Wednesday, January 13, 2010

Big Banks Exiting Contango Trade With Profit by Selling Oil Stored in Tankers

Reuters U.K. reported that the recent cold weather across the northern hemisphere is allowing all those oil tankers to unload their precious cargo, likely at big profits for the banks that had invested hundreds of millions of dollars to rent those tankers. The line up would stretch for 43 Km, see our article on December 31.

We track live all oil ETFs as one of our Live Tracking Sites.

The cost of leasing a tanker is over $40k per day now, according to the median estimate in a Bloomberg survey.

The article said that oil product volumes in "floating storage", peaked at around 100M barrels at the end of 2009. However, a shrinking of the contango (future prices are higher than the front month price), means it is now less attractive to store gas oil at sea. The spread narrowed from nearly $18 a ton in December to as low as $2 as stronger demand for heating lifted nearby prices.

Dr. Kent Moors, executive managing partner of Risk Management Associates, says that "For some time now oil has been both a commodity and a financial asset," "Banks can make profits on the spread between wet barrels and futures, futures and options, and new trading platforms will create new ways to make money in oil".

However, it is a little more complicated. Oil traders are "required to settle their accounts daily, answering margin calls on long and short positions if the market moves against them. Their survival is based largely on overnight credit from banks, where they take short-term loans until the market moves in their favor. But when the recent credit crunch hit, the banks closed the capital spigot and a lot of traders went under. The banks end up owning the rights to the contracts of oil. Many of the banks roll over the oil contracts on a monthly basis for liquidity reasons, meaning not all of the oil the banks have in storage was purchased as far back as 2008, when oil traded in the low $30's. In fact, some of it was obtained at much higher prices". (link)

This may explain the recent runup of Valero:

If demand increases, refineries will use existing inventories, refining is now done at much higher profit margins.

"It was one thing to store oil when crude was below $40 and future months were much higher. Risk factors are much higher now, and it looks like the oil storage trade will soon be unwound".

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