Crude and the "Contango" for 1/28/2009
Here's a real good question: Do you lease a tanker for a 3 to 6 month time frame, at $68 - 70,000 USD per day if you're going to DUMP the cargo tomorrow? Not unless you're planning to use the ship for a $70k a day doorstop, or paper weight. Iran, a member of OPEC, leased 6 tankers ... Iran's production cuts ... (ha. ha) are going into tankers.
Contango : The futures price MUST converge to the spot price. The difference between the spot price and the futures is the "basis". Demand is declining. The basis reflects demand AND SUPPLY, you err if you neglect to consider that supply can DECLINE, can be manipulated lower, and which OPEC has clearly, and repeatedly, stated they intend to REDUCE supply. Yes, there is a lag, when demand falls off, and OPEC supply is subsequently REDUCED to force non-OPEC countries to draw down their inventory ... therein, you get contango. The time lag interval will be determined by how quickly OPEC reduces output, by how much - the targeted excess supply capacity (probably 7 - 7.5 million bbls per day) , the cheating, AND (this is the part OPEC has NO control over, short of stopping output altogether) by when falling demand shifts to increasing demand forcing inventory drawdown...
So, how do I profit from the facts ?????
(1) Demand may continue to fall, but, OPEC is going to continue to reduce output to force non-OPEC countries to draw down their inventory. You can bet, with 100% certainty, that OPEC production cuts will be overdone to the downside AND OPEC won't be in a hurry to increase producton until OPEC gets ABOVE its target price.
(2) the 33 ships now used for storage instead of transport will likely increase in number due to the contango, resulting in higher spot market day rates for the remaining ships ... THIS, the number of ships in storage mode, is more important than the US EIA report !!!! The lenght of the leases indicates they're taking up demand slack that might have driven crude lower.
I expect crude will be back above $60/bbl before MARCH and $75 - 100/bbl by January 2010. I bought DXO at $2.47 (real money), and shorted DUG at $25.30, AFTER the US EIA report came out and the market "smarties" knocked the price of crude down for me to buy DXO, thank you. I expect OPEC's manipulations of supply over the next 1 - 9 months could drive DXO ( double long ) to $25 and DUG (ultra short ) to under $10 ...
As for shippers, I like shippers that have the majority of their fleet under contract. Contracts that include profit sharing when the day rates exceed contract rates and limit the downside when spot market day rates drop. This is a perfect storm for ship rentees, as rising crude prices and shrinking transport pool will drive up the spot market day rates. Just the kind of market that drives ship leasing from the spot market and into long term leases. Examples: DHT announced OSG invoked the contract extentions for 18 months, that brings the DHT fleet to almost 5 years average contract life and adds a minimum of $70 million to DHT contract revenues. DHT has about $100 million in cash and RAISED the quarterly dividend from 25c to 30c. Yield: 18.8% at the current price of $6.38. . SFL contracts average life is 13 YEARS ... yes, years, not months ... and the spot market only matters for profit sharing. So while the contango is shifting tankers from the transport business to the storage business, I want to be in the tankers, not dry bulk shippers, for the SURPRISE earning pop I KNOW is comiing.
I also like XOM, COP, CVX, BP, RIG, DO, PDE, TIDE, NS, NSH, etc
Avoid: DUG and anything short (or ultrashort) crude ( unless you want to short the shorts, ha, ha)