Business | Oil & Gas
Contango pays most in decade as Shell stockpiles crude for future
Firm sees potential in hoarding and has anchored supertanker off UK with $80m of oil.
- Bloomberg
- Published: 23:32 December 8, 2008
New York : In the worst year ever for oil, investors can lock in the biggest profits in a decade by storing crude.
Traders who bought oil at the $40.81 (Dh149.89) a barrel on December 5 could sell futures contracts for delivery next December at $54.65, a 34 per cent gain.
After taking into account storage and financing costs investors would earn about 11 per cent, according to Andy Lipow, president of Houston consultant Lipow Oil Associates LLC. The premium, known as contango, is the biggest for a 12-month span of futures since 1998, when a glut drove crude down to $10.
Stockpiling crude may provide higher returns than commodities, stocks and Treasuries as the US, Japan and Europe endure simultaneous recessions for the first time since World War II. Crude sank 72 per cent in New York since peaking at $147.27 in July. The Standard & Poor's 500 Index fell 40 per cent this year and two-year government notes yield 0.9 per cent.
"The bottom line is that you buy crude at a low price and lock in a profit by selling it forward," said Mike Wittner, head of oil market research at Societe Generale SA in London. "It's low risk. The contango can definitely pay for storage and the cost of capital and leave plenty left over."
Royal Dutch Shell Plc sees so much potential in the strategy that it anchored a supertanker holding as much as $80 million (Dh293.84 million) of oil off the UK to take advantage of higher prices for future delivery. The ship is one of as many as 16 booked for potential storage instead of transporting crude, said Johnny Plumbe, chief executive officer of London shipbroker ACM Shipping Group Plc.
Oil storage
The tankers, if full, hold about 26 million barrels worth about $1 billion, more than the 22.9 million barrels sitting in Cushing, Oklahoma, where oil is stored for delivery against Nymex contracts.
US crude inventories rose 11 per cent this year to 320.4 million barrels, according to the Energy Department.
"All the market operators keep placing oil in storage," said Francisco Blanch, head of global commodities research at Merrill Lynch & Co in London. "Even though the contango is steep, it could get steeper."
Blanch said last week that oil may fall to $25 a barrel should the Chinese economy slip into recession and the Organisation of Petroleum Exporting Countries fail to take enough crude off the market. The opportunity to benefit from the storage trade may disappear in weeks should Opec cut output after its December 17 meeting in Algeria.
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