Four Ways to Capitalize on 'Super Contango'


"Super contango. . .signals an arbitrage opportunity that's literally too good to pass up if you've got the means to capitalize on it."

Many investors have given up on oil, fearing that a fall from grace precludes a rise in price from the ashes. But it's worth noting that the oil markets are right now in a rare state of 'super contango, ' which suggests that the markets expect far higher prices by next year.

According to the New York Mercantile Exchange, June crude oil contracts settled at $52.14 on Tuesday, which represents a state of 'super contango'—and an excess potential profit of $8.83 per barrel ($52.14 - $43.31 = Excess Potential Profit of $8.83). But only for traders who can buy oil now and store it until then.

Super contango is a rare situation that causes most traders to drool—myself included—because it signals an arbitrage opportunity that's literally too good to pass up if you've got the means to capitalize on it. But, as usual, there are all sorts of unanticipated consequences— including a phenomenon we don't see very often—hoarding at sea.

Tanker rates are skyrocketing as companies literally top off very large crude carriers with the 2 million gallons they're designed to carry—and then park them offshore until prices rise. In the meantime, they're also selling the June futures and locking in profits above and beyond what it costs them to buy and store their stash of this 'black gold.'

As many as 80 million barrels of crude are being stored at sea around the globe, according to Frontline Ltd., the world's largest owner of supertankers. That's nearly enough to supply the entire world's demand for a day.

History suggests that far safer bets include mid-process transportation companies or land-based alternatives. Both pay healthy dividends that can help stave off a personal recession no matter what happens with oil prices. That's always important in rough markets.

For futures-savvy investors, there's an even more direct bet. Data shows that 'mean reversions' are particularly powerful phenomena when it comes to commodities, so the fact that spreads have risen to all-time highs suggests that it's only a matter of time before they reverse. One way to potentially capture that would be to buy March futures while selling June futures.

Risk management is paramount, regardless of which path investors choose. Super contango sounds too good to be true and we all know the old adage: If it sounds too good to be true. . .

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