Super Contango – Mother Jones

Get your news from a source that’s not owned and controlled by oligarchs. Sign up for the free _Mother Jones Daily_. SUPER CONTANGO….Normally, it costs more to buy a barrel of oil for

delivery six months from now than it does to buy a barrel of oil today. After all, if you’re not going to take delivery of my oil until July, then I’m going to want the spot price of the oil

_plus_ the cost of storing it _plus_ the cost of having to wait for my money. So maybe a barrel of oil that costs you $38 today will cost you $41 for delivery six months from now. But

instead of $41, what if the July price is $53? Then anyone who wants to can make a guaranteed killing. Accept the contract, buy a tankerful of oil, store it for six months, and then deliver

it. Even after the cost of storage and the interest on the loan you took out to buy the oil, you’ll make a quick and easy twelve bucks per barrel profit. Sounds nice, but since this profit

opportunity is so obvious it should get arbitraged away almost instantly. In short, a situation like this should never happen — certainly not for long periods, anyway. But it has: > On 

Monday, oil for February delivery closed at $37.59 a barrel on > the Nymex, or nearly $15 lower than July’s contract price….Such > a distance between contracts is unusual, sparking 

industry insiders > to term the phenomenon — which reached an apex in late December > — “super contango.” >  > When the price spread is greater than the storage cost, “there is

> an opportunity to arbitrage at a profit without risk,” said James > Williams, an economist at energy research firm WTRG Economics. So what’s going on? One possible explanation is

that most of the easy storage is already full, so it’s not really possible to make a quick buck on this even if you want to. But even if that’s the case, there’s yet another option: oil

producers can pump less oil now (essentially “storing” it in the ground) and then pump it out in July for delivery at the higher price. But apparently they’re not doing that. John Hempton

figures there are two possible explanations: (1) they’re already pumping at full capacity, so they can’t promise to pump extra oil in July even if they want to, or (2) oil producers are so

desperate for cash that they’re willing to take money now even if it’s way less than they could get for the same stuff six months from now. #1 doesn’t seem to be true. So that leaves #2:

thanks to plummeting oil prices, OPEC countries are in serious economic turmoil and desperate for any cash they can get their hands on _right now_. Either that or else there’s an option #3

that’s not obvious. Any ideas?