Oil-storage trade

Oil-storage trade

The oil-storage trade is a trading strategy where oil tank owners and companies that lease storage buy oil for immediate delivery and hold it in their storage tanks, then sell contracts for future delivery at a higher price. When delivery dates approach, they close out existing contracts and sell new ones for future delivery of the same oil. The oil never moves out of storage. Trading in this fashion is only successful if the forward market is in "contango", that is if the price of oil in the future also known as forward prices are higher than current prices or spot prices. Storing oil became big business in 2008 and 2009,[1] with many participants - including Wall Street giants such as Morgan Stanley, Goldman Sachs or Citicorp - turning sizeable profits simply by sitting on tanks of oil.[2]

It has been estimated that one in twelve of the largest oil tankers are being used for the storage, rather than transportation of oil,[3] and that if lined up end to end, the tankers would stretch out for 26 miles.

References

  1. ^ See NPR Contango In Oil Markets Explained http://www.npr.org/templates/story/story.php?storyId=98410267
  2. ^ Where Has All The Oil Gone?, The Wall Street Journal, 6 October, 2007.
  3. ^ Oil Market Outlook: When the contango trade unwinds

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