**Crude Contango** Bloomberg catches up with my analysis that Crude is going higher... (Please read the post I am replying to; and I left out a major not at one point in the post, see if you can find it. But I was clearly say that in late July of 2007 the commercials and the world at large really did not know where prices would be in 12 24 and 36 months; because the entire 10 year strip was flat, horizontal...... very rare to see this.
Their is an essentially risk free trade for the Commercials to sell long dated contracts for a year or so out buy the oil and they already have the spread.
Thus we have a market that is so oversold in the intermediate term that the really heavy weights can make riskless returns of 11% etc. even though they are the ones keeping those 12 month and 15 month prices from being higher. If they were not there to create market efficiency, price 12 and 24 months out would be even higher.
If anyone needs a more forceful, unequivocal example that we shall see reflation, in the global system, and we shall not collapse away into a prolonged deflationary vapor this is the da stuff
....I would say that this situation also implicates serious potential for some USD weakness...
My advice for those who are sitting around grave dancing on looking for more returns on your short energy complex shorts both in the product area and in the energy sector equity complex.... might well be the time to be getting ready to square up on your shorts and consider that the Commercials are much like "Johnie B Goode" ringing a bell forecasting a rebound in certainly the products.
(I'm always appreciative when I come up with some little insight and then see a confirmation piece show up on Bloomberg, or Pimco's missives or Hussman, the smart money up in Boston.) Bloomberg does great research, grab the current edition of Vanity Fair to see how exponentially they have grown in employees and global market coverage and analysis..... every other media firm is contracting and Bloomberg is expanding.
JOhn
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Contango Pays Most in Decade as Shell Stores Crude (Update1)
By Robert Tuttle and Alexander Kwiatkowski
Dec. 8 (Bloomberg) -- 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.
Oil Storage
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.
“All the market operators keep placing oil in storage,” said Francisco Blanch, head of global commodities research at Merrill Lynch & Co. in London. “Even though the contango is steep, it could get steeper.”
Crude oil for January delivery rose as much as $1.93, or 4.7 percent, to $42.74 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $42.60 at 12:30 p.m. Tokyo time.
Blanch said last week that oil may fall to $25 a barrel should the Chinese economy slip into recession and the Organization of Petroleum Exporting Countries fail to take enough crude off the market.
Shell, Koch
The Hague-based Shell, Europe’s largest oil company, last month chartered the supertanker Leander with an option to store North Sea Forties crude, according to Paris shipbroker Barry Rogliano Salles. The vessel arrived at Scotland’s Hound Point, the loading port for Forties, on Nov. 20, according to tracking data compiled by Bloomberg. Sally Hepton, a London-based spokeswoman at Shell, declined to comment.
Shell and Koch Industries Inc. of Wichita, Kansas, also hired four supertankers to hold oil in the U.S. Gulf Coast to take advantage of rising prices in the months ahead. They took Very Large Crude Carriers, or VLCCs, to move oil from the Middle East, said Bruce Kahler, a broker at Lone Star, R.S. Platou in Houston.
Koch Supply & Trading LP spokeswoman Katie Stavinoha declined to comment.
The cost to store crude at Cushing averages about 35 cents a barrel a month, Lipow said in an interview. The cost of financing the crude would also be about 35 cents a month. A trader would have to take ownership of the oil in January 2009 and deliver it during December, according to Nymex rules.
Supertanker Storage
A supertanker would cost about 90 cents a barrel per month for storage, according to data from shipbroker Galbraith’s Ltd. The amount varies, depending on the duration of the storage.
“The economics make sense if you can find somewhere to store the oil,” said Tony Quinn, managing director of Lincolnshire, U.K.-based Global Storage Agency Ltd., a bulk liquid storage terminal consultant. With depots in Europe almost full, “companies don’t have anything else they can do, so are chartering commercial tankers for floating storage.”
The reduced availability of credit may make it harder for traders and companies to purchase and store oil, said Merrill’s Blanch and Societe Generale’s Wittner.
“With this sort of contango, we would probably have seen a larger stock build were it not for the credit crunch,” said Olivier Jakob, managing director of consultant PetroMatrix in Zug, Switzerland.
The opportunity to benefit from the storage trade may disappear in weeks should OPEC cut output after its Dec. 17 meeting in Algeria. The group postponed a decision on production at its Nov. 29 gathering in Cairo.
“It’s still quite profitable as long as inventories are ample and OPEC does not remove the barrels from the market,” said Johannes Benigni, chief executive officer at Vienna-based consultancy JBC Energy GmbH.
To contact the reporter on this story: Robert Tuttle in New York at rtuttle@bloomberg.net; Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net
Last Updated: December 7, 2008 22:46 EST |
