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.

36 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. Thanks for posting this. Oil has been a relatively boring subject recently. It seems like the price has been stuck at $50 for forever and a day.

    I realized I had become so uninterested in the topic lately that I hadn’t checked recent consumption numbers since January.

    Oddly, since consumption in the US hit lows in October and then started to drift higher Nov-March – In April consumption swung down sharply. I follow averaged year-over-year percentage moves, rather than raw numbers. I look at acceleration changes versus raw numbers, so I will have to run a few graphs and talk about it some more to fuigure out what may be happening.

    On Production – OPEC has basically lowered it’s production 3-4 million barrels per day, causing world production to drop 3-4 million barrels per day. The rest of the world (importers) have not noticeably either lowered their production, or had it lowered for them by peak-oil/geologic factors. This is largely the result of any movements being too hard to discern in a 4-month time frame.

    The large drop and relatively stable price at $2/gallon US for gasoline clearly demonstrates the world’s ability to function at supply levels much lower thyan 86-88 mbpd (depending on your source). We are now at 82-84. I suggest that we could go much lower and that geologically-forced production decreases wouldn’t be able to catch up until AT LEAST 2020.

    This has always been my view on Peak Oil. Ask MOU.

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

    The perfect Mother’s Day gift would be to force her to watch the Spanish Grand Prix… oh, wait, sorry, wrong planet.

  5. 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.”

  6. “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.

  7. I should probably clarify “lifestyle changes.”

    To me this means driving monster trucks alone to the mall 6 times a day. It doesn’t mean the disappearance of motorized/wheeled transport or the consumption of delicious hot-pockets.

    We need to get Rachel Ray and the rest of the cuisine-glittorati busy developing recipes for dead human meat. Pig-virus provides ample opportunity that cannot be wasted.

    It has to be microwaveable. I can’t be waiting around the old stew pot like those cartoon cannibals. I’m on the go. See how Campbells transformed themselves in recent years to market themselves to the new fast-paced woman. Starbucks and chicken noodle lunch-on-the-go in your Acura’s cupholder.

    Vroom. Vroom.

    Or maybe we could just feed dead people back to the pigs.

  8. “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.”

    Yeah, I know. In fact I’m fully aware of this. I’m working on a solution. It involves despair and a bottle of merlot.

  9. “despair and a bottle of merlot”

    You’re right, Bif (as always). This place is poetry in motion.

    JR, all I can say is you guys and gals, on some days, are my only lifeline to humanity. Holmes is still so agitated about the commodities collapse that the subject is forbidden, particularly at the dinner table. He’ll get his act together soon. I just know it to be true.

  10. It WAS on the radar when gasoline was $4. But then when it dropped, the peak-oilers (JHK, Deffeyes, simmons) had nothing to say.

    They literally stood there with their mouths open.

    The obvious reaction was that the world made mention of their crying-wolf ways – but the less noticeable effect but more dangerous effect was that peak-oil was discredited just when it needed to be taken seriously.

    Simmons, Deffeyes, Kunstler, Campbell, and others will never take any responsibility for this, but continue on as if they were right all along. Which leads me to believe they are true narcissistic sociopaths.

    They predict the world ending poorly due to oil, selling books on the topic, and than do everything in their power to push these events along.

    Kunstler still won’t acknowledge the real message of “The Black Swan” – which is that we cannot predict.

    When he mentions the book he still uses it as proof of his own theories.

  11. JR, you were one of the few voices in the wilderness of peak oil to say the sky is NOT falling. I don’t pay too much attention to the subject these days, honestly. But I do remember my lessons. I actually learned a lot, so thanks.

  12. No, thank you, Tipping.

    I’ve been reading too many Bret Easton Ellis novels lately (or all of them, there are only like 5). So I never know what is me or what is in my head.

    I needed someone to verify that is my stance. Thanks. You contributed at the exact right second.

  13. Tip. what bike did your hub get? Just curious.

    @JR “more dangerous effect was that peak-oil was discredited just when it needed to be taken seriously.” That’s for sure!

  14. “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 ?

  15. Soylent! Fuck! How did I miss that?

    I’m like the Soylent king. Goddamnit.

    “do you think your microwave will have electricity”

    I’m looking for innovative ways to make this possible.

    So far I’ve only come up with a cold-fusion scheme involving swine-flu… yeah, I know, kinda lame, have you seen “Thunderbird 6” (1968) ?

    Okay. Then don’t call my idea lame.

  16. 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.

  17. No, we won’t.

    That’s the point I keep trying to get across (and your contrarian view is quite welcome, you just need to justify it).

    Doom, you know I’m the biggest fan and believer in Mad Max and Soylent Green. But I’m also an “expert” in these topics. And I just don’t see it.

    These scenarios all rely on rapid decline.

    Decline will be very slow (I think).

  18. 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?

  19. JR, Doom et al., after talking a lot (back in my CFN days initially and here to some extent — see my “20 Years Hence” post) about possible and likely future scenarios, I’m not all that interested, at least right now, in rehashing all that stuff. That’s what separates a person who thinks that resources are probably finite from a peak oil or other alarmist, who as JR correctly suggests doesn’t give a fuck about the consequences of their bell ringing and doesn’t care if they are frequently wrong just so long as they keep receiving attention from people who are addicted to a sense of hopelessness. It’s far worse to see something and not do anything about it than to be genuinely surprised. And after you’ve done enough thinking about any particular topic, there’s little room for being surprised… so volitional ignorance is a more fun and friendly option for a lot of people, especially the one’s who want to feel as if they’ve somehow been victimized and avoid nagging sensations akin to the self recrimination “I saw it coming all along but still managed to fuck up anyway. Hooray for me! And now for my next trick… .”

  20. 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.

  21. 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.

  22. 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.

  23. 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.

  24. Are you talkin’ about selling a naked put? You could be onto something, especially the naked part.

    MOU, your conspiratorial musings are among the finest of their breed. As tin foil hats go, you wear it well. (This is where JR runs for a Rod Stewart link [or not].)

    Empty boxes of oil. What a thought. But seriously… don’t these tankers ride any higher or lower in the water, depending upon whether they have a full load of oil? Water ballast functionality notwithstanding, there are probably ways to simply look at the ships and ascertain whether or not they are carrying a full load of oil. I got it!!! The IMF is hiding gold in the hull… now it’s all starting to fit together.

  25. “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.

  26. “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.

  27. “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.

  28. 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!

  29. Dave, I’m going to be doing some posts on Taleb soon (yeah, I know, I keep saying this but I will). I’ve got his entire on CDs now that I listen to and I’ve got the book on PDF, so now… whatever, you’ll see.

    You are right about him, I want to try to bring these things to light.

    Don’t respond, I know, I sound like a complete douche.

  30. I actually don’t know anything about Rod Stewart except that when I was like 8 “Do You Think I’m Sexy” was like my favorite song ever. I had been raised in a fairly strict household where only the Beatles and the Kingston Trio and the Beachboys were around. It wasn’t so much strict as overseas. We couldn’t get the latest records but all my parents’ friends were dropping acid and ending up sleeping rolled up in the living room rug. Good times.

    Strict musically. When I finally moved to the States, my next door neighbor had Zeppelin II and Sabbath War Pigs on 8-track. I was like what is this awesome shit.

  31. 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.”

  32. Doom, memmel is not allowed here. I really can’t stand that motherfucker. If you insist, I’ll read it. What I hate most is his arrogant, no numbers , no track record bullshit.

    He predicts more than anybody. I’m assuming the fact that he never gloats about successful predictions verifies how bad he is.

    I’m totally serious. I’ve said this before. I know you like memmel. But the dude is mental. Plus he is wickedly wahtever you call it.

    he has no sense of separetly paragraphs. and I never hold this againgst anybody, but this is what it looks like when I do it on purpose. This is what his writing reads 100% of the time. I can’t follow that and nobody is willin gto translate. No fuckit I won’;t go back and have somebody spellchch for me and make it so it is bearable cuz Ive got a disease called alcoholism and I’m not always sober. But narcolepsy is cool.

    I actually try. I’ll admit, I’m lazy as all hell, but memmel is just a goofball.

    You know what. I don’t know what my problem is. I’ve got nothing against memmel. He just pisses me off. I used to talk to the guy personally. Honest. I went one on one for a long time. I hate him. Oh, and he’s not the worst.

    I’m gonna go over to F1wolf and blow off some steam.

    And I’m not shitting. I’m coming back Monday. I’m gonna take on OEO as long as you motherfuckers keep my cover.

  33. 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?

  34. 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.

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