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USO & OIL: Super Contango!

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January 30, 2009 – Comments (0)

I am not a commodities investor, but the recent gyrations in crude plus the newly found knowledge that there are ETFs based specificially on the forward month WTI contracts attracted my attention. Reading up on them, I ran into this contango thing. The contracts for this summer are a full $10 above the spot. So, there are 330M bbl of crude in domestic storage, and 90M more in super-tankers squirreled away, all awaiting the price increase this summer.

Question: what if –

*The Middle East does not erupt in flames (they are already shooting at each other as usual, and this has not fazed the spot price)

*OPEC is not successful in cutting production (or it does so, but still cannot keep up with the collapse in demand)

*The global recession widens and deepens.

*The glut in the US market increases

*Demand falls off a cliff

*Futures take a big haircut

Will all these tankers come ashore and dump in panic, creating what they are trying to avoid: a collapse in price?

Why haven’t arbitrageurs and hedge funds clobbered it (or have they already)?

Just curious.

But, keep your powder dry on this one.

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