Super Contango
Independent Investment Research

by John Dalt

01/22/09

Oil took a dive today. The weekly EIA reports came out showing a build in inventories. You may have heard the term ‘Contango’, it is a normal condition describing the relationship between spot prices and future delivery prices. The oil market is in now in ‘Super Contango’. Normally commodity markets trade at a predictable range into the future. If you can buy oil at $38.00 on the spot market in January, then the futures contract for delivery in June would be at that price plus carrying charges. The carrying charges include interest, storage and insurance to hold the commodity until delivery. The math is pretty simple if we assume a carrying charge of $1 per month: buy a barrel of oil for $38 + 5.00 = $43 cost to deliver in June. The June contract presently trades over $52 per barrel. This leaves a potential profit of $9 per barrel. This ‘Super Contango’ is attracting players like flies in a barnyard. Cushing Oklahoma storage is almost full, tankers are being rented for long term rates to store oil that is being bought on the spot and contracted for delivery on the futures market. This is not a play for the small player. A two million barrel super tanker would cost $76 million to fill plus $10 million to park for five months with a profit lock of $18 million! You might lose a dollar here and there but quite an arbitrage situation for player willing and able to play it. This play is so attractive that tanker rates have risen over 50% in the last 20 days! Estimates are that over 80 million barrels of oil are currently stored in tankers. Why are futures prices so out of whack? Three obvious reasons:

·         End users like refiners and airlines are working the futures market to lock in supply at a favorable rate.

·         There is still a ‘threat’ premium on oil.  There are countries that will resort to terrorism to scare the price of oil higher since they are dependent on the money to support their governments.

·         When  the world economy recovers, there is not enough oil. 

You might want to research General Maritime (GMR) and Overseas Shipping Group (OSG).  OSG appears to be the larger and stronger country.  They will profit from the current storage demand, whether they lease long term or capitalize on the higher shipping rates because of the demand.

Two notable stocks today. Walmart sales in December were below expectations; the stock was spanked, closed down $ 0.27 @ $48.87. Immersion (IMMR) traded down to $4.23; they have $4.26 in the bank for every share! This is the company that makes ‘haptics’; that is the software that makes game controllers, blackberries, and operating room training mannequins vibrate or click when you touch them. This gives the consumer touch feedback. This company is not yet profitable, but they just signed an agreement with Visteon for incorporation of their products in new cars. They could be a great multiplier in the next couple of years.

I wrote on Dec 1, 2008 about the ramifications of the India-Pakistan conflict on U.S. foreign policy.  India suffered a terrorist attack and blamed Pakistan; both these countries have nuclear weapons.  Al-Qaeda operates out of Pakistan with relative impunity, and India is in the middle of a national election.  It appears the Indians have accepted that the al-Qaeda was responsible.  One of my predictions of fallout has come true.  The route for our military supplies through Pakistan is now closed due to al-Qaeda attacks.  Pakistan has moved troops to the India border rather than pursue al-Qaeda.  U.S. and NATO supplies for the war on terror in Afghanistan came through Pakistan.  All supplies now have to be flown in or come through the North through Turkmenistan.  This route is no joy ride.  A quick glance at a globe shows the difficulty of this route.  Our military has their hands full in this cauldron.  

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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