For oil trader, the last two month of contango trade made a lot of money for them due to the spread between oil price and oil futures is large enough to cover the cost of storage. While this popular trading is now fading away for the rally in recent weeks, the spread still existed but not enough to be profitable as before. The gap between first and seven-month futures narrowed to $2.79 a barrel on Monday from $5.07 a barrel on Jan. 29. It’s simply “nowhere near” enough to cover the cost.
Just a month ago, oil traders were weighing up whether to park unwanted crude aboard tankers while BP Plc Chief Executive Officer Bob Dudley joked that swimming pools might be needed to hold the excess. Yet instead of offering bumper profits, as in previous market gluts, stockpiling barrels on ships would result in a financial loss, just as it has done for the past six months, in a sign the current surplus may not be as big as feared.
A crude trader would lose about $7.6 million if they wanted to park 2 million barrels at sea for six months, more than double the loss they would have swallowed in February, according to data compiled by Bloomberg from E.A. Gibson Shipbrokers Ltd. and oil futures exchanges.
The losses from storage partly reflect that hiring a tanker has become more expensive amid robust demand for crude. In dollars-per-barrel terms, the cost of using the ships to store for six months advanced to $6.80 from $6.16 over the month, E.A. Gibson estimates.
The biggest change between now and a month ago is oil supply that’s been unexpectedly curbed. One pipeline linking the the northern part of Iraq to the Mediterranean Sea halted in mid-February, while another from Nigeria was hit by sabotage. U.S. oil production is threatening to drop below 9 million barrels a day for the first time since November 2014.
From those three locations alone, combined output was restricted by about 1 million barrels a day compared with a month earlier, according to data compiled by Bloomberg. That’s about half the global surplus. Since then, flow from Iraq’s north has started to resume. And don't forget the missing volume of supply stands for 43% of the oversupply which combined with recent events of declined production will introduce to a even of oil.