Oil traders aren’t dancing the crude contango this time
THE MOST ENDURING GLUT IN DECADES LEAVES TRADERS SEEING A SLOW RECOVERY
Back when the global recession trashed oil demand and prices, the likes of BP Plc and Vitol Group found a novel way to profit: They stashed crude on tankers. With a slump of similar magnitude now, traders are seldom finding the same opportunities.
Here’s why. What defined both periods is something the industry calls contango, meaning oil for next month is cheaper than, say, for April. There were moments in the depths of the 2008-09 recession when a standard 2 million barrel cargo might fetch $14 million (Dh51.4 million) more for later delivery than it did in the spot market. That made for an easy trade: Find a ship for less than that. The same economics have seldom worked this year.
“These are very different market conditions,” said Paul Horsnell, London-based head of commodities research at Standard Chartered Plc. “Traders certainly are not getting much from floating storage plays.”
Oil market
The main difference now is what people expect for the future of the oil market. The financial crisis was seen as a short, sharp shock to oil demand that wouldn’t endure, according to Eugene Lindell, an analyst at JBC Energy GmbH, a consultant in Vienna. That meant later prices far exceeded immediate ones. Now, the most enduring glut in decades leaves traders believing the market’s recovery could be much slower.
That means the cost of storing would wipe out potential profit from doing so. In midNovember, the three-month contango was about $2.50 a barrel, or about $5 million for one of the industry’s biggest cargoes, according ICE Futures Europe exchange data. It has since diminished, offering even smaller rewards for holding onto supplies. Keeping such crude on tankers for the same duration cost about $4.65 a barrel, figures from E.A. Gibson Shipbrokers Ltd show. Spot rates for the vessels have subsequently soared to fresh sevenyear highs, making it even less viable to horde than it was.
The oil curve back then correctly priced in the idea that demand would recover and that Opec would curb supplies to clear a glut, according to Lindell. This time, demand has kept growing and the oversupply is showing little sign of abating. Meanwhile, the Organisation of Petroleum Exporting Countries is insisting, most recently on December 4, that it won’t tackle an excess without help from nonmembers.