It Takes Two to Contango

Generali

As anyone that owns a car will know, the oil price has fallen significantly in the past few months, however nobody seems to have told futures traders that.

A future is a kind of derivatives contract where you agree to buy a certain amount of a thing at an agreed price at an agreed future date. A market is said to be in contango when you can buy a thing at the current price and sell a future at the current future price, pay for borrowing the money to hold the asset and pay to store it.

So the oil market is in contango at the moment: you can buy a barrel of oil, sell it for delivery in a few months time, store it in a warehouse and make money. The only problem is that the world is running out of storage room for oil; indeed it looks like oil storage will all be full by May.

May sees the start of the 'driving season' in the USA, when Americans drive to another part of the country to take a vacation and that's when demand for oil (gas/petrol) is at its highest. Come September when the driving season ends we can expect to see the POO fall by a large amount again, I'd be unsurprised to se it halve again to $30/bbl.

HAMISH_MCTAVISH

Generali wrote: »

Come September when the driving season ends we can expect to see the POO fall by a large amount again, I'd be unsurprised to se it halve again to $30/bbl.

Maybe.

But we're already seeing a heck of a cut to exploration in conventional fields, and unconventional production is falling offline at quite some pace in the US with a number of commentators now expecting significant reductions in output by the end of summer.

It'll certainly be interesting to see which happens first.

vivatifosi

So to clarify the get rich quick plan...

We walk to work until May
Then fill the car up like crazy, bring it home and siphon it off into big plastic tanks in the garden for a couple of months.
Then flog it to our neighbours who didn't have the foresight come November.

This time next year we'll be millionaires Rodney.

Generali

vivatifosi wrote: »

So to clarify the get rich quick plan...

We walk to work until May
Then fill the car up like crazy, bring it home and siphon it off into big plastic tanks in the garden for a couple of months.
Then flog it to our neighbours who didn't have the foresight come November.

This time next year we'll be millionaires Rodney.

That or short sell Brent futures.

Generali

HAMISH_MCTAVISH wrote: »

Maybe.

But we're already seeing a heck of a cut to exploration in conventional fields, and unconventional production is falling offline at quite some pace in the US with a number of commentators now expecting significant reductions in output by the end of summer.

It'll certainly be interesting to see which happens first.

The rig count we follow at work has seen a cut of fewer than 10% of working rigs so far.

The thing is, it's good as an oil producer for there to be fewer rigs pumping oil as long as its other people turning off the taps. The only thing worse than making a small revenue is making no revenue at all, even if your costs are higher than your revenues.

I've been going through a lot of oil company annual reports at work because of a client request and they are all basically saying the same thing; we can get oil out of the ground more cheaply than a bunch of other companies therefore we can continue to pump oil and a load of other firms will go bust first.

Oil companies pump oil, it's what they do. They're not going to stop pumping oil just because they're making a loss!

Graham_Devon

Generali wrote: »

Oil companies pump oil, it's what they do. They're not going to stop pumping oil just because they're making a loss!

I've been reading in the press of the "threats" shall we say from oil companies that they will stop pumping oil as they make a loss. The average I believe was a loss on $60 a barrel.

I have to admit, I did wonder why they would do this. It's a bit like Tesco suggesting they will close all their stores if they made a loss. It just wouldn't happen. Not at these prices anyway. You'd turn a loss into bankruptcy.

Generali

Graham_Devon wrote: »

I've been reading in the press of the "threats" shall we say from oil companies that they will stop pumping oil as they make a loss. The average I believe was a loss on $60 a barrel.

I have to admit, I did wonder why they would do this. It's a bit like Tesco suggesting they will close all their stores if they made a loss. It just wouldn't happen. Not at these prices anyway. You'd turn a loss into bankruptcy.

I agree with you. A company needs revenue.

Thrugelmir

Generali wrote: »

you can buy a barrel of oil, sell it for delivery in a few months time, store it in a warehouse and make money.

Didn't realise that oil was shipped in barrels these days.

patman99

It used to be the case that the oil companies used to park tankers full of crude off the South English coast and not dock them until the price reached a specific level. Not sure if that is still the case.

The one big threat that big oil can do nowt about is the growth of hybrid vehicles.

Nearly every bus sold these days is a diesel/electric hybrid with 40% better mpg than a standard diesel bus. Imagine the affect on oil prices once the lorry makers introduce the same kit.

Generali

patman99 wrote: »

It used to be the case that the oil companies used to park tankers full of crude off the South English coast and not dock them until the price reached a specific level. Not sure if that is still the case.

The one big threat that big oil can do nowt about is the growth of hybrid vehicles.

Nearly every bus sold these days is a diesel/electric hybrid with 40% better mpg than a standard diesel bus. Imagine the affect on oil prices once the lorry makers introduce the same kit.

My point is that the world is running out of empty oil tankers in which to store oil.

HAMISH_MCTAVISH

Generali wrote: »

My point is that the world is running out of empty oil tankers in which to store oil.

Interestingly, the difference between Brent and WTI has jumped to $12 a barrel, the glut continues in the US domestic market but appears to be easing elsewhere.