Oil companies starting to store oil
As recently as 3 months ago few would have expected this to happen but it looks like some oil companies are storing oil in tankers, trying to take advantage of higher prices in the future:
The arbitrage discussed above should result in a downward push on the future price. I'm not an expert in derivatives (or anything else for that matter ;) ) but the futures market is one of the least forward-looking markets out there. A lot of people look at the futures markets and try to gauge what future expectations are, but they are almost always wrong except close to expiry. The futures for commodities have been completely wrong at times but the best example is the Fed Funds futures market, which is used to predict the future FedRes interest rates. The futures market has been mostly wrong when it comes to the interest rate calls. (However, the futures markets move closer to being correct as time passes e.g. if you ever look at Fed Funds futures the week before the FedRes rate decision, it is fairly accurate.)
So much has happened in the commodity markets in such a short period of time. I always knew that commodities were very volatile but I never would have expected them to collapse so quickly. The difficulty now--for both the commodity bulls and bears--is to figure out how much the fundamentals have changed, if it has at all. The most acute problem in the commodities market is the reflexivity phenomenon that George Soros has alluded to. Namely, the impact of market participants started having an impact on fundamentals and vice versa. The injection of hundreads of billions into commodities by investment funds has distorted the commodities, and vice versa, that it is difficult to discern what is "real". For instance, is a $140 oil or $3 copper a sustainable "real" price? Or is that a price that was "created" by the market?
In the worst year ever for oil, investors can lock in the biggest profits in a decade by storing crude.
Traders who bought oil at the $40.81 a barrel on Dec. 5 could sell futures contracts for delivery next December at $54.65, a 34 percent gain. After taking into account storage and financing costs investors would earn about 11 percent, according to Andy Lipow, president of Houston consultant Lipow Oil Associates LLC. The premium, known as contango, is the biggest for a 12-month span of futures since 1998, when a glut drove crude down to $10.
Stockpiling crude may provide higher returns than commodities, stocks and Treasuries as the U.S., Japan and Europe endure simultaneous recessions for the first time since World War II. Crude sank 72 percent in New York since peaking at $147.27 in July. The Standard & Poor’s 500 Index fell 40 percent this year and two-year government notes yield 0.9 percent.
“The bottom line is that you buy crude at a low price and lock in a profit by selling it forward,” said Mike Wittner, head of oil market research at Societe Generale SA in London. “It’s low risk. The contango can definitely pay for storage and the cost of capital and leave plenty left over.”
Royal Dutch Shell Plc sees so much potential in the strategy that it anchored a supertanker holding as much as $80 million of oil off the U.K. to take advantage of higher prices for future delivery. The ship is one of as many as 16 booked for potential storage instead of transporting crude, said Johnny Plumbe, chief executive officer of London shipbroker ACM Shipping Group Plc.
The tankers, if full, hold about 26 million barrels worth about $1 billion, more than the 22.9 million barrels sitting in Cushing, Oklahoma, where oil is stored for delivery against Nymex contracts. U.S. crude inventories rose 11 percent this year to 320.4 million barrels, according to the Energy Department.
The arbitrage discussed above should result in a downward push on the future price. I'm not an expert in derivatives (or anything else for that matter ;) ) but the futures market is one of the least forward-looking markets out there. A lot of people look at the futures markets and try to gauge what future expectations are, but they are almost always wrong except close to expiry. The futures for commodities have been completely wrong at times but the best example is the Fed Funds futures market, which is used to predict the future FedRes interest rates. The futures market has been mostly wrong when it comes to the interest rate calls. (However, the futures markets move closer to being correct as time passes e.g. if you ever look at Fed Funds futures the week before the FedRes rate decision, it is fairly accurate.)
So much has happened in the commodity markets in such a short period of time. I always knew that commodities were very volatile but I never would have expected them to collapse so quickly. The difficulty now--for both the commodity bulls and bears--is to figure out how much the fundamentals have changed, if it has at all. The most acute problem in the commodities market is the reflexivity phenomenon that George Soros has alluded to. Namely, the impact of market participants started having an impact on fundamentals and vice versa. The injection of hundreads of billions into commodities by investment funds has distorted the commodities, and vice versa, that it is difficult to discern what is "real". For instance, is a $140 oil or $3 copper a sustainable "real" price? Or is that a price that was "created" by the market?
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