There has been quite a bit of talk amongst my colleagues, in the news and on other blogs recently about oil companies and even investment banks storing crude in tankers moored at sea to profit from the oil price contango that’s been persisting in the market of late. Most publicized of the latter, the investment banks, is Citigroup’s use of VLCCs to store massive amounts of crude off the coast of Scotland and the recent cancellation of orders to rent crude tankers by Morgan Stanley as the trade disappears.
Below is a chart I pulled off Bloomberg this morning that shows the trade being profitable through certain periods in November and December, while today’s further widening spread demonstrates a ballooning of it back out to October levels. (The red line is the difference between crude spot and December futures, while the blue like is the freight rate for storing crude. As long as the red is higher than the blue, traders can buy oil to store and sell December futures, locking in an arbitrage profit.)
Similar to the post I put up in September about the crazy short squeeze that caught a lot of speculators trying to roll their oil futures at the last minute, this just goes to show there’s only a certain degree to which speculators can affect these commodities markets. One marked difference here, however, is that these pundits actually wanted to (and did) take delivery of their oil. But, it didn’t take long for news headlines and investment community chatter to see this arbitrage go the way of the buffalo…
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