Deja Vu All Over Again? | Russell T. Rudy Energy LLC
A contango exists when the market perceives that future prices will exceed current ones. This is now the case with oil. Investors and traders are attempting to exploit this by selling futures contracts at the higher prices and buying at prevailing prices. As long as the costs of acquisition and storage are less than the future contract price, there is a profit.
“World Oil” reports that speculating on oil prices is not a new practice. Back in 1862 Andrew Carnegie bought oil at $1 per barrel, dug a giant hole in the ground to store it, and waited for a shortage which would result in $10 oil. Unfortunately for Carnegie, supply kept increasing, oil began leaking out of the hole, and prices never rose.
Currently the contango is at a 4 year high of approximately $2.15 per barrel. This has resulted in a record amount of West Texas Intermediate crude (WTI) in storage in Cushing, Oklahoma. Over 500 million barrels of oil are being stored in the U. S., the highest level since the 1930’s. Of course, this increased demand for storage is bidding up the cost of doing so. The price for storing a barrel of oil in South Louisiana is now $1.43 per month. There are even rumors that traders, such as Glencore PLC, are storing oil in at least 4 supertankers off the coast of Singapore and Malaysia.
As students of History know, the story of Andrew Carnegie had a happy ending. Yes, he did lose his $40,000 bet on crude oil price speculation, but his investment in the Pennsylvania oil fields in general, more than made up for his loss and started him on the path to becoming one of the richest men who ever lived.
To read the article in its entirety, please go to http://www.worldoil.com/news/2016/2/19/the-robber-baron-who-botched-the-world-s-first-oil-storage-trade .
