Last year at around this time I wrote a fairly extensive blog entry about crude oil and contango.
As a refresher: 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.
One would naturally expect this discount to be closely related to the costs of storage space. After all, if I buy crude today and tell you to deliver it six months from now, you have to keep it somewhere during the interval, and pay the maintenance on the storage facilities. If I take delivery now but I don't use it over the six months, then the cost of storage falls on me.
So: a year ago I simply measured the per-barrel price for March delivery (which was $46.47) against that for August delivery ($53.81) and extrapolated that into an annual rate. The five month delay in delivery cost the buyer $7.34 at that time, which extrapolated into an annual figure would have been $17.64, or about 38% of the price of the barrel.
Checking the figures a year later ... the price of a barrel is now $74.14 for March delivery, and $77.08 for August. That's a difference of $2.94 for storage. This annualizes to $7.06. That's roughly 9.5% of the price of the barrel.
Why has contango fallen so drastically over the course of the year? People were noticing the drop as early as May. But I can find very little blogospheric commentary that addresses the reason for the drop. Could storage space have gotten less expensive?
Let us go back to basics. Supply and demand. There could be more supply (available space) if the owners of storage facilities haven't been re-filling them as rapidly as they've been pumping the oil out toward the refineries and its trip toward retail use. Or perhaps the large contango of a year ago inspired entrepreneurs to invest in the creation of new storage facilities. Those facilities have since been coming on line, and that has driven the contango down, just as it should according to the textbooks.
Or it could be a demand issue. Anyone who wants to join in with some helping hypothesis ... I'm all ears.
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