Spread Between Futures Contracts Makes Stashing Crude Offshore Attractive
It’s also a side effect of the flood of barrels from emergency stockpiles. The U.S. began releasing oil from its Strategic Petroleum Reserve in late July, and some of that is expected to spill over to offshore tankers from onshore tanks due to capacity constraints.
What does it take for buying oil in the physical market, storing it aboard a chartered tanker and selling it forward to be a profitable trade? Low freight rates and a big enough difference in price between oil-futures contracts for near-term delivery and those for delivery further out in the future.
On Friday, crude-oil futures for September delivery settled 1.8% lower at $95.70 a barrel on the New York Mercantile Exchange. October futures also ended down 1.8%, at a pricier $96.13 a barrel. Industry insiders refer to this situation—when the second-month oil contract is more expensive than the front-month—as “contango.”
Analysts say that 43-cent price difference is set to widen, as the influx of SPR crude drives down near-term prices.
“There’s a view that the contango is going to increase here, maybe significantly,” said John Kilduff, a founding partner at New York-based commodities hedge fund, Again Capital. “There’s a lot of talk about that in the market.”
If the price difference does indeed widen, there could be a sudden rush offshore as others seek to pile into the trade that garners profit with little risk.
“This has ‘copycat’ written all over it,” Mr. Kilduff said. “It will be almost self-fulfilling.”
Seven tankers, with the capacity to store around 11 million barrels of crude, have been chartered off the U.S. Gulf Coast since the beginning of June, ship broker ICAP said in its weekly overview of very large crude carrier storage published Friday. The data doesn’t break out how many of those tankers were chartered as part of a bet on a widening difference in oil prices.
Oil deliveries from the SPR are supposed to be completed by the end of August.
This crude accounts for half of the 60 million barrels the International Energy Agency said its member nations would release as part of a coordinated action to offset the loss of Libya’s crude exports. The IEA advises the world’s industrialized economies—also some of the world’s biggest oil consumers—on energy policy.
Even with turmoil in Libya inching closer to a resolution, experts say it may take a while for oil output to reach pre-conflict levels given the extent of damage and looting in the oil and natural-gas fields.
That has many market watchers convinced that prices will rise later in the year, after the downward pressure exerted by the release of strategic barrels has abated.
To be sure, those assumptions may be scuttled by Tropical Storm Don, which made landfall on the south Texas coast late Friday. At one point last week, about 12% of the U.S. Gulf of Mexico’s oil output was shut in due to the storm.
Oil demand from emerging markets is also forecast to stay strong. That means the difference between the nearest-month futures contracts and more forward contracts should widen even further.
It’s unlikely that these kind of complex bets will become as widespread as they were in 2008 and 2009, when the price difference was consistently more than $1 a barrel.
Then, banks, refiners and trading companies all jumped into the trading strategy. Offshore oil storage peaked at around 100 million barrels, but then gradually declined in the second half of 2009 as the difference between the front two contracts fell back below $1.
– by Sarah Kent, Dow Jones & Company
image courtesy OSG