range for 5 years from 2000-2005 to new $50 first time in 2005, so oil producers who are used to $30 oil for a decade love to take $55 for next 5 to 6 years and same CL speculators are can not digetst 60 oil for next 5 years. this explains the no spread on CL for multiple years, so spread seems started from 2006 onwards with higher oil prices of range 60 to 70
Dec '06 - $63.88
Dec '07 - $61.39 - and you have backwardness for 06/07 ..
Dec '08 - $59.74
Dec '09 - $58.64
Dec '10 - $57.94
Dec '11 - $57.64

As you can see, oil futures do not predict $80 barrels of oil in 2006. They seem to predict that oil prices will rise, but only by a dollar or two. Why the discrepancy? I can think of a few reasons why futures contracts may be lower than predicted oil prices, such as:

1. The time value of money: By buying a futures contract, you're tying up money today for a good to be delivered months or years from now. If I wanted oil in September 2006 I could either buy a future contract today, or take the money, invest it in a stock or bond, then sell that asset in 2006 to pay for the oil I need. Futures prices tend to reflect this, which is why the future price for oil in 2011 is so low. But can the time value of money really be so high that people are willing to pay $80 for a barrel of oil next year when they can "lock in" at $64.42 right now?

2. Liquidity: Futures contracts for far off dates such as December 2011 tend to be very illiquid - there are not too many buyers or sellers. That is not the case for contracts in 2006, as they are traded multiple times a day.

3. Future Prices as a Mean: Perhaps many people believe that a barrel of oil will be $80 or $100 next year and are buying contracts based on that belief. If there are investors who believe that oil prices will crash and expect $30 barrels next year, then they would be acting to drive the futures price down to the current level. To get a better idea if this is happening, we would need to consider the price of crude oil options, not just futures.

4. Entry Costs: The minimum crude oil contract that one can buy or sell on the NYMEX is in the range of $33,000. This may deter many investors from entering the market, leaving the price artifically low.

Can these factors be causing the price of crude oil futures to be artificially low? It wouldn't seem so given the magnitude of the spread between futures prices and pundit expectations. So either:

1. The pundits are wrong

2. The markets are wrong and investors are leaving a lot of money on the table by not buying up crude oil futures

I'm not sure which to believe. The second explanation seems pretty unlikely, but then again, crude oil futures did not anticipate the recent rise in price. My gut still tells me that the first explanation is the correct one, but I'm not as confident in it as I would like to be.

I'd love to hear what you think on the matter. You can contact me by using the feedback form.