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Vet67to82 (< 20)

The US EIA, Crude Supply, Shipping, and the Contango

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January 29, 2009 – Comments (2) | RELATED TICKERS: DXO.DL.DL2 , DHT , SFL

  I went to the US EIA website and in the search box, typed in "Contango" ...

THIS is what I got:

10 results for Contango out of at least 12 (Details)

These sources have been queried: Web Results - Top 12 results retrieved out of 12 in 0.356s, 100 requested. (4 pages requested - 2 OK)

Did you mean contagion    << ( Did I mean contagion, ha, ha, ha!)

Heating Oil Futures Prices  Slide 11 of 27. Contango Steepens. Heating oil futures are normally in "contango" this time of year, which means more distant months are higher priced than nearby months.www.eia.doe.gov/.../1998/winter_fuel_outlook_naseo/sld011.htm-

AdministrationFutures Market Incentives to Build Petroleum Stocks X.. when in backwardation, since future product prices are expected to be lower than current prices. When current prices are lower than expected prices, the market is in contango  ...www.eia.doe.gov/.../1999/high_propane_stocks/sld017.htm- 

Stocks:  When prices for oil today are lower than prices for oil in the future –- a sign of oversupply -- the market is said to be in contango. If the contango is wide enough to cover the ...www.eia.doe.gov/.../oil_market_basics/stocks_text.htm-

EIA - Short Term Energy Outlook  In the present environment, with a minimal cushion of surplus upstream and downstream capacity to meet disruptions in supply and with futures markets in contango (i.e., a market ...www.eia.doe.gov/emeu/steo/pub/special/high-oil-price.html-

U.S. Crude Oil Prices Since the beginning of 1998, crude prices, as well as other petroleum product prices, have been in contango for much of the time. This has provided incentives to increase refinery ...www.eia.doe.gov/.../1998/winter_fuel_outlook_naseo/sld012.htm-

US Equities Disclosures  Bloomberg, UBS The Brent oil futures market turned, its contango gone, daily differentials of two-month out futures -six-month out futures $(8) $(6) $(4) $(2) $-$2 $4 $6 $8 Jan-03 Jul-03 Jan ...www.eia.doe.gov/conf_pdfs/Monday/stuart.pdf-

Energy Information Administration (EIA) - Derivatives and Risk ...  Assuming the market is in contango —i.e., when near-term prices (for “prompt months” are lower than prices for the months ...www.eia.doe.gov/oiaf/servicerpt/derivative/chapter3.html-

   ... there's more visit these to learn more about contangos from the past ...

2 Comments – Post Your Own

#1) On January 29, 2009 at 2:17 PM, 4everlost (28.91) wrote:

I've been reading your recent posts with interest and visited the Oil Market Basics site.  The posts that are very straight forward and backed up with facts always catch my attention.  But I must be missing something here.  I can't figure out why its unusual for today's price to be lower than the price in the future.  If something costs $X today and you add economic factors and carrying/storage costs and whatever else (let's call them Y) shouldn't it cost $X+Y in the future?

Thanks and keep the good info flowing!

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#2) On January 29, 2009 at 3:59 PM, Vet67to82 (< 20) wrote:

Your thinking is correct, but narrowly focused to one scenario: that everything is stable, without any expectation of change in either supply or demand .  With any product, but especially commodities,  you have  multiple scenarios;  as those scenarios play out you can make money, lose money, or go no where ... it's supply AND demand AND speculation.

 Possible scenarios (a few examples):

          Supply         Demand              futures go up  

 (1)   stable              stable             winter heating season

(2)     stable             stable              summer driving

(3)    falling               stable            OPEC cuts, conflicts

    Futures go up due to the "expections" of increased demand, reduced supply, or both.  The spot or cash market reflects what's right now.  The current scenario facts are: demand is falling AND OPEC is cutting supply.   Everyone is watching, but ignoring the OPEC cuts for right now as OPEC's cuts haven't yet caught with the drop in demand, hence the increase in supply,  and this isn't in the US EIA report, there are 33 ships storing 60-80 million bbls of crude, leased for multiple months, that if these "contango players" weren't "in the game" crude would be at $20/bbl.

    Unlike speculators, the "contango players" have a clear opportunity to take advantage of the difference between the cash price and the futures price. You buy the cash price, you sell the futures.  Your profit, less storage and insurance, is the difference.  If you're real good, you take more risk and roll the futures, month to month, against the stored crude and you can make even MORE money.  The speculators, know demand is falling, the speculators also know OPEC is cutting supply, what the speculators don't know, the "catch the  falling knife scenario", is when will the supply cuts catch up with the falling demand.  When you see global reductions in inventory, the OPEC cuts will have caught up, and  the speculators will jump in.  We'll all be in trouble again ... trapped in a viscious circle. 

   I have no problem with the  "contango players" they're actually doing all of us a favor by taking up some of the falling demand that could otherwise dropped crude to $20/ bbl.  The $20/bbl crude would have done big damage to our IRAs, 401 Ks, and the global economy would be horrendous possibly taking YEARS to recover.  Any thought of alternative, "green", good for the planet energy, and the companies in that industry, would be GONE. 

   I have a big problem with the speculators.  The speculators have no intention of taking possession of the commodity they're speculating in - they're in it for themselves - only themselves, and if the speculators drive crude back to  $140 - $150/bbl with $5 gallon gas the global economy will crash again.  This time the math says a second "global" crash will be UNRECOVERABLE.     

   The whole world needs to look at how speculators hurt us and put serious limits on speculation, BEFORE OPEC's cuts start working. 

 

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