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