The oil-storage trade, also referred to as
contango
Contango is a situation where the futures price (or forward price) of a commodity is higher than the ''expected'' spot price of the contract at maturity. In a contango situation, arbitrageurs or speculators are "willing to pay more owfor a comm ...
, is a market strategy in which large, often vertically-integrated oil companies purchase oil for immediate delivery and storage—when the
price of oil
The price of oil, or the oil price, generally refers to the spot price of a barrel () of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC Ref ...
is low— and hold it in storage until the price of oil increases.
Investors bet on the future of oil prices through a
financial instrument
Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form ...
,
oil futures in which they agree on a contract basis, to buy or sell oil at a set date in the future.
Crude oil is stored in salt mines, tanks and oil tankers.
Investors can choose to take profits or losses prior to when the oil delivery date arrives or they can leave the contract in place and physical oil is delivered on the set date to an officially designated delivery point. In the United States, that is usually to
Cushing, Oklahoma. When delivery dates approach, they close out existing contracts and sell new ones for future delivery of the same oil. The oil never moves out of storage. If the forward market is in "
contango
Contango is a situation where the futures price (or forward price) of a commodity is higher than the ''expected'' spot price of the contract at maturity. In a contango situation, arbitrageurs or speculators are "willing to pay more owfor a comm ...
"—the
forward price The forward price (or sometimes forward rate) is the agreed upon price of an asset in a forward contract. Using the rational pricing assumption, for a forward contract on an underlying asset that is tradeable, the forward price can be expressed in t ...
is higher than the current
spot price
In finance, a spot contract, spot transaction, or simply spot, is a contract of buying or selling a commodity, security or currency for immediate settlement (payment and delivery) on the spot date, which is normally two business days after the ...
—the strategy is very successful.
While new tanks have been added in Cushing for a storage capacity of 6.6 million barrels, by March 2015 all the tanks were fully leased through 2015.
In 2015, global capacity for oil storage was out-paced by global oil production and an oil glut occurred. Crude oil storage space became a
tradable commodity
Tradability is the property of a good or service that can be sold in another location distant from where it was produced. A good that is not tradable is called non-tradable. Different goods have differing levels of tradability: the higher the co ...
with
CME Group
CME Group Inc. (Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, The Commodity Exchange) is an American global markets company. It is the world's largest financial derivatives exchange, and trades in asset class ...
— which owns
NYMEX
The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago. NYMEX is located at One North End Avenue in Brookfield Place in the Battery Park City section of Manhattan, New York City.
...
— offering
oil-storage futures contracts in March 2015.
Traders and producers can buy and sell the right to store certain types of oil.
Chronology
The concept started to be used by oil traders in the market in early 1990.
But it was in 2007 through 2009 that the oil storage trade expanded.
Many participants—including Wall Street giants, such as
Morgan Stanley
Morgan Stanley is an American multinational investment management and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in more than 41 countries and more than 75,000 employees, the fir ...
,
Goldman Sachs
Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, H ...
, and
Citicorp
Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services corporation headquartered in New York City. The company was formed by the merger of banking ...
—turned sizeable profits simply by sitting on tanks of oil.
By May 2007 Cushing's inventory fell by nearly 35% as the oil-storage trade heated up.
![Bateaux comparaison3](https://upload.wikimedia.org/wikipedia/commons/4/4b/Bateaux_comparaison3.png)
By the end of October 2009 one in twelve of the largest oil tankers were being used more for temporary storage of oil than for transportation.
From June 2014 to January 2015, as the price of oil dropped 60 percent and the supply of oil remained high, the world's largest traders in crude oil purchased at least 25 million barrels to store in supertankers to try and make a profit in the future should prices rise.
Trafigura
Trafigura Group Pte. Ltd. is a Singaporean-based Swiss multinational commodity trading company founded in 1993 that trades in base metals and energy. It is the world's largest private metals trader and second-largest oil trader having built or p ...
,
Vitol
Vitol is a Swiss-based multinational energy and commodity trading company that was founded in Rotterdam in 1966 by Henk Viëtor and Jacques Detiger. Though trading, logistics and distribution are at the core of its business, these are complemente ...
,
Gunvor
Gunvor Group Ltd is a Cypriot-domiciled multinational commodity trading company registered in Cyprus, with its main trading office in Geneva, Switzerland. Gunvor also has trading offices in Singapore, the Bahamas, and Dubai, with a network of re ...
,
Koch,
Shell
Shell may refer to:
Architecture and design
* Shell (structure), a thin structure
** Concrete shell, a thin shell of concrete, usually with no interior columns or exterior buttresses
** Thin-shell structure
Science Biology
* Seashell, a hard ou ...
and other major
energy companies
The energy industry is the totality of all of the industries involved in the production and sale of energy, including fuel extraction, manufacturing, refining and distribution. Modern society consumes large amounts of fuel, and the energy indust ...
began to book oil storage supertankers for up to 12 months. By 13 January 2015 at least 11
Very Large Crude Carriers (VLCC) and Ultra Large Crude Carriers (ULCC) were reported as booked with storage options, rising from around five vessels the prior week. Each VLCC can hold 2 million barrels.
By 5 March 2015, as oil production outpaced oil demand by 1.5 million barrels a day, storage capacity globally dwindled. Crude oil is stored in old salt mines, in tanks and on tankers.
In the United States alone, according to data from the
Energy Information Administration
The U.S. Energy Information Administration (EIA) is a principal agency of the U.S. Federal Statistical System responsible for collecting, analyzing, and disseminating energy information to promote sound policymaking, efficient markets, and publ ...
, U.S. crude-oil supplies were at almost 70% of the U.S. storage capacity, the highest supply to capacity ratio since 1935.
According to
Bloomberg Business
''Bloomberg Businessweek'', previously known as ''BusinessWeek'', is an American weekly business magazine published fifty times a year. Since 2009, the magazine is owned by New York City-based Bloomberg L.P. The magazine debuted in New York City ...
, the efficiency of newer
shale oil
Shale oil is an unconventional oil produced from oil shale rock fragments by pyrolysis, hydrogenation, or thermal dissolution. These processes convert the organic matter within the rock (kerogen) into synthetic oil and gas. The resulting oil ca ...
wells that use
hydraulic fracturing in the United States
Fracking in the United States began in 1949. According to the Department of Energy (DOE), by 2013 at least two million oil and gas wells in the US had been hydraulically fractured, and that of new wells being drilled, up to 95% are hydraulic ...
, combined with the $12 million upfront well drilling and construction costs, provide incentives to oil producers to continue to flood the already glutted market with under-priced oil in spite of crude oil storage limitations.
Many less efficient and less productive older wells were shut down but these
shale oil wells
Shale oil extraction is an industrial process for unconventional oil production. This process converts kerogen in oil shale into shale oil by pyrolysis, hydrogenation, or thermal dissolution. The resultant shale oil is used as fuel oil or upg ...
continue to increase production while making a profit in a market where crude oil is priced as low as $50 a barrel.
Strategic Petroleum Reserve (SPR)
The United States
Strategic Petroleum Reserve (SPR) is the world's largest supply of emergency crude oil—727 million barrels— stored in huge underground salt caverns along the coastline of the Gulf of Mexico.
An emergency oil stockpile was recommended by several Presidents throughout the twentieth century, in 1944, in 1952, 1956 and in 1970. The SPR is a "deterrent to oil import cutoffs and a key tool of foreign policy" but it has rarely been used.
On October 20, 2014, a report by the U.S.
Government Accountability Office
The U.S. Government Accountability Office (GAO) is a legislative branch government agency that provides auditing, evaluative, and investigative services for the United States Congress. It is the supreme audit institution of the federal govern ...
(GAO) recommended reducing the size of the Reserve. According to the report, the amount of oil held in reserve exceeds the amount required to be kept on hand since the need for foreign imports of crude oil have decreased in recent years. The report said the U.S. Department of Energy agreed with the GAO’s recommendation.
See also
*
Contingent payment sales In business dealings, transactions often occur that include variables based on future events that can be difficult to ascertain (for example, a company may sell in an amount stock along with a percentage of that company's net profits.) As these tra ...
References
{{Reflist
Oil and gas markets
Oil storage