The oil and gas rig count continues to stagnate and the oil price hasn’t seen $50 in more than a month. It’s been a hard market for oil companies all year, and the ongoing glut doesn’t seem to be easing as quickly as anyone would like.
But, as they are prone to do, versatile oil companies have found a way to profit off the lows.
Oil traders Glencore Plc and Vitol Group this month have taken advantage of a phenomenon called a contango: a time when a commodity’s future price is higher than its current price.
No matter the current state of the oil market, the price is expected to rise again eventually. This week, in fact, OPEC asserted that U.S. production will soon slow and that oil prices would see $80 again by 2020.
But the contango may offer producers a way to keep producing. You see, if oil companies can find a profitable way to store excess oil supply, then there is little reason to cut back.
Understand, U.S. shale oil drillers have only recently begun lowering production. Many companies have been able to keep break-even prices low, and thus stay profitable.
Being able to store and sell supply later at a higher price than the current cash price is just another way for companies to stay cost-effective in the harsh market we have now.
This month, Glencore sent a mid-size tanker of crude oil to an onshore storage facility on the island of St. Lucia in the Carribean. Vitol, in August, sent its supertanker to a similar onshore facility in Saldanha Bay, South Africa.
As of Tuesday this week, the difference between the price of Brent crude and the one-year future price was $7.82.
And with oil refineries entering maintenance season—wintertime in the Northern Hemisphere—that difference may yet widen. If that happens, even offshore tanker storage may become profitable.
E.A. Gibson Shipbrokers estimates that the price only needs another $0.10 to be cost-effective for some Middle Eastern oil supply. The contango level there is currently $3, and the estimated price of offshore storage is only $3.10 per barrel.
Goldman Sachs Group has estimated that oil supplies are an average 2 million barrels a day over global demand, which means storage space is becoming strained. If the glut continues as it has, those offshore options will become more attractive.
And the contango situation is sure to keep oil traders profiting even with low prices.
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Until next time,
A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.
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