The supertanker TI Oceania was built to ferry vast quantities of oil across oceans, but for the next year it is expected to remain anchored off the coast of Singapore, storing millions of barrels of oil for Vitol SA, a giant trading house.
According to shipbrokers and analysts, the 3-million-barrel megaship—one of the largest in the world—is just one example of efforts by traders to turn a profit in the slumping global oil market. The strategy is simple: buy and store oil at cheap prices now, selling futures contracts to lock in the higher oil prices expected later.
“It is one of the easy ways to make money and that’s one of the interesting things about it from a trading perspective: It’s a counter cyclical source of profit for the Vitols and Glencores and Trafiguras,” said Craig Pirrong, a finance professor at the University of Houston, referring to a handful of the biggest oil traders in the world.
The opportunity to stockpile oil in such large quantities has come from the dramatic shift in the market for the commodity in recent months. Since June, prices have collapsed, tumbling by more than 50% amid soaring production from the U.S. and unwavering output from the Organization of the Petroleum Exporting Countries, at a time when global economic growth—the main determinant of demand—is slowing.
The oversupply has given rise to a so-called contango in the market, when the current price of a commodity is lower than prices for delivery in the future. That makes it attractive for buyers to purchase oil now at the cheaper rates, store it and strike sales agreements at a higher price in the future, locking in profits.
The price difference between the March and August contracts for Brent crude oil, the international benchmark grade, is currently $6 a barrel. That is the steepest premium since an oil-price slump in 2008 and 2009.
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