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Oil is in serious contango again!

About two years ago, the forward curve on oil prices rose dramatically, this means that oil delivered in the future was more expensive than oil delivered today.  Generally futures’ prices are in backwardation, since goods delivered in the future are worth less than goods delivered today (think cost of money).  However, every so often contango occurs (actually more often than most would think), it is also a statement on the anticipated future demand for oil, what the futures indicate is that the markets anticipates the price of oil (in USD terms) to rise by at least 10 dollar over the coming 12 months:  January futures for oil (West Texas) are priced around $100/bbl, compare to $91/bbl this morning.


Assuming no storage costs and no transaction cost, oil traders have the opportunity to lock in a 12% profit by buying oil today for delivery in one year – futures do not have optionality, the trade must be executed on the purchase date.

My guess is that many hedge funds (since so many investment banks have “shut down” their prop desks) are looking at this trade very carefully.  Last week you could purchase spot oil at $85/bbl, a gross 18% “risk free” transaction.  Funny enough the trade became a lot cheaper with the Baltic Dry Index continued drop – down to 1,107 last night.

So if you are seriously rich, there is out there a risk free trade in the oil space.  Look at many oil tankers parked off the cost of Singapore and in the Gulf of Oman, loaded to the gill with oil for delivery in early 2012.

Note:  I have no position in this trade, its just an observation 

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