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Oil's Index Investors May Now See Positive Returns

U.S. oil futures are at a 2 1/2 month high. In addition to China manufacturing data and more optimism over an eventual EU debt deal, traders are covering short positions in commodities after more comments from a Federal Reserve official about the possibility of further monetary easing ahead.

There are also two important technical factors that are also helping to drive up U.S. oil prices. December WTI oil futures jumped over $4 intraday to nearly $92 a barrel, the highest price since August 5.

QE3?

Following comments late last week from Fed members Tarullo and Yellen calling for more asset purchases, Fed Vice Chairman Dudley is saying now saying that it's "possible" the Fed could pursue QE3.

Oil Barrels
Oil Barrels

"Traders are now being forced to cover their shorts as the market is reassessing the Fed's level of participation following lackluster response to Operation Twist in September," says commodities trader John Netto of M3 Capital.

"This coupled with a lot of hedge funds positioned short ahead of the EU summit has exacerbated the buying."

Backwardation

Another factor: WTI oil futures are now in "backwardation"—meaning the front month price is higher than future months—for the first time since November 2008.

"This means means index investors (mainly in the USO ETF) whose returns have been compromised since late 2008 despite oil's rise from $30 to $90 a barrel, are finally making money on the 'roll yield,' as they sell the front month and buy later months," says Tradition Energy analyst Addison Armstrong.

And, traders say this renewed backwardation of WTI crude oil prices may be encouraging more buyers to come in.

The Great Unwind

Also, the front-month premium of Brent crude to WTI oil futures has decreased by about $8 since last Thursday. The spread is now under $20. WTI oil prices plummeted last week on the announcement that Brent crude would be added to the DJ UBS Commodities Index next year, exacerbating the Brent premium to WTI futures.

The compression of this spread today may be more due to short-covering as some institutions speculate that Libyan oil may return to the market sooner rather than later, Armstrong says.

Disclaimer

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC's Senior Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.