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2009 Is Back, And So Is The "Risk-Free" Contango Trade

Tyler Durden's picture




 

In many ways what is going on in late 2014 is a carbon copy of events in early 2009: back then the market was melting down every single day. Now, it is also melting, only in reverse. Back then the the interest rate was 0%, as it is now 6 years later (only with $3 trillion more in the Fed's balance sheet), and while then the Fed was scrambling to recover from the disaster of its latest bubble bursting, now it is focused on preventing the same bubble it successfully reflated - the third consecutive in a row - from popping. It will fail as it always does.

Just as notably, like in early 2009 so too now the price of crude oil and the entire commodity complex has disintegrated. Back then nobody doubted it was due to a global depression, while now the collapse is being spun as bullish (because apparently OPEC is oversupplying not just crude but copper, steel, iron ore and all those other commodities which China suddenly no longer wants - for more details speaks to Australia and Brazil). The result of this is that just like in 2009 so now the crude curve has entered full-blown contango. Which means that suddenly storing crude is all the rage as one can effectively pocket a risk-free profit if one can simply buy the product now and sell it at some point in the future for a guaranteed roll up the non-backwardated curve. Just like in 2009, as long as one has a place to store said contango-ed commodity.

As the following snapshot from January 2009 shows, the 12 month, $25 contango back then was without precedent, and as a result there was an epic scramble by hedge funds, banks and various other speculators to store about 100 million barrels on tankers with the intention to sell later. Since the contango was so wide one could easily lease any number of VLCCs and still be profitable on the trade. In fact, a big reason for the renormalization of the crude curve back then was because so many funds jumped on this arb.

Fast forward to today, because the "risk-free" contango trade is back.

As Reuters reports, "global oil traders are likely to store crude in tankers next year, as a widening contango makes large-scale storage at sea profitable for the first time since the financial crisis more than five years ago, industry sources said."

Just like in 2009, "with Brent for prompt delivery dropping sharply versus later contracts in the past week, traders are increasingly requesting to lease vessels for storage."

The spread between buying now and selling later means that "the current contango on the ICE Brent market would already be sufficient to make floating storage viable based on average 2014 freight rates," JBC Energy said in a note. Analysts at JBC Energy expect 30-60 million barrels of oil to be stored offshore worldwide in the first six months of 2015.

And while it may not be anywhere close to the massive curve dislocation from early 2009, Brent for February delivery is currently close to $3.95 cheaper than for delivery five months later, the widest gap since 2010. And yet, so far in 2014 "only a few tankers have stored oil at sea as the discount for the front month crude futures has been insufficient to finance chartering. Ship owners have also been resisting calls to lease out vessels for oil storage given a seasonal hike in freight rates."

However, as day rates drop, ship owners will be compelled to lock in deals to allow charterers to store crude for months, industry sources said.

"Moving into the first quarter of 2015, freight rates are likely to correct downwards, opening up floating storage opportunities," JBC Energy said.

The problem is that with oversupply on deck (pun not intended) suddenly the world may find it does not have enough tankers!

The International Energy Agency expects 300 million barrels of crude to be put into storage globally, including onshore and offshore, in the first half of 2015, which could "bump against storage capacity limits" in OECD countries.

Which paradoxically means that all those trounced tanker stocks may suddenly get a strong tail wind as a result not of actual end-customer demand, but as specs try to lock in a risk-free spread on the contango and rent tankers for sub-1 year charters, until the physical delivery date comes.And if indeed capacity limits are hit, then quite soon not a single tanker will be available to actually transit crude from source to end market, as all will be leased by hedge funds to simply sail in circles with thousands of tons of precious black gold cargo.

So for all those who have hundreds of millions to spend on storage costs and can take advantage of economies of scale, the contango trade is a no-brainer. What about everyone else? This question brings us to the "risk-free" profit idea we first presented in January 2009. For those who may not have been around back then here it is again.

Risk-Free Profit Idea of the Day

 

Buy: Barrels of Oil

Why? You pocket $25 RISK FREE per barrel for just holding on to it for 11 months

What is the Catch? U need a place to store a couple of barrels of oil...

What is the CNBC Catchphrase? Contango

What is the math? Buy oil for February physical delivery (perfect, gives you time to organize this brilliant strategy), with the goal to sell it in January 2010, for an 11 month holding. According to most recent NYMEX quotes, you pocket exactly $25/barrel doing this trade.

Some geometry. A Barrel of Oil, is a standard volume measure equivalent to 42 gallons, or 158.9873 liters for our 2 European readers. This "black gold" is stored in 55-gallon drums, which have dimensions of roughly 24" by 34"; while traditionally these have been made of steel, you can buy plastic alternatives. Since you don't care about the quality of the drums you can buy used drums. According to this Craigslist seller you can buy bulk used drums for $8/each. The average circular barrel takes up on average 4 square feet in area and is roughly 3 feet high. You can stack barrels as many as you need high, limited by the height of the storage facility.

Next you want to find an average sized warehouse - presumably somewhere cheap, let's say Stamford, CT, which is terrific for two reasons 1) most of our readers are in the greater Stamford area, and 2) if there is a leak, you will pollute not some endangered crane breeding ground, but the domiciles of some of the richest people in the US. Elsewhere in the country, rates will be cheaper. According to this link, you can rent a 2,200 sq/ foot warehouse in Stamford, CT for $3000 month (this assumes no haggling). Plugging all these variables in the below spreadsheet, and you end up with a risk free profit of $41,800 over 11 months without moving your finger... And this is a scalable and leverageable idea - meaning you can potentially book unlimited profit, as long as you can find the storage, the barrels and someone to finance it if you don't have the upfront costs. Even if inflation has a "hyper" prefix at some point over the next 11 months (which we at Zero Hedge are very concerned about and believe it might happen), you will still be locking in a real profit.

 

Obviously, one has to scale all the aspects of the trade to the current reality, but the underlying math is still applicable and if the crude collapse continues will make it that much more attractive.

 

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Tue, 12/23/2014 - 22:02 | 5586936 tmosley
tmosley's picture

Oil glut, bitchez.

Tue, 12/23/2014 - 22:33 | 5586985 Manthong
Manthong's picture

Hey, gasoline is in contango too, right now.

How about we just fill those 4,400 barrels in Stamford with gasoline?

Tue, 12/23/2014 - 23:32 | 5587151 Dr. Engali
Dr. Engali's picture

Open one up and toss in a match for good measure.

Wed, 12/24/2014 - 00:13 | 5587250 Urban Redneck
Urban Redneck's picture

refined gasoline starts to break down after only a couple months...

Wed, 12/24/2014 - 00:35 | 5587274 Greenskeeper_Carl
Greenskeeper_Carl's picture

You don't have to actually hold it. Just looked online, futures all the way out to 2017 are available to purchase(NY bay, most liquid market, I believe). You are agreeing to buy at a price set now , and you can get diesel for 2.15 or so a gallon(this is before they add all the taxes) for delivery in 2017. You don't have to hold the fuel, you just have to agree to buy it for that price at the time of experation of the contract , or sell the contract to someone else. Place your bets....

Wed, 12/24/2014 - 09:56 | 5587947 Panafrican Funk...
Panafrican Funktron Robot's picture

"You don't have to actually hold it."

*Paging Mr. Corzine.*

Someone needs to be re-educated regarding futures.

Tue, 12/23/2014 - 22:04 | 5586937 holdbuysell
holdbuysell's picture

Always enjoy the data-driven analysis-style articles on ZH, even if they do, at times, become a bit 'chewy'.

Keep it up Tylers!

Tue, 12/23/2014 - 22:08 | 5586944 Kreditanstalt
Kreditanstalt's picture

Except that if end demand doesn't rise significantly for the next one, two, three or more years the futures prices will come down too.

 

Gold: backwardated FROM THE FRONT MONTH all the way out to ONE YEAR...

 

Lose your shirts, clowns!

Wed, 12/24/2014 - 00:15 | 5587254 Dazman
Dazman's picture

For crude... You sell it NOW at the contango price for delivery on the FUTURE date. So if you can buy low now, store it and deliver it on the future date. It does not matter what happens to the future prices in interim - you've already sold at that higher price and will be delivering.

The problem is liquidity. You really can't do this at scale because if you look at the order book for future dates more than a few months out it's VERY thin, e.g. the Dec 2019 moved $4 on like 1 or 2 contracts recently. Not a very scalable strategy unfortunately.

Tue, 12/23/2014 - 22:13 | 5586948 One And Only
One And Only's picture

This isn't about defending market share for Saudi Arabia.

Saudi Arabia is an unofficial US terrirtory and King Faisal learned that lesson the hard way. 

This is obviously a US play at crushing Russia and a lot of companies were ready for it. Last time oil was here XOM was trading in the 60's so they must have been pretty well informed about what was going on and put on the right hedges.

Oil will collapse until Russia collapses (or Putin folds) whichever comes first. If that means oil at $20 you better be ready for $20. If stocks collapse 10-25% then that's the price to bring Russia to it's knees.

 

Tue, 12/23/2014 - 22:21 | 5586966 Winston Churchill
Winston Churchill's picture

Thats not going to happen.

China simply cannot allow it to.

Expect a dollar dump, either partial as a shot across the bows, or a full dump ,as a shot into

the bows.

China is in the driving seat, and the US is in the trunk, whatever it may think.

 

Tue, 12/23/2014 - 22:38 | 5586981 LetThemEatRand
LetThemEatRand's picture

You are assuming that China is not part of the NWO plan.  I think they are very much part, as is Russia and billionaire Vlad.  Not long ago, he imprisoned a competing oligarch with oil interests, Khodorkovsky.

The bankers have been moving pieces into place for more than 100 years.  Don't underestimate them.  

Tue, 12/23/2014 - 22:51 | 5587012 layman_please
layman_please's picture

red shields have set up shop nicely in china. though, in russia, they run into some trouble, but not to worry, that's why every country has a central bank. 

and vlad, he doesn't need to be NWO, he will do his part, regardless. he will play the role of the archenemy, wants he it, or not.

Wed, 12/24/2014 - 00:02 | 5587227 Ahoy Polloi
Ahoy Polloi's picture

I guess that's why all the billionaire Chinese are buying up property in the US, Canada, & everywhere else.

Wed, 12/24/2014 - 00:03 | 5587228 Ahoy Polloi
Ahoy Polloi's picture

I guess that's why all the billionaire Chinese are buying up property in the US, Canada, & everywhere else (because they so enjoy working together with the Red Shield).

Wed, 12/24/2014 - 02:51 | 5587453 TheReplacement
TheReplacement's picture

That is a rather terrifying point.  However, I still subscribe to the idea that there are multiple factions within the NWO.  I also believe any individual who sees the golden ring before him is likely to work with those he naturally associates with in order to grasp it.  What that means to me is that if the Chinese leader feels he can make a play he will and he will do it as the leader of the Chinese.  Same for Russian or American leaders. 

Even if the NWO is successful, we all know that at the end of the day only one guy is going be be left in charge.  People will be purged.  Expect them to put up a fight and to use the full might of there nation(s) in that effort.

Wed, 12/24/2014 - 03:50 | 5587509 malek
malek's picture

How do you know it wasn't Khodorkovsky who had been part of the NWO plan instead.

Wed, 12/24/2014 - 08:28 | 5587728 Winston Churchill
Winston Churchill's picture

Honor amongst psychopaths ?

Et tu Brutus.

Even if you are correct, it does not preclude dumping USD, as the jockeying for place/ranking

unfolds.This is not a papal conclave going on here, and those have gotten bloody in the past.

Wed, 12/24/2014 - 02:17 | 5587415 Obama LaForge
Obama LaForge's picture

I wouldn't buy any commodity until China's housing crisis unfolds. Except maybe gold. 

Tue, 12/23/2014 - 22:17 | 5586958 Carpenter1
Carpenter1's picture

This is what you call "jumping the gun."

Bet $100 there's less demand in 1 yr than there is now.

Tue, 12/23/2014 - 22:18 | 5586960 Bunghole
Bunghole's picture

That part about Stamford, CT was priceless.

You forgot the bribe for the fire inspector when he sees your 4,400 barrels of oil stored in a building without an approved sprinkler system of having to provide an SPCC plan signed by a PE for storage of more than 10,000 gallons of petroleum products.

Otherwise, brilliant.

Wed, 12/24/2014 - 00:55 | 5587312 Buckaroo Banzai
Buckaroo Banzai's picture

Getting the oil pumped into the barrels, and getting the barrels transported to the warehouse is gonna cost something too.

Tue, 12/23/2014 - 22:21 | 5586962 ebworthen
ebworthen's picture

On Jeopardy tonight one of the questions was:  "When did the wealth of the 1% of the past year match those of this year just before a crash?".

The answer of course was 1928.  *cough*

Tue, 12/23/2014 - 23:05 | 5587064 LetThemEatRand
LetThemEatRand's picture

I'll take "shit Jamie doesn't want you to know," for $100 Billion in non-recurring charges, Alex.

Wed, 12/24/2014 - 00:42 | 5587289 Greenskeeper_Carl
Greenskeeper_Carl's picture

"THIS TIME IS DIFFERENT, DUMBASS!"

Tue, 12/23/2014 - 22:37 | 5586994 NoDebt
NoDebt's picture

It takes two to Contango.

 

Tue, 12/23/2014 - 23:29 | 5587138 Dr. Engali
Tue, 12/23/2014 - 22:40 | 5586995 Duc888
Duc888's picture

 

 

"Next you want to find and average sized wharehouse, somewhere cheap,  say in Stamford CT.........

 

Ain't nuthin "cheap" in Stamford CT.

Try Bridgepuertorico.

 

Shity officials are wayyyyyyyyyyyyyy cheaper to buy there too.  You can still get someone whacked for $50 by a gang "prospect".  It's never been cheaper.  Deflation I guess.

Tue, 12/23/2014 - 22:43 | 5586998 himaroid
himaroid's picture

Makes sense. Buy oil cheap during oil bust, fed goes zimbabwe to save the world from oil bust, all things physical explode to the upside.

How much more downside before fed can justify QE4+++++ ?

One or two terrible jobs reports?

That's all.

Gotta go tune up precious metal pick up truck.

Tue, 12/23/2014 - 22:51 | 5587028 BringOnTheAsteroid
BringOnTheAsteroid's picture

Ummmm, when you say "how much more downside" what exactly is it you're talking about? I'm guessing not the DOW or S&P or Nasdaq or Nikkei or the China one (whatever that is called).

Tue, 12/23/2014 - 23:25 | 5587127 himaroid
himaroid's picture

Just like last time, they gotta give us the big scare to justify it.

You do remember the last couple of times, right?

greenspan printing for dot com bust?

hank paulson kneeling for housing?

With posturing repubs in power, I believe it will take another collapse to justify.

dot.coms - a new era

housing never goes down

Are you a believer?

Wed, 12/24/2014 - 03:59 | 5587517 BringOnTheAsteroid
BringOnTheAsteroid's picture

No, I actually agree, there'll be a major collapse in equity markets which will bring in the final supersonic round of money printing. Just not sure how long the upside from this will last before the US dollar collapses. I have a feeling TPTB know this as well henceforth purchased 2 billion rounds of hollow points.

Wed, 12/24/2014 - 00:43 | 5587291 Greenskeeper_Carl
Greenskeeper_Carl's picture

What downside? Markets are at all time highs, bond yields are at all time lows. You think the fed or this 'market' gives a shit about some marginal shale producers going bankrupt?

Wed, 12/24/2014 - 01:15 | 5587325 himaroid
himaroid's picture

Again, you guys thought the exact same thing about housing and tech companies. Why didn't your heroes at the fed stop those collapses?

They are surely fighting desperately to maintain confidence while at the same time pump the markets.

These are working at cross purposes.

When they convince people that the economy is OK, they cannot QE.

When the markets get weak, people lose more confidence in the economy.

The old liquidity trap has them stuck and fucked.

You guys seem nice enough, here's a tip.

Buy treasuries as they have the every two months overbought sell off.

Figure out how to hedge a core tbond position, and trade around it.

Makes for a Merry Christmas.

Wed, 12/24/2014 - 02:55 | 5587459 TheReplacement
TheReplacement's picture

They only care about bank collapse. 

Wed, 12/24/2014 - 09:49 | 5587920 Greenskeeper_Carl
Greenskeeper_Carl's picture

i was being sarcastic, the guys at the fed are far from being ' my heros '. their words and actions when markets dropped a few % a couple months ago told me all i need to know, they will restart QE if the markets actually drop, i realize that. I just meant they don't care about some shale producers going under, its inconsequential. All that oil will still be there, and once prices go back up, someone wil scrape together the money to go pump it out of the ground.

Tue, 12/23/2014 - 22:53 | 5587029 cigarEngineer
cigarEngineer's picture

One thing armchair quarterbacking at ZH offices can't know from experience:
You can only store those 55-gal barrels 3-high. And taking them down one by one with a forklift is a biitch.

:)

Tue, 12/23/2014 - 23:33 | 5587161 Dr. Engali
Dr. Engali's picture

Pffttt, don't bother us with the details. We have a sure fire way to make some extra fiat. What could possibly go wrong?

Wed, 12/24/2014 - 00:59 | 5587318 Buckaroo Banzai
Buckaroo Banzai's picture

Strap the barrels to hardwood skids.

Wed, 12/24/2014 - 02:55 | 5587461 luckylogger
luckylogger's picture

DUH!!!!!!!!!!!!!!!

of course it is satire.....

anybody who knows the oil business knows that this was an example of what the big boys do.................

Think before you post, buddy.................

Tue, 12/23/2014 - 22:58 | 5587046 Homey Da Clown
Homey Da Clown's picture

So let me see if I have this right

 

Oil prices Down Under Bush- Blame Bush

Oil prices UP under Bush- Blame Bush

Oil prices UP under Obama- Blame Bush

Oil Prices down under Obama- Obama gets credit

Wed, 12/24/2014 - 00:47 | 5587295 Greenskeeper_Carl
Greenskeeper_Carl's picture

Let me see if I have this right:
Think any of this has to do with either one of them?- You must be a dumbass

Wed, 12/24/2014 - 00:59 | 5587321 Buckaroo Banzai
Buckaroo Banzai's picture

You're right of course, but I think you missed the point.

Tue, 12/23/2014 - 22:59 | 5587053 Babaloo
Babaloo's picture

I'm not a commodity guy, so here's a question for those who are. Do you have to buy the actual and store it? Or can you just buy the front month and sell the deferred and profit as they come together?

Wed, 12/24/2014 - 09:46 | 5587907 mastersnark
mastersnark's picture

Have to take delivery. Futures expire and rolling over to new front months won't get you the profit you'd get taking delivery and then delivering at locked in back month price.

Tue, 12/23/2014 - 23:12 | 5587082 dirtyfiles
dirtyfiles's picture

yep buy low sell high with profit for sure here

opposite to buy high with the hope of selling higher like "the market"    lol

 

Tue, 12/23/2014 - 23:17 | 5587092 Rjgroad
Rjgroad's picture

Those filled barrels weigh a bit over 300 pounds each. So, if you try to stack them 8 high, I suspect you will see the true meaning of crude collapse.

Tue, 12/23/2014 - 23:22 | 5587114 Kina
Kina's picture

China  will step in to support Russia for the simple fact that if the US 'wins' against Russia then China most certainly next.

Much better for China to keep US busy with Russia by propping up rubble and Russian economy whilst teaming up with it military and nuclear strength and technology.

China's position in any NWO is US factory worker, China has ambitions matching its ancient past.

 

Also China/Russia know US economy is FUBAR and global economy FUBAR.... thus the need to develop their own 'little' BRICS niche.

Tue, 12/23/2014 - 23:30 | 5587143 dirtyfiles
dirtyfiles's picture

I think Ukraine will switch back to Russia after they realize that they are just the Western tools

Tue, 12/23/2014 - 23:38 | 5587173 Rjgroad
Rjgroad's picture

I have a different take on the geopolitics. KSA is pissed that USA and Russia actively working with Iran to ultimately allow Iran to become a nuclear power. KSA punishes Russia for commiting to build more nuclear plants in Iran by gutting Russia source of hard currncy. KSA punishes Obama for negotiating with Iran and generally messing with things in the MidEast and gets a kicker of seriously damaging the shale business and also alternate energy economics.

The winner is China which needs the crude in the long term and can now swap those nasty US Dollar reserves for hard assets. With US and Russia competing throughout the ME, China can focus on their internal issues and watch us squirm.

Wed, 12/24/2014 - 03:03 | 5587470 TheReplacement
TheReplacement's picture

If that theory is true then KSA would likely arlready have a covert "arrangment with China.

One would think the US.gov would not like having KSA dictate AND hurt domestic interests.  Control matters to the masters.  If the governments are the masters then you would expect umbrage at that level.  Does the US.gov pressure or threaten KSA to cut output?  Not yet so I do think your theory is wobbly, though not terribly unreasonable at all.

The banks are in control of this theatre.

Tue, 12/23/2014 - 23:45 | 5587186 Ewtman
Wed, 12/24/2014 - 00:12 | 5587241 fuu
fuu's picture

So this is the old JPM stashing oil tankers at sea for a while play?

 

"Just drive around the block again dude."

 

Is the sea receding? What's that rushing sound?

Wed, 12/24/2014 - 00:16 | 5587255 Bluntly Put
Bluntly Put's picture

It looks like the business to be in is storage, oil and bills.

.

Wed, 12/24/2014 - 03:06 | 5587472 TheReplacement
TheReplacement's picture

Meh.

Code inspector is probably better.  Find the unlicensed oil storage, take a hefty bribe that includes information on the next guy, and move on.  All done tax free.  Hell, such a position might turn bribe money into an oil storage investment just knowing same will never be found out of code compliance. 

Empires have started with less.

Wed, 12/24/2014 - 00:33 | 5587273 theyjustcantstop
theyjustcantstop's picture

with it being deemed a national security risk, i've spoke with opec, and other interested parties, i will cap americas gas prices at $2.25 a gallon, and i've contracted with opec for $70 a barrel, for the next 5 yrs. for 20 million bpd..

i've signed one of these memos, and these actions will be affective 1-1-2015, the rest of the world can go contango that, and heres a word from our very own vic nuland, from state, whats your message vic, fu., eu..

 

Wed, 12/24/2014 - 01:30 | 5587366 OneTinTrooper
OneTinTrooper's picture

I still think those clunkers we bought for cash should have been put in storage.

Wed, 12/24/2014 - 07:42 | 5587668 GoldSilverBitcoinBug
GoldSilverBitcoinBug's picture

Free profit I fucking love it where do I sign, LOL ?

Wish I could do that in my socialist France :(

BTW you could do that with any commodity like gold: maybe easier to storage ?

"Contango Trading": learned something extremely valuable today, Thanks ZH !

Pegged currency trade is great also, I have fun on EURCHF an USDHKD (especially that their CB are determined to defend it at all cost) when it bounce from the lower side and exit 20 to 100 pips later.

Wed, 12/24/2014 - 09:51 | 5587921 mastersnark
mastersnark's picture

Way too complicated. I'm just going to bury a whole bunch of lizards in my yard. I'm pretty sure they'll turn to oil. Pretty sure...

Wed, 12/24/2014 - 09:59 | 5587952 winchester
winchester's picture

that can be called extra long term storage. not sure you will be able to use the profit of such act , but, for the 6 fingers next generations of humans, why not.

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