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If you've been eyeing a new gas-guzzling SUV as your next vehicle, you may want to reconsider that Prius once more. That's because today's low gas prices won't be around forever and oil prices aren't about to "tank" any time soon.
In fact, the oil price crash has created a state of "contango," a market anomaly that savvy investors can exploit. It's presenting a rare market opportunity to profit that only comes around once every few years.
A Market Anomaly That Leads to Big Profits
Let's start with a definition. Contango is trading jargon. It means the current price of a commodity is lower than prices for delivery in the future.
That's where we are in the oil market right now, and it's created a chance to profit.
The last time this happened was during the 2008-2009 "supercontango." Back then, oil tanker ships stored millions of barrels of crude oil off the coasts of major producing or strategic areas like the Gulf of Mexico, England, and Singapore. Spreads between near-month prices and those for delivery 12 months later ran better than $23 a barrel for West Texas Intermediate Crude (WTIC).
It led to a massive 100 million barrels just floating around in seaborne oil tankers for months on end. Big oil players bought the oil cheaply, and sold it on futures markets for much higher prices. Then, they simply stored it and waited for the delivery date to arrive, pocketing some hefty profits.
None of this was even possible until about 25 years ago. In 1990 entrepreneur Lars Jacobsson founded Scandinavian Tank Storage AB, introducing the concept of an oil storage trade.
Fast forward to today's opportunity which, while more modest, is still substantial.
Saudi price cuts, sustained North American shale production, and a worldwide slowdown are pressuring oil prices now.
But markets are forward looking. They know that drilling can't simply be "turned off" at a moment's notice. Doing that is a multi-step process requiring time, technical expertise, and money. So there's a lag between lower prices and lower output.
Right now markets are forecasting WTIC prices will be higher by $10 a barrel (conservative, in my view) a year from now. And a number of players are positioning to lock in those profits.
The most obvious benefactors are the large integrated oil companies like Exxon, Shell, and Total. They have the product and excess storage capacity to simply stockpile and sit on the oil, while selling it in the futures market for later delivery.
By digging into their deep pockets or accessing capital, large commodities traders like Trafigura and Vitol, and even Wall Street bigwigs like Goldman Sachs and Morgan Stanley, are cleaning up with big gains and little risk.
In the last eight months these heavy hitters have bought nearly 30 million barrels to store in supertankers.
Oil futures prices exhibit a distinctly upward sloping curve, confirming the opportunity remains solid. So long as the spread is sufficient to pay for insurance and storage plus an acceptable profit margin, the opportunity is in place.
How to Profit from Contango
Don't be dismayed, it's not just for the big boys.
For retail investors, there's also a way to profit from oil's current state of contango, and that's through the oil services subsector that benefits from oil storage.
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.
I'm interested in this oil play at current wo prices?
Peter,
You're one of my favorite advisors. I always profit from your advice intellectually, and sometimes even financially.
But you lost me at the end there. How would the oil services subsector specializing in storage profit from impending production cuts and continuing—or even increasing—demand for oil? It seems counter-intuitive to me that a company in the storage business should benefit from lower industry inventories and more urgent demand for product. It seems to me that storage companies should do better in situations of surplus product and contango, like now, where they're storing excess product while awaiting more favorable prices.
What am I missing?
Thanks.
I want to know who to contact to get in on this play for what would probably be considered a grub stake of 5 to start with. This is just get my feet wet and hopefully come out on top and a few dollars richer.
My understanding is that costs for storage are at a minimum, tank farm storage, $25mo-per barrel with significantly higher costs for supertanker storage. How can Exxon profit storing oil for resale a year from now if we're only talking about as little as a $10-barrel rise in price? There must be something missing in my math. But what?