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Oil contango pays most in decade; stockpiling earns 11%
By Robert Tuttle and Alexander Kwiatkowski
Monday, December 8, 2008
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."
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.
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, Koch
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.
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