It’s very interesting to get into the whole trading thing deeper than you had been before. If you have never heard the term, Contango before, were both in the same boat. Just because the currency market in the US is lumped in with commodity trading, doesn’t mean I have heard it all.
Contango is “a condition in which distant delivery prices for futures exceed spot prices” in this case oil that is being held in takers off the coasts so that real commodity traders, Oil companies, refiners etc, can benefit from the difference in near and future commodity contracts.
Why would they do this, what forces are at work here? On land the oil refineries are full as demand for oil and oil products has dropped, so storing the oil on land is expensive because there is a shortage of space to store oil. To solve this problem, suppliers store the oil on tankers, out of the market, and off the balance sheets, effectively hidden, and then deliver when the price difference or cantango resolves itself.
The problem is that well over 100 million barrels are stored at sea right now and will need to be delivered because it can only be stored for so long. In a well written article that explains this very well I pulled the following quote.
“Historically, the general rule has been that 50 days of forward cover is mega bullish for oil prices, 53 days is bullish, 57 days bearish and 60 days mega bearish,” said David Hufton, managing director of brokers PVM Oil Associates.
So how many days of forward cover do we have right now including the off shore oil? 64.45, the most since the end of the first gulf war, it seems that lower gas prices may be coming.
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