(Updates with Bank of America comment in sixth paragraph.)
July 16 (Bloomberg) -- Oil traders have the most incentive in four years to store crude at sea and sell it as prices rise, prompting speculation about a revival in the trade once used by companies including BP Plc and Citigroup Inc.
Brent for September traded at $107.60 a barrel at 12:42 p.m. London time today, $1.16 more than the same grade for August, according to the ICE Futures Europe exchange. That premium hasn’t been bigger since May 2010, the bourse’s data show. That was also around the time oil companies last used tankers for storage in this way, according to E.A. Gibson Shipbrokers Ltd., a London-based broker that arranges charters.
The gap between the two months is wide enough for oil traders to profit from keeping oil at sea for delivery later, according to Energy Aspects Ltd., a consultant in London. Frontline Ltd., an operator of the biggest tankers, said July 14 the premium should be enough to encourage such bookings. The price structure, known as contango, hasn’t translated into vessels being hired for storage so far and other analysts say it still needs to get bigger for that to happen.
“The prompt Brent spreads are at a level that incentivizes floating storage, that is, it becomes economic for companies to store crude on tankers,” Amrita Sen, the chief oil analyst for Energy Aspects, said by e-mail yesterday. “It’s a trade that proved profitable during the period of contango in 2008 to 2009.”
Oil companies and banks, including BP, Royal Dutch Shell Plc and Citigroup’s commodities trading unit, anchored ships laden with crude off the U.K. coast in 2009 to take advantage of the contango. London-based BP said “interesting trading opportunities” helped it earn $500 million more than normal in the first quarter of 2009.
The collapse of the front-spread is the most pronounced since the economic crisis of 2008, and the resulting discount on prompt supplies represents a “supercontango,” Francisco Blanch, head of commodities research at Bank of America Corp. in New York, said in a report dated yesterday.
While the opportunities it presents for storing crude at sea will probably fade, the shift in Brent may weaken West Texas Intermediate, the U.S. crude benchmark, which the bank expects to fall below $100 a barrel this year, Blanch said.
Contango encourages traders to put oil in storage, then profitably sell futures contracts and deliver the supplies at a later date, according to Petromatrix, a consultant based in Zug, Switzerland. The structure can penalize financial investors seeking to maintain a position from one month to the next as the subsequent contract is more expensive, according to Olivier Jakob, Petromatrix’s managing director.
The August Brent contract expires today. Price movements can be amplified on the day before expiration as traders seek to close outstanding positions. Still, contango has also developed between the second- and third-month contracts on ICE Futures Europe, with September Brent trading at a discount of about 30 cents to October.
The collapse in the premium for near-term Brent supplies reflects both the return of Libyan shipments and subdued crude demand from refiners, Torbjoern Kjus, a senior analyst at DNB ASA in Oslo, said on July 10. Libya, the holder of Africa’s biggest crude reserves, is preparing to resume exports from the Es Sider and Ras Lanuf terminals that were handed over last week by rebels seeking self-rule in the nation’s east.
The front-month Brent contract hasn’t traded at a discount of more than $1 a barrel to the second month since May 2010, toward the end of the yearlong spell of contango in which traders implemented the floating storage strategy. A spread of 75 cents to 80 cents a barrel per month makes stockpiling crude on tankers viable, Energy Aspects estimates.
While September is trading at a premium to next-month prices, a better measure of contango for determining if storage works is between August and January, according to Eugene Lindell, a senior analyst at JBC Energy GmbH in Vienna. That spread is currently about $1.20 a barrel. It would need to rise to about $2.50 to $3 a barrel before traders began booking vessels, he said.
The last time traders stored crude on tankers was June 2010, according to Patrick Tye, an analyst at Gibson. There have been no reported bookings of tankers for storage so far as a result of the contango, said Odysseus Valatsas, the chartering manager at Dynacom Tankers Management Ltd. The Glyfada, Greece- based company operates Very Large Crude Carriers and other tankers.
Barclays Plc, Citigroup and Societe Generale SA predict that the discount on the front month is unlikely to persist as rising Chinese demand will bolster refinery operating rates and curb a short-term surplus. Lower output from the North Sea will also support near-term Brent, Citigroup predicts.
If Libyan exports continue to recover, Saudi Arabia, the biggest oil exporter, will adjust its output to prevent a surplus, supporting the front month, Barclays and Societe Generale said. This will cause the contango to reverse into the opposite condition, known as backwardation, in which the front- month trades at a premium to later deliveries, the banks said.