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Friday, August 21, 2015 2:12 PM

Oil Crash Continues: West Texas Crude Below $40, Brent Near $45; Floating Oil Carry Trade in Review

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The crash in oil prices continues. Here are a couple charts to consider.

West Texas Crude

Brent Crude

West Texas Intermediate broke the $40 barrier to the downside today but is slightly above that level now.

WTI last broke $40 to the downside in 2008 but has not had a monthly close below that level dating back to 2004. Brent is near the $45 mark.

Floating Oil Carry Trade Review

In 2008, hedge funds and other big money stockpiled oil in floating ships in the $30s waiting for a rebound. This time they did so at higher prices, and at a cost of $40,000 a day.

Let's investigate how that is working out for anyone still in the trade.

Flashback January 9, 2015: ​Major Oil Traders Book Tankers for Stockpiling Crude at Sea.

A continuous fall in global oil prices has prompted major oil traders to start hiring supertankers as they can benefit from stockpiling crude oil at sea.

The oil giant Shell and energy traders Trafigura and Vitol have booked crude tankers for up to 12 months, said Reuters, referring to the fixture lists provided by tanker brokers and oil traders.

Traders reportedly use the vessels to store excess crude at sea until prices stabilize as in 2009, when more than 100 million barrels were stockpiled this way. Then the news caused outrage over oil “speculators” supposedly waiting to sell oil at higher prices in future.

Shell has reportedly booked two vessels, and Vitol, the world's largest independent oil trader, has booked the TI Oceania Ultra Large Crude Carrier, one of the biggest ocean going vessels with a three million barrel capacity.

The move can be explained by the market phenomenon known as “contango”, when spot or current prices fall below the cost of future shipment. It has happened for the first time since 2009 as spot prices fell by more than 50 percent in the last six months. This gives traders more reason to buy oil now, store it in tanks and benefit when demand recovers.

Trading firms have been able to hire the Very Large Crude Carrier (VLCC) vessels for less than $40,000 a day, compared to spot rates of $60,000 to $70,000 a day, according to the lists.

Traders can currently purchase Brent crude for less than $51 per barrel, while barrel for delivery in August costs more than $57, thus, in this case “contango” is more than $6. Analysts say the contango above $6.50 a barrel is needed to cover expenses on hiring a tanker, providing insurance and gaining profit from offshore storage.
West Texas Contango

West Texas Contango

Anyone still in the floating oil carry trade business is getting their ass seriously kicked.

Perfect Timing Anyone?

Stockpilers did have a chance for a nice profit between February thru June if they bought Brent near $50. But to that, they had to have near-perfect buy-timing, and they better have already sold.

Losses have mounted since. And anyone who thought this was a good idea above or near $60 is in deep serious trouble.

Mike "Mish" Shedlock

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