Contango Narrows. Now What?

Saturday, October 10, 2009

Inventories Out Today

The Energy Department report later today will probably show that crude oil inventories rose for a 16th time in 18 weeks, increasing 2.8 million barrels in the week ended January 23.

Contango Narrows

The price of oil for delivery next December is 29% higher than for the february month, narrowing from 35% on January 16. The contango in the oil market is narrowing and Jonathan Kornafel, a director for Asia at options trader Hudson Capital Energy in Singapore said “The tightening of the contango over the past week is the sign of the beginning of a bottoming in the market. That whole phase of floating storage and selling the contango has run its course.”

Shell Sells Stores Crude

The trading arm of Royal Dutch Shell has sold its first two cargoes of North Sea crude oil from floating storage, unwinding a trade that has involved up to 80 million barrels over the last two months.

In a move that is likely to be followed by other traders, Shell sold two cargoes each of 600,000 barrels of Forties FOT-E crude to oil trader Vitol on Monday and Tuesday in ship-to-ship transfers, the company said in a statement.

The cargoes were sold from a supertanker at Scapa Flow in Scotland's Orkney Islands and booked for transshipment between Feb. 6-14 and Feb. 14-16.

Shell was taking advantage of a sharp narrowing of the discount for prices for prompt crude below forward oil futures, called a contango, that has dominated the oil market since the middle of last year.

If other traders follow Shell`s move, and much of the oil enters on the market it could have a dramatic impact on prices:

"If the oil comes out of storage into a market that is seeing relatively weak oil demand and limited interest from refiners, it will pressure the prompt oil market, squeeze the spread between nearby and forward barrels and will help the contango widen again" a trader told Reuters


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