The oil market is currently in super-contango. That is the forward prices are much higher than current prices.
Usually speculators fix this. Buy oil now, store it, sell it forward and make a profit.
But the easy storage is full. The WSJ reports that people are buying tankers to moor off the coast of Scotland to exploit the arbitrage. It looks to be a surprisingly good trade.
So given the storage is full it is possible that the super-contango exists. However a super-contango has implications – both for investment and geopolitics. This post explores those implications.
What is happening in the oil exporting states?
Not all storage is full. Most oil is stored in the ground. It has been for hundreds of millions of years – and the ground storage is mostly stable.
Surely the oil exporting states (Russia, Saudi Arabia, Venezuela etc) can store the oil and release it later – and hence take advantage of the super-contango.
But for some reason they are not doing so. I have a couple of theories:
Theory 1: the oil exporters are diabolically desperate for cash
The most obvious theory (not necessarily correct) is that that oil exporters are diabolically desperate for cash. They can’t defer today’s cash receipts for much bigger ones tomorrow.
Usually if you have a really good investment idea (oil storage appears to be one) then there is finance available. But seemingly there is no finance and Gazprom amongst others has liquidity issues.
We know about Gazprom – but most of the oil exporters – certainly the ones alleged to have excess capacity to bring the oil to the surface in the future – are in the Middle East. If they are all that diabolically desperate for cash it has geopolitical implications. Collapsed economies are not pretty.
Theory 2: there is insufficient extraction capacity to bring the oil to the surface in the forward period and hence take advantage of the contango
My second explanation is that there really is no ability to store oil in the ground this month to extract extra oil in (say) 18 months because the exporters are short extraction capacity. This seems unlikely. Opec claims it is cutting back production – which implies they are leaving some capacity idle. They could however by lying. There might not be all that spare capacity around.
In which case you want to get really long the drillers and anyone else who provides oil extraction capacity.
I have no third explanation. But in summary either the oil exporters are diabolically desperate for cash (and their economies are about to totally fail) or OPEC is lying about oil capacity and they are really constrained – or a combination of the above.
If anyone has a third explanation I am really keen to hear it.