The Big Oil Contango
(h/t Michael Panzner for mentioning this in a recent chat which I am doing on Going Concern this week and next. The dude rules and Financial Armageddon is still one of the greatest literary works of our time. *fapfapfap* right? I love it, so what)
Really? Can you believe ships are loaded up with oil and just sitting there at sea rocking back and forth?
Hell, I no longer know what I believe.
Contango trade is profitable if the spread is wide enough to cover the costs of holding crude stocks, namely storage and working capital. Such stocks are discretionary stocks built or drawn in response to prices, and particularly in response to the forward price curve.
Discretionary stock building occurs “disproportionately” in the US Northeast, particularly around New York, and in Northwest Europe, especially in the Antwerp-Rotterdam-Amsterdam (ARA) area where the world’s two active product futures exchanges, the NYMEX and the International Petroleum Exchange, are based.
I have no idea what that means.
Wait, got it.
With on-land tank farms getting full, the discretionary stocks turn to oil tankers for floating storage. According to research by Gibson Shipbrokers, one in twelve of the world’s largest crude oil tankers are being used to store oil rather than transport it.
Now what in the hell could anyone be storing oil for?
It's cool, all commodities are kind of whacked out right now because of government intervention and, subsequently, sovereign debt concerns. Duh. I could totally see why that might be relevant.