The Contango between spot and 12 month forward oil prices is a record high of $13/barrel reflecting the difficulty traders and hedge funds are having in securing long term credit and the cost of storage in the current oversupplied market according to the FT. Normally the spot and forward prices reflect a) the cost of finance to buy oil now and hold for one year plus b) the cost of physical storage to hold it for that period. Investors would normally sell the 12 months and buy the spot, holding the oil and taking the profit after the finance and storage have been paid for – it’s a simple arbitrage play. But the forward price is at a huge percentage premium because investors can’t borrow and because the only storage space available is incremental space like unused super tankers that is intrinsically more expensive than fixed land based storage ” between two and three times as much.
Oil inventories have increased everywhere since the summer and capacity is fast filling up. Inventories in Cushing, Oklahoma, the delivery point for West Texas Intermediate, have increased 58 per cent in the past three months to 22.9m barrels and traders say more is on the way. Rumors that Russia and OPEC will cut production to raise prices briefly touched the market yesterday until buyers re-considered the likelihood of Russia cutting oil production when the country is bleeding foreign exchange. No sign of support for the oil price from the investment community then.