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:
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.
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.