Oh dear, oh dear

It´s not that this article is wrong, it´s that it´s so hugely uninformative.

Almost a dozen oil tankers carrying millions of litres of oil and gas have anchored off the British coast because the cargo\’s owners are waiting for prices to rise.

Well, yes, but why? The article tells us not.

The reason is:

Right now, you can buy oil for $36 a barrel. And you can lock in a contract to trade oil in June for $51.30. When futures prices are higher than current prices, it’s a situation called “contango.Oil markets expect a little bit of contango, but the spreads we’re seeing today are off the charts.

Of course, any time there is a market anomaly this severe, there’s got to be a way to profit.

The Forbidden Contango

The reason such a large contango is rare is because it’s too easy to profit from it. If you were so inclined, you could right now buy the actual physical oil for $36 a barrel, keep it for six months and have a locked in price of $51 in June. Traders do this all the time. All of that buying and selling generally brings market prices to levels where there isn’t such a large profit to be made.

So where is the breakdown in today’s market? Storage capacity has run out. Oil tanks are filled to the brim. Instead of traditional on-shore tanks, investors have taken to borrowing tanker ships, filling them up, and letting them float offshore.

It´s not that tough to figure it out. So why didn´t the article say so?

Answers on a postcard to the Barclay brothers please.

12 comments on “Oh dear, oh dear

  1. All of that contango means that someone is going to go bust selling oil at $36 when they can only buy it in the market at $51.

    Someone’s going to lose heavily.

    Tim adds: Futures markets are, by definition, zero sum, this is true……

  2. Perhaps said journalist just thinks that they are hoping for oil prices to go up, rather than taking advantage of a contango.

    Perhaps derivatives are too difficult for financial journalists?

  3. Since the Telegraph has decided to rush downmarket, you must expect it to carry stuff written for the dimwit-in-the-pub and his bint.

  4. The real question is why do producers, who have unlimited, costless storage capacity (its called geology) need to sell it in the spot market when they could sell it forward.
    This gives you insight into just how buggered up the economies of Russia, Venezuela and some of the Mid East really are.

  5. The contango has narrowed quite significantly, the spot price is currently $49/b and the six month price is $57/b.

    I disagree with BiA and Tim that someone is going to lose heavily. Futures are a zero-sum game, but what it being talked about here is not unforeseen movements in the spot price (or futures prices) but one that people are aware of.

    If I buy crude off you at $57/bbl for delivery in six months time, even though the spot price is $49/b (or $31/b), then at the time the contract is taken out we are both happy with it. It’s a voluntary exchange.

    Furthermore both contracts could rise, fall, or one could rise and the other fall. It’s the same potential chance for seller and buyer.

  6. Don’t you need to go a step further? So far you have shown that people are so keen to stock up on oil that they are cramming it into any vessel they can find. But you haven’t shown why.

    My bet is that Iran is going to go sour this year. And it looks like quite a lot of other people are betting the same.

  7. I don’t think you can draw that conclusion from what was described (a steep contango) because the spot price hadn’t risen, implying there was a shortage of current demand.

    Futures prices aren’t, as far as I am aware, any better predictors of the price in the future than spot prices.

  8. I meant to add the spot price has since risen, which might (or might not) be becuase of the reason you outline.

  9. I’d also guess (but might be wrong) that these ships are not holding gas. LNG boils off over time, it being held liquid at -160C, so you either use it or lose it. And I don’t think the world’s LNG supply is large enough nor the LNG carrier fleet large enough to have tankers sitting about doing nothing.

  10. Right now, you can buy oil for $36 a barrel.

    This seems wrong too. At the moment, and for the past month or two, it has been around the $45-$50 mark.

  11. That’s what i said?

    “The contango has narrowed quite significantly, the spot price is currently $49/b and the six month price is $57/b.”

    The article is from January

  12. Interesting, I noticed that there have been quite a few tankers off Torbay at the moment (at least 6). Normally that means there is bad weather coming, but the weather has been reasonable recently. This gives a good explanation for what they are going there.

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