A refresher on contango

Contango is the discount you can get on a non-perishable commodity by virtue of your willingness to accept delivery at once, or (stated inversely) the extra payment you make if you want the seller to hold it for you for some interim.

As I noted in a post on the subject I wrote here in January, the per barrel price of oil at that time was $46.47 for March delivery. That is as immediate a delivery as Nymex listings will get you. Going out further, a barrel for August 2009 delivery went for $53.81. So the contango for that five-month period was $7.34, or $17.64 annualized, or 38% annualized and stated as a percentage of the value of the barrel. That seemed historically very high and I wondered about the reasons in that January post.

Six months later, the price is up, however one measures it. But let's maintain our focus on contango. Crude oil for July delivery (essentialy the spot price) is at $72.68 a gallon, looking at the "most recent settle" at Nymex. Going out five months, a barrel to be delivered in December costs $76.12. This is a contango of a modest $3.44, or $8.26 (11.4%) annualized.

Why has the contango dropped so drastically?

Presumably this means that in January oil was being held offshore in tankers, and now it is being released into the market. That would make the on-tanker storage space less valuable and bring down its price.

That's the theme of the Izabella Kaminski blog entry to which I've linked you, and she has further facts and numbers.

It doesn't sound as if the recent price incraeses are the result of price machinations. It seems as if the refineries ran through their backlog and are now closer to being current than they were in January, yet demand or anticipated demand is great enough to move prices up even while crude is moving onshore.

That would be good news in terms of a recovery, although as I've indicated before the recovery in question is the inflation-stoked and inflation-soaked sort that will bring more than its own share of problems.