Another episode of “How does THAT work?”
Today I learned about contango, specifically, how it relates to the oil industry. Currently, crude oil is trading at about $30ish a barrel, a far cry from the $147 a barrel it was last summer. This has caused a few companies to hoard some oil. Basically, there are people with lots of money who buy up a couple million barrels worth of oil at current prices, stick it on some super tanker that costs like $50,000 a day to rent/operate (plus extraneous costs like security to ward off pirates) and get some schmuck to sign a contract promising they’ll buy the oil in the short future (like 6 months or a year) at $55 a barrel. Costs millions, but they make millions more. Sounds dumb, right? Especially since we’ve seen nothing but downtrends for oil. But there’s a giant trade in this stuff and big companies are hoarding oil to sell it later at a speculative cost.
It’s sort of like shorting the market, except with the risk of piracy and more complications with logistics. You can make a ton more money though, but you also incur more risk (bigger the risk, bigger the gain and also bigger the loss). Thing is, who would sign a deal to buy oil at more than $20 a barrel more than the current price? That means you expect some significant gain over $20 in the amount of time you signed the contract for. When we’ve seen a $100 price drop in the per barrel of oil AND Texas is sitting on all this oil because of a drop in demand, plus all the political shifts to “go green” and all, I don’t really see who would sign such contracts. But then, Wall Street lost like $7 trillion selling what was essentially fracking nothing (bad loans on no collateral ahoy) so I guess there’s really a buyer for anything, even if they have nothing to buy with.
The more I learn about the economy, the more I wonder if anyone knows what the hell they are doing. Well, aside from the scammers.