Sunday 28 June 2020

How to Trade in Oil, Contango: Profit and Loss in Global Trade - Bloomberg

How to Trade in Oil, Contango: Profit and Loss in Global Trade - Bloomberg:

An oil trade that made its way into Donald Trump’s press briefings -- and earned big profits for commodity merchants and tanker owners alike -- is fading away with every dollar that the price of crude rallies.

When oil demand cratered earlier this year because of the coronavirus and a flood of cargoes, the U.S. president talked about “oil all over the oceans.” It was a reference to the tens of millions of barrels of unwanted crude that traders were hoarding on ships at profit. Tanker owners including Frontline Ltd. and Euronav NV also reaped windfalls as a frenzy to book the ships on storage charters drove up rates.

Those days are done. The big financial incentive to store, known in trader jargon as contango, has all but vanished. Worse still for tanker owners: it’s disappeared partly because the OPEC+ oil-producer alliance has drastically curtailed the supply of cargoes. In other words, no incentive to store and fewer shipments.

“For now, this play is largely over,” said Richard Matthews, an analyst who monitors the trade at E.A. Gibson Shipbrokers Ltd. “Quite simply the contango is no longer there, so it does not make any economic sense to enter into a new floating storage trade, unless the deal was locked in when the contango was sufficient to cover freight costs.”




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