1) They fill tankers full of crude and store them (or keep them movable with no destination per se, just making sure the hull doesn't rust and what not). Some of the big names doing this are Citi's commodities trading unit, BP and Royal Dutch. A favorite spot to anchor your tanker is off the Orkney Islands in North Scotland or off the coast of Louisiana. For an interesting perspective see here. Companies likely to benefit from continuing contango are Phibro LLC which has a track record as hirer of tankers, and Frontline, the largest owner of supertankers.
2) They dump the oil in Cushing, OK. The town of 8,000 is in the middle of nowhere, but is where all West Texas Intermediate contracts are delivered. There is nothing memorable about the town except the hundreds of huge oil storage tanks which can store up to 35 million barrels. In a period of contango, the tanks are full waiting to be unloaded at higher contracts in the future. Wall Street companies that have a monopoly over the storage business in Cushing are BP, Enbridge, Plains All American and SemGroup (well, this one not so much any more), while other global players include Vitol and Morgan Stanley.
(Cushing, OK storage tanks)
So before people rent out warehouses in the tri-state area, they may want to consider purchasing a cheap second-hand tanker or renting out some reservoirs in the middle of the heartland.
Tomorrow - we pick up on the reason for the huge contango and how, aside from blaming the usual OPEC and hedge-fund suspects, airlines such as Southwest, JetBlue and Delta (which are underwater on forward oil hedges to the tune of billions of $) are likely culprits as well due to their meeting of margin calls in cash and weighing in on the light volume near-term crude market.Sphere: Related Content Print this post