Super Contango in Oil

I bet not many people heard of this term. In case, if you are not familiar with the term, it denotes a normal and very specific condition associated with future contracts, in which the price of oil for distant delivery months from now exceeds the price of oil being traded right now on the spot market. Typically, the price difference is related to the cost of storing and insuring the oil itself.

I know many investors have given up on oil, fearing that a fall from grace precludes a rise in price from the ashes. In this piece, I am showing that the oil markets are right now in a rare state of ‘super contango’, which suggests that the markets expect far higher prices by later part of this year and next year.

On Tuesday, oil traded at $38.81 a barrel NYMEX spot. With storage cost of 90 cents per barrel per month, under normal market conditions, I would expect the June crude oil contracts to be priced roughly $43.31. However, the June contract at NYMEX was settled at %52.14 on the day with an excess potential profit of $8.83.

In general, the spreads we’re seeing now are at, or near, their highest levels since April 2004, when the government started collecting Cushing data. Cushing is the delivery point of all NYMEX futures. It signals an arbitrage opportunity that’s literally too good to pass up if you have got the means to capitalize on it.

It won’t be surprise to see tanker rates to skyrocket as companies literally top off very large crude carriers with the 2 million gallons they’re designed to carry – and then park them offshore until prices rise. Since January 1, the benchmark supertanker rental rates have risen more than 56%. As many as 80 million barrels of crude oil are being stored at sea around the globe, according to Frontline Ltd, the world’s largest owner of supertankers.

In the meantime, they’re selling the June futures and locking in profits above and beyond what it costs them to buy and store their stash of the ‘black gold’. According to recent reports by Bloomberg News, Phibro LLC, the commodity trading arm for Citigroup has booked two supertankers to hoard crude oil supplies. It would not be surprise to see Morgan Stanley, which owns half of tanker group operator Heidmar and Goldman Sachs, which executes commodities trades and structures related deals through J.Aron & Co to run in packs.