Jonathan Leff (Reuters ) wrote a detailed analysis of the current state of crude oil in the US. In the midst of all the detail is a potential bet, a bet that is almost sure.
Back in the dark days of the financial collapse and the Great Recession, crude oil spiked all the way up to $147 per barrel. Much of that was speculation, but a good part of it was the fact that a major surplus developed as the global economy went through the throes of the economic downturn. This led to a rapid reversal in the price of crude oil, which led to a “classic” low-risk trade – the contango play.
Basically, traders buy crude and then store it until the price of oil once again goes higher than the current futures price. The contango play is happening again today, as “oil costs $8 less per barrel than what futures buyers will pay in a year.” The February 2016 oil contract was trading at a premium of more than $8 a barrel to the first-month Feb 2015.
Adding to the surety of the bet is the fact that US commercial, on-shore, oil-storage capacity is 33% higher than it was in 2010. Currently, only 150 million barrels fill the total capacity of 439 million.
“Prices can stay at these levels as storage fills. But if demand doesn’t pick up or supply go down, then prices will fall again,” according to Philip K. Verleger, an energy economist who has closely tracked oil storage economics for three decades.
All the more reason to consider making this bet.
