Deep in Contango

It has been suggested that being “deep in contango” reflects a prevailing perception (or perhaps reality) that the world is awash in a particular nonperishable commodity. It has also been suggested that a return to a less deep contango condition, i.e., when the difference between short- and long-term futures prices narrows to more closely track actual carry costs, is an indicator that perceptions regarding the immediate availability of said commodity may soon reverse.

Anyway, here’s some fresh information about contango trading in oil:

Oil stored at sea rises to record levels

The contango offers a trading opportunity for oil companies.

As a result of the global downturn, the cost of hiring oil tankers has fallen sharply.

Rental costs for VLCCs capable of holding around two million barrels have fallen to between $35,000 and $40,000 per day, or 52-60 cents per barrel of crude oil per month.

After financing costs of around 30 cents per barrel per month are added —this brings an approximate monthly cost of storing oil of around 90 cents per barrel.

Providing the spread between oil futures months is wider than the cost of storing oil, trading companies can buy discounted prompt oil, sell a similar quantity of forward oil futures and put the oil in a tanker for a month or longer.

Energy Trades Ease Oil Firms’ Pain

Oil companies are ideally placed to profit from this trade because they have plenty of storage capacity in the form of tanks and pipelines to stockpile the oil while waiting for prices to rise. Other, smaller traders would have to pay high rates for storage.

In a typical contango play, a company that bought oil on the spot market at $49.92 a barrel as of Tuesday’s close, and at the same time sold a futures contract for September delivery at $53.19 was able to lock in a profit of $3.27 a barrel. In mid-January, the difference widened to $15.21. Contango has narrowed in recent months, but the trade still pays off handsomely, even factoring in storage and financing costs.

“It’s almost like printing money,” says Torbjorn Kjus, oil market analyst at DnB NOR Markets in Norway.

21 Replies to “Deep in Contango”

  1. There’s probably some clever way for individual investors to approximate this action albeit with less profit, through a plurality of different transactions timed just so, but I don’t have any money anyway so I’ll just take a nap.

  2. If you have no money you can still sit back and watch all this poetry in motion.

    Hey did you see that the linked article erroneously shows a containership as being a crude oil tanker? Kinda funny.

  3. Awwww Mannnnn… that totally killed my buzz. I thought those were festive multi-colored hermetically-sealed modular boxes of oil, perfect for mothers day gift giving.

  4. ooops, buzz kill…

    but wasn’t that a Dead song?

    “And its just a box of [oil], I dont know who put it there,
    Believe it if you need it, or leave it if you dare.”

  5. “I suggest we have plenty of time to initiate lifestyle-saving changes. So let’s get cracking on a gas-tax!”

    Interesting comment. I don’t disagree. But I still think the lifestyle changes have to be forced. But thats what you are saying re gas tax, so OK. Not even on the radar though. Obama keeps saying we will have to make difficult choices. He and Congress have no stomach for this kind of measure however.

  6. “It has to be microwaveable. I can’t be waiting around the old stew pot like those cartoon cannibals. I’m on the go.”

    Soylent hot-pockets. Yeah, that’s the ticket!

    May I suggest a crock-pot, aka slow cooker?
    The toughest meat becomes tender after 3-4 hours. Just plan ahead. Or real BBQ, slow roasted in a 42 gal. drum.

    Besides, do you think your microwave will have electricity when long pork is readily available at Cardullo’s ?

  7. Just to add a contrarian point-o-view, by 2020 we will be living in a Mad Max world. But, I want to be wrong and live with you folks in your world made by hand with F1 racing, of course.

  8. Hahaha, Black Swan! It’s your card, but I’m playing it. Expect either a world war or a “limited” regional war, like the one we have on low heat in the Middle East. Hey, and the Swine Flu looks like a nice little mini-Black Swan to me. Developing quite nicely, ala the 1918 flu epidemic, so expect moron from it in the fall–surprise!

    Oh, and recall we are a nation that is technically broke financially. The only reason we are getting away with this phony money federal budget is because we can force China, Japan and others to accept our debt. If they ever find a way around our hegemony or just decide to call our nuclear bluff, then watch out, a big time, possibly game-ending Black Swan.

    Nope, wishing for moron BAU is just that, so much wishing. I think we might even be so many zombies ourselves, convincing ourselves we are alive but the reality being something else. Everyone’s hoping otherwise, whistling past the graveyard, busing themselves at work (assuming they are still employed) only to be reminded with a casual glance at the headlines on that boy’s newspaper. Extra, extra, read all about it!

    Note we now have a Detroit Big-2. Who’s going down next? GM, too big to fail?

  9. something will happen, ya just don’t know what, or when. i’m still betting on $200 sometime in the next 2 or 3 years. but it’s just a bet, like any other.

    it’s just like taleb, he says you can’t predict, and i agree, but he bet on an equity collapse anyway. a lot of people saw it coming, including me. i “just” completely and uterly misjudged the effect on commodity pricing, what a turd.

  10. so anyhoo, for whatever it’s worth, not much, i shifted out of stocks, for the most part in the fall of 2006, good call on my part. of course i bought commodities, mostly stocks, funds and etf’s at the same time. this was great for a while.

    i was buying gold in 2005 and 2006 when it was around $400. this was also a good call on my part.

    ya win some you lose some.

    actually, i think taleb said something like, if want to even have chance at profiting from the markets, you must be willing to expose yourself to black swans. i agree, for whatever that’s worth.

    basically it come down to somthing like: you make your bets and you take your chances. that’s life.

  11. of course if i could go back to the summer of 2008 i would have shifted completely to cash. i even thought about it at the time. but sat there and did nothing. so i guess that my current bets are kind of a default position anyway. luckily, again all just luck, i’m not in a position that i have to sell low. anyhoo, something will happen. that’s the one thing you can absolutely, 100% count on.

  12. Could you like, naked short oil on the high sea?

    Or more to my point, could they start some shenanigans like they have caught Morgan Stanley doing with PMs, selling paper when you don’t have it in the vault and quickly covering when you have to deliver? This oil at sea looks like another opportunity to cheat, to me. Claim there is more than there really is. Great way to use empty tankers to artificially suppress the price of oil if you want to go deep into tin hat territory. Help keep the tankers from tanking too.

    Create a hell of a long squeeze on the Iranians, Russians, Saudis, etc…Also help ramp up the economy by lowering the price of oil.

    Don’t mind me, just writing speculative fiction here.

  13. “The IMF is hiding gold in the hull… now it’s all starting to fit together.”

    The Spanish tried that move a few centuries back. Too many Black Swans. Makes for great stories and treasure hunts, however.

  14. “I saw it coming all along but still managed to fuck up anyway.”

    This seems to be the essence of being human, and probably why a merciful God decided to give us senses of humor. Just pretend your life is like one of those old Woody Allen movies! Remember when at the end of Love and Death he is led away by the grim reaper and looks back and says “I got screwed.” Damn that was funny.

  15. “speculative fiction”

    That reminds me. I’ve been keeping an eye out for WMBH fan fiction but no cigar, so far. Something must be done, I think.

  16. BunnBunn,

    You look so cute in tin!

    Interesting about the weight of the fluids (or lack) on the height of the ships in the water. I wondered if those ships could take on water and expel it without polluting. Silly me. People who would do that kind of a thing (if they did) would not care about pollution, would they?

    Thanks for your answer.

    Snuggles Mr. Bunny!

  17. Just to illustrate that moi is not the uber-doomer I’m cracked up to be, here is a concluding snippet from “memmel” over at TOD today:

    “Have we seen the highest price for oil before it becomes unaffordable and is the worst behind us ?
    Not even close this game has barely even started its the top of the first in the game of the end of civilization.

    Could the nine innings of play pass quickly ?
    Sure !

    From now on out the whole house of cards can literally come crashing down any day. But the underlying forces will build over several years. My best guess is still 2011-2012 before we even begin to reach a serious people starving depression and the social net becomes torn. Probably two more years after that before reducing people to absolute poverty no longer ensures enough resources to run a viable civilization and social order breaks down.”

  18. Dude! Lighten up. Yes, I know memmel is a tad mental. You are also correct about his writing abilities, not to mention he is a “motor-mouth” who posts too much.

    BUT, you’ve got to take that baggage to see the gems, like what I posted from him here. It’s at the end of a long posted comment that I have not even yet read in its entirety.

    Also, on Gail, someone posting as BOE really jumped on her post today. And, some of what he said is correct. Poor Gail, I know you don’t like her and probably think she is a lightweight. But, she tries. She has the gift of time to devote to these matters and she can sorta write, better than memmel, of course. And, again, she’s hitting on the important questions, what really matters, even if she doesn’t have the answers–who really does?

  19. The guy that went after Gail is BOP. He says he used to work in the oil patch as a systems analyst. He is the shits–very smart, very direct. Go read his comments on TOD today, or yesterday, I suppose.

Comments are closed.