Contango, Contango: Oil Being Horded At Sea By Traders
By: Ainsley Brown
Contango!
What is a contango?
No it’s not an even more exotic version of the sultry Latin dance, nor is a tropical fruit. Then what is it?
Contango, as explained on Money Morning, “denotes a normal and very specific condition associated with futures contracts in which the price of oil for distant delivery months from now exceeds the price of oil being traded right now…Typically, the price difference is related to cost of storing the oil itself.”
Contango!
In other words buy low, sell high. Traders are buying oil at low prices in today’s market, storing it, knowing that the prices for future delivery are much higher. They are even betting that these future prices will go even higher. Despite the fact that demand for oil actually fell last year for the first time since 1983, according to the International Energy Agency, it is a sure bet that this will eventually change once the world begins to recover from the current economic crisis – China has already reporting positive signs of recovery.
Contango!
And where are these traders storing this oil?
At sea. Yes at sea.
Oil traders currently have as much as 80 million barrels of crude stored at sea around the world, according the Norwegian listed Frontline, the world’s largest owner of super tankers. The strong demand has resulted in supertanker rental rates have skyrocketed. However, even with this oil traders still stand to make a handsome profit.
Contango!
And who are these oil traders?
Well, the usual suspects top the list – the oil companies. However, along with names such as Royal Dutch Shell and BP are also names such as Citigroup Inc., Morgan Stanley and Goldman Sachs Group Inc..
