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Canny traders stow cheap oil at sea
Crude stored in tankers to cash in on next year's contract delivery prices
Jan 08, 2009 04:30 AM
Tyler Hamilton
Energy Reporter
For sale: two million barrels of offshore oil. No drilling required.
General expectations for a rebound in oil demand during the second half of the year have opened the door for traders to play a high-stakes game of arbitrage.
They're chartering massive vessels known as supertankers in growing numbers to capitalize on unusually large spreads between current oil prices and prices being paid for future deliveries.
For example, oil for December 2009 delivery is priced $15 (U.S.) a barrel above current levels.
To capitalize on this, the traders are stockpiling huge volumes of oil at today's prices, while locking in a profit by contracting to make future deliveries at richer prices.
Their customers are willing to pay future premiums based on expectations that oil's supply-and-demand picture will eventually tighten as the economy regains health.
Oil prices have been rebounding in recent weeks, but they were clobbered yesterday as renewed fears of a glut surfaced. Crude prices for delivery next month fell 12 per cent, the largest drop in seven years, after a U.S. report showed an unexpectedly big jump in supply.
But stowing crude at sea is "exactly what we'd expect to happen if people today think the price is too low," said Joseph Doucet, a professor of energy policy at the University of Alberta.
He said traders renting tankers for arbitrage purposes are taking a chance, but there's nothing illegal about stockpiling. "What you're not allowed to do is collude with another party to influence prices."
A barrel of sweet crude for February delivery plunged to $42.63 (U.S.) on the New York Mercantile Exchange yesterday, after the report from the U.S. Energy Information Administration showed commercial crude inventories last week increased by 6.68 million barrels.
Still, the prevailing economics have traders excited by an opportunity called "contango" – a situation when a non-perishable commodity such as oil gets more expensive as deliveries extend into the future.
Based on yesterday's closing price, buyers of oil are prepared to pay $47.39 a barrel for March delivery, $54.41 a barrel for July delivery and finally $59.49 a barrel for delivery in January 2010.
Analysts say the opportunity to buy oil at less than $43 and sell it in the futures market for 40 per cent more, for delivery a year from now, is too profitable to resist.
It's just one of many ways traders play the market, and part of the reason why it's so difficult to get an accurate handle on the mysterious and often volatile movement of day-to-day oil prices. "If I could do that, I'd be on the beach someplace," joked Doucet.
Frontline Ltd., one of the world's largest owners of supertankers, revealed yesterday that oil traders have tried to charter as many as 10 vessels. That's on top of about 25 supertankers reportedly already reserved for storage purposes.
The big tankers, if stood on end, would be as tall as the 102-storey Empire State Building in New York.
"The carriers hold about 2 million barrels of crude and traders are seeking to lease the ships for three to nine months," wrote Addison Armstrong, director of research at Stamford, Conn.-based Tradition Energy, in a research note.
Even including storage, insurance and other costs, the potential payoff is generous. Traders can also take advantage of bargain charter rates prevailing for supertankers.
The practice of physically storing oil at sea isn't new but often stirs up controversy, particularly when pump prices climb and commodity speculators attract anger.
It was reported last month that the U.S. Commodity Futures Trading Commission is investigating energy traders who store oil in tankers as part of a larger study of wild volatility in the market.
With files from Star wire serviceshttp://www.thestar.com/Business/article/563455
Crude stored in tankers to cash in on next year's contract delivery prices
Jan 08, 2009 04:30 AM
Tyler Hamilton
Energy Reporter
For sale: two million barrels of offshore oil. No drilling required.
General expectations for a rebound in oil demand during the second half of the year have opened the door for traders to play a high-stakes game of arbitrage.
They're chartering massive vessels known as supertankers in growing numbers to capitalize on unusually large spreads between current oil prices and prices being paid for future deliveries.
For example, oil for December 2009 delivery is priced $15 (U.S.) a barrel above current levels.
To capitalize on this, the traders are stockpiling huge volumes of oil at today's prices, while locking in a profit by contracting to make future deliveries at richer prices.
Their customers are willing to pay future premiums based on expectations that oil's supply-and-demand picture will eventually tighten as the economy regains health.
Oil prices have been rebounding in recent weeks, but they were clobbered yesterday as renewed fears of a glut surfaced. Crude prices for delivery next month fell 12 per cent, the largest drop in seven years, after a U.S. report showed an unexpectedly big jump in supply.
But stowing crude at sea is "exactly what we'd expect to happen if people today think the price is too low," said Joseph Doucet, a professor of energy policy at the University of Alberta.
He said traders renting tankers for arbitrage purposes are taking a chance, but there's nothing illegal about stockpiling. "What you're not allowed to do is collude with another party to influence prices."
A barrel of sweet crude for February delivery plunged to $42.63 (U.S.) on the New York Mercantile Exchange yesterday, after the report from the U.S. Energy Information Administration showed commercial crude inventories last week increased by 6.68 million barrels.
Still, the prevailing economics have traders excited by an opportunity called "contango" – a situation when a non-perishable commodity such as oil gets more expensive as deliveries extend into the future.
Based on yesterday's closing price, buyers of oil are prepared to pay $47.39 a barrel for March delivery, $54.41 a barrel for July delivery and finally $59.49 a barrel for delivery in January 2010.
Analysts say the opportunity to buy oil at less than $43 and sell it in the futures market for 40 per cent more, for delivery a year from now, is too profitable to resist.
It's just one of many ways traders play the market, and part of the reason why it's so difficult to get an accurate handle on the mysterious and often volatile movement of day-to-day oil prices. "If I could do that, I'd be on the beach someplace," joked Doucet.
Frontline Ltd., one of the world's largest owners of supertankers, revealed yesterday that oil traders have tried to charter as many as 10 vessels. That's on top of about 25 supertankers reportedly already reserved for storage purposes.
The big tankers, if stood on end, would be as tall as the 102-storey Empire State Building in New York.
"The carriers hold about 2 million barrels of crude and traders are seeking to lease the ships for three to nine months," wrote Addison Armstrong, director of research at Stamford, Conn.-based Tradition Energy, in a research note.
Even including storage, insurance and other costs, the potential payoff is generous. Traders can also take advantage of bargain charter rates prevailing for supertankers.
The practice of physically storing oil at sea isn't new but often stirs up controversy, particularly when pump prices climb and commodity speculators attract anger.
It was reported last month that the U.S. Commodity Futures Trading Commission is investigating energy traders who store oil in tankers as part of a larger study of wild volatility in the market.
With files from Star wire serviceshttp://www.thestar.com/Business/article/563455
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