Year in and year out, crude oil traders trade various intermonth futures spreads to take advantage of the relationships between the different contract months in this market. Many traders don’t know these spreads can signal outright trade opportunities in the deferred (back) months of the spreads — as long as traders don’t succumb to an all-too-too common misconception about a spread’s "message."

For several years the price of crude oil has been central to discussions concerning the inflation risk in the U.S. economy. From time to time a Federal Reserve statement or an economist’s forecast will suggest the inflationary potential of the oil market is less than many people think because the futures market is projecting lower crude oil prices. These people note the price of the December crude contract, for instance, is lower than the price of the nearby September contract.

The apparent logic behind this argument is that a futures price denotes a future price. Accordingly, a lower December contract price amounts to a market prediction of lower crude prices in the future, while a higher December price forecasts higher prices to come (this relationship never seems to be explicitly mentioned, though).

This isn’t what a futures price is, but let’s come back to that in a moment.