04-29-09 by dugan
The poor little oil companies are reporting profits that are way down, though only in comparison to the last three record-busting years of picking consumers clean at the pump. But they’re making up a sizable chunk of losses in their oil drilling businesses with fat, risk-free profits in their oil futures market trades. Depending on the size and structure of that "contango trading," they are also locking in higher prices for oil in months to come, no matter what happens to the economy. One thing for sure, though–they won’t be telling us those details.
Here’s the explanation, from the Wall St. Journal blog linked above:
[T]he oil companies have been able to partly compensate for the
low oil price by taking advantage of a crude market that since October
has been in what’s called contango, a price structure where near-term
contracts are cheaper than contracts for delivery in the future.
Contango usually occurs when there is the expectation that prices
will rise — the slow economy and the historically high amounts of
crude in storage drive down current prices, while expectations for
economic growth and tighter oil supplies push up future contracts. …
In a typical contango play, a company that bought oil on the spot
market at $49.92 a barrel as of Tuesday’s close, and at the same time
sold a futures contract for September delivery at $53.19 was able to
lock in a profit of $3.27 a barrel. In mid-January, the difference
widened to $15.21. Contango has narrowed in recent months, but the
trade still pays off handsomely, even factoring in storage and
financing costs."It’s almost like printing money," says Torbjorn Kjus, oil market analyst at DnB NOR Markets in Norway.
There’s zero risk, because the companies are making the money right then and there, when they buy and sell what could be the same barrel of oil. Somebody, somewhere will eventually have to take delivery of that barrel from the oil company.
Want to try it yourself? You can’t. Only big oil companies with vast amounts of storage space for oil can do it (Shell and BP both reported big profits in trading). The rest of us would have to build or rent oil tanks or pipelines, more than wiping out the profit.
So we can’t protect ourselves by putting a few hundred bucks into a nice personal contango. And if the oil companies’ trades are big enough, that higher oil price in the not-so-distant future will be a self-fulfilling prophecy.
One more thing. Big refiners are also making money in the downturn. Even though Valero reported making and selling much less gasoline, its profits in the first quarter were up 27%. That’s in part because refiners are making a bigger profit per gallon now than when gasoline was at $4.00, which helps explain why gasoline prices didn’t fall as much as the price of oil.