Contango!

We are living in interesting times. In July, oil hit $147 a barrel. Five months later, oil prices have dropped by $100 a barrel. Not only that, but now it is profitable for people (if they have a few hundred million or a billion laying around to buy crude at today’s spot price, store it for a year, and lock in a profit by selling it forward. Platt’s explains the scheme:

the forward curve for oil is now providing a huge incentive for market participants to store oil. For example, the one-year spread between December 2008 and December 2009 crude is running about $10, and the combination of financing and storage costs aren’t enough to wipe out that profit incentive to buy oil now, sock it away for 12 months and collect the difference in price.

Apparently it is now profitable to rent supertankers and store the oil in supertankers because of the contango.

Usually the contango gets arbitraged away, but the credit crunch is keeping people on the sidelines, allowing the big boys to make money because they have billions in cash.