Tuesday, January 27, 2009 1 comments ++[ CLICK TO COMMENT ]++

Crude oil contango dissapearing

Bloomberg is reporting that the arbitrageurs trying to profit from the oil contago are starting to unload some of their cargo:

Royal Dutch Shell Plc sold more than 1 million barrels of crude stored off the U.K. and a vessel hired by Citigroup Inc.’s Phibro LLC left its anchorage in Scotland for the U.S. as the incentive to keep oil in tankers disappears.

Shell sold two 600,000-barrel cargoes of North Sea Forties crude for delivery in mid-February at Scapa Flow near Scotland’s Orkney Islands to oil trader Vitol Group, the companies said. The oil, already on board the supertanker Oliva, has been anchored off the U.K. coast since at least December, according to Bloomberg vessel tracking data.

Oil companies and traders have stored as much as 80 million barrels of crude on tankers as the so-called contango, a market where buyers pay more for supplies later in the year than now, allowed them to profit from storing crude. The incentive to store oil on vessels is shrinking as the spread between 1st- and 12th-month crude narrows to about $12 a barrel from $17 in early December.

I'm not sure if the above story played a role but oil was down almost 8% today. Marketwatch speculates that there are concerns over demand destruction and excess supply:

Crude-oil futures dropped 9% Tuesday, as another set of U.S. economic reports unleashed fresh worries that persistent economic weakness will spell further erosion in energy demand.

Also pushing oil lower, analysts predicted that new data will show U.S. crude inventories have risen for a fifth straight week and reached the highest level seen in 17 months.

Falling for a second session, crude oil for March delivery closed down $4.15, or 9.1%, at $41.58 a barrel on the New York Mercantile Exchange. The percentage loss was the biggest since Jan. 7.

As always, the media has no clue what is driving these price changes--no one else does either--so the speculation may or may not be true. It wasn't even an year ago when the media often speculated that oil prices were rising due to concerns over supply shortages, while those in the industry, such as the Saudi oil minister, kept saying that he has enough oil to sell to anyone that wants it.

I was speculating late last year that this would lower the futures price and that is what seems to have happened, although not quite in the manner I imagined. I thought the futures curve will shift down, along with the spot price. Right now, it looks like the spot price has risen while the futures curve has fallen slightly. Perhaps the spot price will fall once these arbitrageurs sell the oil but I may be wrong.

The above chart is the same one I used in late December, except I have updated it with the current futures curve. The futures curve has shifted down slightly, while the spot price has risen significantly. You can see the market marking down the price by looking at one of the futures contracts. Below, I have reproduced from barchart.com, the distant, very thinly traded, Dec 2017 contract:

The year has not been kind to the popular crude oil ETF, USO, investors. Assuming that no sizeable dividend was paid this year, it looks like the price has deviated significantly from the crude oil price.

I'm not too familiar with USO and not sure what it tracks, but assuming it tracks the same thing as the WTIC plotted at stockcharts.com, a gap is starting to develop. I wonder if this is the loss from rolling over the futures contract. So far it's shaping up to be a very volatile year in the world of oil.


1 Response to Crude oil contango dissapearing

February 10, 2009 at 7:51 AM

yes, the gap between USO and spot is due to the contago effect

Post a Comment