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Vet67to82 (< 20)

Crude Supply, Shipping and the Contango for tomorrow 1/22/2009

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128

January 21, 2009 – Comments (4) | RELATED TICKERS: DHT , FRO , SFL

contango Definition   A condition in which distant delivery prices for futures exceed spot prices, often due to the costs of storing and insuring the underlying commodity.  Opposite of backwardation.

   Yesterdays' expiring February WTI contact was priced at $34/bbl, a $24 discount to the January 2010 contract currently trading at $58/bbl.  That's contango!

   Due to the ML King Fed holiday, the US EIA crude supply will be delayed until tomorrow.  That report WILL show a SURPRISE increase in the supply.  A  result of weakening demand, overproduction and high inventory levels and the contango .... which allows oil buyers with lease space in Cushing to take advantage of the widening spread by buying front-month WTI and selling an outer-month contract, taking delivery of the crude in Cushing, storing it there, then “redelivering” it to Cushing afterwards for a higher profit in this currently declining oil environment.

   I expect the US EIA report to show 326 - 330 million bbls, not counting the Strategic Petroleum Reserve (SPR).  I also expect about 33 millions bbls are held by Cushing.   What that report won't show : Land based storage is at or near capacity.  The US government does allow companies to add to the SPR.  So, the SPR may also show an increase.  There are currently 33 ships  being used for storage of crude.  Those ships are holding an estimated  60-80 million barrels currently stored on very large crude carriers (VLCCs). That's close to a full day's  global demand. 

   Shell, Koch and Vitol have been the major floating storage players with unconventional financial players including Morgan Stanley and Citi, through its commodity trading unit Phibro.   If you have the cash ... you can play.   For each ship, 1 - 2 million bbls, after expenses, I am expecting each of the companies are raking in  $5 - 10  million or about a 10% return ... not bad when interest rates are 0.25 %.  These will be SURPRISE earnings to all but a educated few.   

   Those 33 VLCCs storing crude, some of which have been leased for 3 - 6 months, aren't available for transporting crude so the remaining VLCCs are enjoying SURPRISE record day rates, which will translate into surprise earnings right through Q4 2009. Good for shippers, like DHT, FRO, OSG, SFL, TK.   Keep in mind OPEC is bent on reducing production, probably until  spare capacity hits 7 - 7.5 million bbls per day.  I expect, at that point, the globe will be forced to draw down inventories to meet the shortfalls in OPEC supply,  OPEC will have overdone it, the contango will disappear, and crude will rocket up to the $75 - 100/bbl range.  The increasing crude prices will benefit COP, XOM, BP, USO, etc.  so you have a double play here, shipping ... 'till the VLCCs drop off storage duties and the Majors, as the globe drawing down inventories, sends crude back through the roof.    

    2009  is going to be a great year for twists and turns, there's a new dance in town and it's the contango !!! 

  

4 Comments – Post Your Own

#1) On January 21, 2009 at 2:29 PM, chk999 (99.98) wrote:

Nice write up. I'm looking for an entry point to play this with real money. (This is just me being cheap.)

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#2) On January 21, 2009 at 2:54 PM, Vet67to82 (< 20) wrote:

Thanks chk999.  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. 

DHT just  announced OSG invoked the contract extentions for 18 months,  DHT has about $100 million in cash and  just 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.   

  Doing the homework is everything.  

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#3) On January 21, 2009 at 7:17 PM, Vet67to82 (< 20) wrote:

  In looking for an entry point, with real money, I'd be paying attention to the release of the US EIA crude report tomorrow around 11:00 AM.   If the US EIA explains any surprise increase in the crude supply as a probable play on the contango, amongst other factors, of course,  ... which I believe is bullish for crude, then, you've got your buy signal.  If the US EIA explains any increase as just demand destruction, then the market will react negatively, the energy sector will drop  and you get an even better buying opportunity. 

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#4) On January 22, 2009 at 11:27 AM, Vet67to82 (< 20) wrote:

per US EIA today

U.S. commercial crude oil inventories increased 6.1 million barrels for the week ended Jan. 16, compared to the previous week, according to the Energy Information Administration. That's more than the 1.4-million-barrel increase expected by analysts surveyed by Reuters.

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