Storage Industry Benefits From Oil Contango

TREFIS ^ | February 19th, 2015 | Tim Maverick

[thackney]

One might think that the mood at the International Petroleum Week annual convention would be sour, considering the plunge in crude oil prices over the past six months.

But quite the contrary . . . for oil traders, at least.

They’re ecstatic, celebrating their best market since the 2008 oil price crash. That’s because there’s contango in the oil market – the price of oil for future delivery months is higher than the current spot market price.

Storing Oil = Easy Money

With the contango, traders can make huge profits simply by storing millions of barrels of oil for sale down the road.

Marco Dunand of oil trader Mercuria told Reuters he believes that there will be about 400 million barrels of oil worth roughly $22 billion stored onshore and offshore in massive oil tankers by the end of the first quarter of 2015.

Fortunately for traders, the United States has the most onshore oil storage capacity. And it’s dirt cheap, too. At our country’s main oil storage facility in Cushing, Oklahoma, it costs less than$0.50 per barrel!

With near-zero financing rates, oil trading companies can purchase oil on the spot market, store it at Cushing, and sell it later at a $10-or-more-per-barrel profit.

Unfortunately for investors, the big oil trading companies like Mercuria, Vitol, Trafigura, and Gunvor are all privately held. Glencore PLC (GLNCY) also trades oil, but its biggest exposure is to metals.

Money in Storage

But, many of the actual storage companies, whose business is booming, do trade on the stock exchange.

A couple of the big players in Cushing are Canada’s Enbridge (ENB) and Plains All American Pipeline L.P. (PAA). Both companies are also involved in other aspects of energy infrastructure, including pipelines.

A couple of other companies caught my eye, too.

One interesting company is related to Vitol, the world’s largest oil trader. Vitol owns 50% of VTTI, one of the world’s biggest independent energy storage businesses. And in August, VTTI spun off part of its business into the New York Stock Exchange-listed VTTI Energy Partners L.P. (VTTI).

The limited partnership owns nearly 400 storage tanks in Europe, Asia, the Middle East, and the United States, with a total capacity of 35.5 million barrels.

Another company to note is the world’s largest independent storage company, Dutch-based Vopak (VPK.AS). It’s building a huge new storage facility in Malaysia, adding to its existing global portfolio of 89 terminals with a total capacity of more than 195 million barrels.

These companies will continue to rake in the money as long as oil stays in contango and there’s a need for massive storage of black gold.

And the chase continues,

[thackney]

With near-zero financing rates, oil trading companies can purchase oil on the spot market, store it at Cushing, and sell it later at a $10-or-more-per-barrel profit.

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Note that today, you would have to store the oil for 15 months to get that $10/bbl profit, storage cost ~$7.5/bbl for that time. So $2.5 profit from a $59 investment over 1.25 year time. Annualized 3.3% return on investment. Far less, probably zero, if you put any time value on money.

[henkster]

So if I read your take correctly, these companies are storing oil just because its their job and somebody has to do it.

[thackney]

I didn’t give that as a reason.

But those that own storage tanks, often a midstream company that neither owns the oil or refines the oil, built tanks for that reason.

But traders can make some money at this time by storing oil. Not a lot of money by my calculation.

[Axenolith]

There does seem to be a lot of “whistling past the graveyard” on subjects like this with respect to it overall being deflationary (which I don’t have a problem with).

Oil is currently accumulating out-of-ground at something like 3-5 million barrels a day in a decreasing demand environment. There’s a lot of instruments (financial) on shaky ground given this, I noted recently that a couple of the ETF’s in oil are looking at losing ~30% of their value based on their holding 1/2 of their assets in oil/diesel for March delivery.

If any of those things can ride this out to whenever, there might be some smoking buys out there, but I wouldn’t go “long” on an oil based investment until a year or so after the next election, and then only if a rational being is elected...

[American in Israel]

The statement “simply store millions of barrels of oil” is an oxymoron. Oil traders buy and sell contracts, never oil.

[thackney]

With the current contango, traders are taking possession while selling a future contract. It is the part the reason of rising storage and offshore tankers being used for storage.