Although the first-second month spread in WTI is starting to snap back toward some semblance of normalcy, its big blowout leaves in its wake questions of what it might take to not have this happen again. (If one assumes that what has occurred is something to be avoided, which not everyone agrees with).

Two possible solutions, one physical, one market-oriented:

At an analysts' forum in New York a few weeks back, Mike Cockrell, Teppco's senior vice president-commercial upstream, said Teppco is Teppco Partners is considering reversing the direction of its 300,000 b/d Seaway crude pipeline, which runs from the Texas Gulf to the NYMEX hub in Cushing, Oklahoma. If that were to be done, it means that a buildup in crude inventories like the one that has pushed down the value of front-month WTI to both second-month WTI and Brent is less likely to happen. No more "roach motel," where the crude goes into Cushing, but can't come out. It would be able to exit to the south...and to the Gulf Coast. That greatly reduces the possibility of the huge buildup in crude that blows out the first month-second month spread and pushes down the value of WTI to Brent to less than historic norms.

Separately, in a suggestion that to implement wouldn't take the engineering work of a new pipeline, energy economist Phil Verleger, in his latest weekly report to his clients, suggests that the NYMEX crude contract should move to a cash settlement basis. His argument is complex, but it can be boiled down to this: the heavy involvement of financial players in the market (read: hedge funds) creates a dynamic in the market caused by the fact that they are playing in a physical delivery market, but can't take delivery. This requires them to get out well before expiration. Oil traders, on the other hand, holding oil in storage in Cushing do not need to liquidate their positions and thus can cause the contango to be greater on the NYMEX than the cash market after NYMEX trading ends. Verleger adds that Tosco extracted similar payments from Metallgesllshaft in 1993 during the MG's ill-fated foray into the gasoline market.

Cash settlement, with open positions at expiration settled using a final-day pricing index, such as Platts, would eliminate this distortion from the market, according to Verleger. He noted that last month, after the April NYMEX contract went off the board and the financial players were out, that the April-May contract in the cash WTI contract snapped back more toward the cost of storage. (On Thursday, the Intercontinental Exchange announced plans for a sour crude futures contract, with cash settlement, based on Platts).

Verleger's concern is that the current system is probably exaggerating the depth of the contango, and extracting huge costs each time those funds must roll first month to second month. If that eventually discourages financial players from participating in NYMEX trade, and moving to the cash-settled Brent contract on ICE Futures, the NYMEX certainly will be losing an engine that has propelled its growth in recent years.

NYMEX does have a cash-settled crude contract, on its Globex platform only. Open interest has been growing slowly, and stands a little over 61,000 contracts. By contrast, the physical contract has open interest of more than 1.3 million. It would take more open interest than that to push the hedge funds on to the cash-settled instrument.

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