Here’s the latest trade: Traders are buying millions of barrels of oil in the spot market, renting ships to store it and simultaneously selling it in the futures market.
It’s possible because the futures market is in contango i.e. there’s an upward sloping curve for commodities delivered in the future.
As you can see, WTI prices in March of next year are about $9 higher than now.
WTI contract table
The trade sets up a fairly simple arbitrage. You buy a million barrels of oil today, load it onto a ship for 14 months and sell it in March 2016, pocketing $9 million for your trouble.
The trade was pioneered (or at least popularized) around the 2007 oil boom; it even has its own Wikipedia page. Reuters is reporting that at least 25 million barrels of oil have been booked for floating storage and 12 oil tankers will be floating around and waiting to deliver.
The returns are eaten away by shipping, delivery, storage, transaction and insurance costs but evidently it’s profitable. Then again, I think there are some traders out there who want to do it just to say they did.
In any case, it feels like a painfully inefficient use of resources. But that’s what happens when markets disconnect and it’s a lesson on ways to profit from a mis-priced market.
