The Guardian tells us that oil traders are hiring supertankers to store oil in. This is true. The price today is low so why not, buy now, store and sell for more in the future. And then they manage to misunderstand – look, this is The Guardian talking about an economic matter, of course they are wrong – what is going on:
Commodity traders are hunting for extra space to store their crude as demand for oil collapses by 29m barrels per day in April compared with last year, falling to lows not seen since 1995. The traders are understood to be storing the excess crude in the hope it can be sold at a profit when demand for transport fuels returns later this year.
No, they don’t hope to sell it at a higher price in the future. They have sold it at a higher price in that future.
The oil market is in what is called a “contango”. The price to deliver oil at some point in the future is higher than the price to deliver now. Higher than the price of the oil today plus the storage costs into that future.
OK. So, let us make this a bit simpler. Just assume that May is right now and that June is 30 days time. We can buy now at $14.70 and sell then at $23.64. Not bad for 30 days of waiting.
But of course we’ve got to store the stuff for 30 days. As The G tells us:
Charter rates for giant vessels that can be used to store oil have more than doubled in the last month to reach highs of $350,000 (£280,000) a day as traders scramble to find space for crude that cannot be sold on to refineries.
They say such a boat can store 2 million barrels. Yes, relying upon any number from The G is problematic but let’s run with it. 17.5 cents per day per barrel storage cost. We need to store for 30 days. $5.25.
Oh, cool. We buy at $14.70, store for $5.25, sell at $23.64, that’s a $3.69 a barrel profit. And we’re doing it with 2 million barrels. Bentley Continentals all round!
OK, yes, loading and unloading costs, finance charges, etc, but roughly that’s what is being talked about.
So, what’s The G got wrong? It’s this:
in the hope it can be sold
No, that’s not what is done. It is sold, now, at that future price. Because that’s what futures markets allow people to do. As Adam Smith – writing about wheat of course, not the oil that was so rarely used in his day – pointed out, what speculation does is move prices around in time. This is what these oil futures markets allow. We move the low price from the time of glut, now, into that future where there is dearth.
We buy now, which raises the price now. We sell now for future delivery, which lowers that future price. We’ve moved the glut forward in time.
Which is the bit that the G is missing. People aren’t sitting there with their future contract price hanging our of their underpants where it might get damaged. They’ve zipped it up and ensured it by selling a future. For that’s what a future is, delivery of the item at some future date at a price agreed now.
The Guardian has, as is so often – OK, always, about everything – true of something financial or economic, missed the point. The oil traders aren’t hoping, they’ve made certain. The people hoping are the speculators on the other side of the future. Which is what a futures market enables, that physical traders can be certain and the risk is passed on to the speculators.
They’re missing, that is, the entire point of the system itself, the movement of prices – and thus dearth and glut – through time.
Well done to Ms. Viner there, well done indeed.