January 21, 2009

A Crude Contango. What? Why?

Crude oil prices in the futures markets are currently so much higher than spot prices that big investment houses are hiring oil tankers just to keep crude oil in storage for a few months and cashing in the price difference.

Bloomberg reports of Morgan Stanley, among others, hiring more vessels.

Morgan Stanley hired a supertanker to store crude oil in the Gulf of Mexico, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from higher prices later in the year, two shipbrokers said.


Frontline Ltd., the world’s biggest owner of supertankers, said Jan. 14 about 80 million barrels of crude oil are being stored in tankers, the most in 20 years. A purchaser could buy oil now, keep it for months at sea and fetch better prices by selling futures that are higher than the spot price.


Phibro LLC, Citigroup’s commodities trading unit, has the 1 million-barrel carrier Ice Transporter stationed off north Scotland and also hired the supertanker Ashna to store. Shell, Europe’s largest oil company, booked two supertankers.

“From a tanker owner’s perspective, this is a little gift from heaven,” Finn Engelsen, managing director of Lorentzen & Stemoco AS, an Oslo-based shipbroker and consultant, said by phone from Oslo today.

For the shipbrokers and shipping companies this is clearly a perfect deal. But what is the status of the tanker crews? I guess they have it easy being harbour-bound.

But seriously, who on earth are the counterparties that are buying these expensive futures? Can't they see that there is a huge build-up of crude in storarge that is going to push the spot price even lower in the future? Has price discovery completely broken down in such an intensely followed market? How about that. We really do live in interesting times.

1 comment:

Spin Doctor said...

I suspect price discovery has broken down to a large extent in these frantic market conditions. The other interesting point to note is crude may well be headed lower if the economic slide continues, and I think it will.
For me however the most important point to note is people like MS and Citi are speculating still and that too with taxpayer money.