Contango: The Most Profitable “Buy-and-Hold” for 2009 So Far

by Matt Weinschenk, Senior Analyst, White Cap Report

A different buy-and-hold strategy has become the #1 profit-maker for 2009. And I’m not talking about stocks.

Direct investments in oil, right now, are paying off in spades. And it’s because oil markets are… well, totally screwed up.

Right now, you can buy oil for $36 a barrel. And you can lock in a contract to trade oil in June for $51.30. When futures prices are higher than current prices, it’s a situation called “contango.” Oil markets expect a little bit of contango, but the spreads we’re seeing today are off the charts.

Of course, any time there is a market anomaly this severe, there’s got to be a way to profit. 

The Forbidden Contango

The reason such a large contango is rare is because it’s too easy to profit from it. If you were so inclined, you could right now buy the actual physical oil for $36 a barrel, keep it for six months and have a locked in price of $51 in June. Traders do this all the time. All of that buying and selling generally brings market prices to levels where there isn’t such a large profit to be made.

So where is the breakdown in today’s market? Storage capacity has run out. Oil tanks are filled to the brim. Instead of traditional on-shore tanks, investors have taken to borrowing tanker ships, filling them up, and letting them float offshore.

(Doesn’t sound like that could be profitable? Let’s say you could get your hands on a Suez-max tanker. They run about $46,000 per day for rental and max out at 1 million barrels. With current spreads, that’s $15 million for an outlay of $828,000. Easy money!)

When there’s money like this being made, we’d like to earn our share.

I’ve looked into building some storage tanks in my backyard.