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NOTE: Originally published for Metal Augmentor subscribers on January 6, 2010 at 10:22PM EST.
Over the past year or so, I’ve written several
times about the interesting situation in the crude oil market that
essentially allows a few big players to lock in an arbitrage profit by storing
crude oil in tankers offshore and selling the oil forward on the NYMEX or
other futures market. For example there is this posting called Watch the Contango in Oil!
It turns out that in these earlier studies of the
subject matter of the crude oil contango and storage scenario, I used a fixed
price for the cost of crude storage but in fact the price has been quite
variable as demonstrated in a recent post by Mike Shedlock called 26 Mile Long Glut of Idle Oil Tankers. In his commentary, we find a Bloomberg story that
references the daily rental cost of a supertanker as around $30,000 right
now. By contrast, according to the sources I quoted earlier last year, the
rental cost was $75,000 per day. At the time, I calculated that it would cost
$1.10 per barrel to store crude oil for one month on a tanker. Using the
lower rate of $30,000, however, the monthly cost would be around $0.45 per
barrel. In addition, it is possible that individual rates might be negotiated
even lower (especially since the tankers are basically just floating and
therefore have reduced operating costs). Perhaps the $30,000 per day being
quoted for this year is higher than the rate that some players have been able
to negotiate. If so, the monthly cost would be lower than $0.45 per barrel.
Why is this worth discussing, you might ask?
Because, as Mike Shedlock and others have pointed out, all of this stored
crude will eventually come to market and if it does so quickly because
storage is no longer affordable then we could literally have a major
liquidation event in the crude oil market, causing a sharp and seemingly
inexplicable drop in oil prices. That in turn could create ripple effects in
other commodity markets including the metals. But even if the reverberations
are minor, there could be a very attractive speculative play in just crude
oil itself if we are able to recognize the early signs and act appropriately.
Such “early signs” in this case include
primarily the same signals that we look for in the gold and silver basis
— a shrinking of the contango. Thus, I’ve dolled up a crude
spread chart that I think might be useful in taking a look at the situation.
The chart below is the spread between the current front month February 2010
NYMEX crude oil futures contract and the December 2010 futures. This chart
will be adjusted as the NYMEX crude contract rolls to the next front month
(e.g. by January 15 the front month will be the March contract). I’ve
drawn a line showing the $0.45 per barrel storage cost ($4.50 per barrel
based on the 10 months between expiration of the February 2010 and December
2010 contracts). As the chart shows, crude prices have been flirting with
this breakeven $0.45 per barrel-month storage level and it seems like we
should keep an eye on the situation. Trading ideas to follow if and when
appropriate.
Click on the chart below for a full size image.
Tom Szabo
Silveraxis.com
Also by Tom
Szabo
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