Why? You pocket $25 RISK FREE per barrel for just holding on to it for 11 months
What is the Catch? U need a place to store a couple of barrels of oil...
What is the CNBC Catchphrase? Contango
What is the math? Buy oil for February physical delivery (perfect, gives you time to organize this brilliant strategy), with the goal to sell it in January 2010, for an 11 month holding. According to most recent NYMEX quotes, you pocket exactly $25/barrel doing this trade.
Some geometry. A Barrel of Oil, is a standard volume measure equivalent to 42 gallons, or 158.9873 liters for our 2 European readers. This "black gold" is stored in 55-gallon drums, which have dimensions of roughly 24" by 34"; while traditionally these have been made of steel, you can buy plastic alternatives. Since you don't care about the quality of the drums you can buy used drums. According to this Craigslist seller you can buy bulk used drums for $8/each. The average circular barrel takes up on average 4 square feet in area and is roughly 3 feet high. You can stack barrels as many as you need high, limited by the height of the storage facility.
Next you want to find an average sized warehouse - presumably somewhere cheap, let's say Stamford, CT, which is terrific for two reasons 1) most of our readers are in the greater Stamford area, and 2) if there is a leak, you will pollute not some endangered crane breeding ground, but the domiciles of some of the richest people in the US. Elsewhere in the country, rates will be cheaper. According to this link, you can rent a 2,200 sq/ foot warehouse in Stamford, CT for $3000 month (this assumes no haggling). Plugging all these variables in the below spreadsheet, and you end up with a risk free profit of $41,800 over 11 months without moving your finger... And this is a scalable and leverageable idea - meaning you can potentially book unlimited profit, as long as you can find the storage, the barrels and someone to finance it if you don't have the upfront costs. Even if inflation has a "hyper" prefix at some point over the next 11 months (which we at Zero Hedge are very concerned about and believe it might happen), you will still be locking in a real profit.
Are we missing something, or is the market so dislocated there are just insane pockets of value... We think the latter... What is your take?
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26 comments:
surely this must be a joke
You also need insurance and need to factor in delivery costs to/fro.
Good luck finding a warehouse that will allow you to store hundreds of gallons of highly flammable, environmentally hazardous crude oil.
Crude isn't very flammable.
how do you propose getting this oil from cushing oklahoma .. into the plastic(?) barrels(from houston)... and then to stamford ct?
thats probably not free...
U Haul.
No seriously, logistics were based on a 2 minutes search on craigslist. you can probably buy a cheap barn on OK, purchase local barrels and wait for the check
This one has been going around for a little bit...the best option we've got going is renting a bunch of cargo vans and parking them in an OK wal-mart parking lot for a month. Feb/Mar spread is $8 and quite doable...
Um, labor costs?
http://www.sglp.com/
last time that I checked, they still have capacity
Were you watching Its Always Sunny before you came up with this idea?
Why not store it in a tank? Or buy some foreclosed gas stations in Michigan and store it in the ground?
Store your inventory in a warehouse in OK, that will dramatically increase your margins. Also, lever up 25x (to LMV) at L+7, that makes things a little more interesting.
I hear that the Fairfield Greenwich Office is vacant property.
your profits are likely to be even higher. The barrels can be resold once you are done with them.
You forgot to mention several things
1. The cost of the holding the hedge
2. Delivering to and fro the delivery point in Oklahoma/brining the oil to stamford
3. You have to be able to swap that oil with some end user. There is no guarantee that you could just find someone to buy it from you spot in the month of contract expiry
4. Many people who actually trade oil have already factored this idea in and are currently storing oil anywhere they can to take advantage of this profit. In due time the market (theoretically from arbitrage) should come in lines with this contango, considering that it is, in fact a contango (storage costs, hedge costs, interest expectations, end user demand, supply, transportation costs are all worth considering when you factor this idea in)
At the end of the day the most difficult part will be finding someone to buy the oil.
"Are we missing something, or is the market so dislocated there are just insane pockets of value..."
You are missing the various state laws and EPA regulations that would probably put you in the red. There is a reason the tankers being used to store oil are all parked on the other side of the world.
thank you for hollering at one of your two european readers.
am all about europe. should explain the occasional totally random soccer posts... way to go berbatov - man u all the way
Hell, Bridgeport would probably pay you to store oil in its old poisoned factories, or at least look well the other way provided you generate a couple no-show security jobs for friends of the Mayor. They would help you too, if you can't unload the stuff - oil spills might trigger an EPA emergency cleanup which is the only way anyone spends a nickel upgrading the place.
Be nimble in the new economy, people
Sounds eligible for TARP funds. Oil storage bailout.
what if oil trades below $35 after 11 months...
you sell the jan 2010 contract today. u promise physical delivery at that date. that is whole point
What about Canadian readers? There's a least one (me).
we love all our fans. we hope you international readers spread the word about zero hedge... but remember, the 1st rule of zero hedge is you do not talk about zero hedge... bit of a paradox there
It's an interesting situation. But seriously, the logistics of pulling this off are remarkably difficult. Which is precisely why the market differentiation exists. The holding costs are very low, but it has to be done on a grand scale to be worthwhile. For $40,000...it's not realistic for me, and $40,000 is alot of money.
For somebody who makes twice what I make, but happens to be in a field (say storage units) that can keep their costs lower, then you're talking a possibility.
For someone who makes 1/2 what I do and $40k is a fortune...they have no way to actually pull it off.
For someone who makes 3 times what I make - why bother for $40k?
Point is - the price differentiation is large, but there is no reasonable logistical framework to make it work for the average person. So it's a not a terrible dislocation.
On the other hand, one thing that it does point to is misread markets. If I'm in the oil business, and I'm still expecting $65 oil in 11 months, then I'm misleading my company. Oil is a volatile commodity, true....but oil inventories are ridiculous.
One reason I knew oil/gas prices were coming down? A friend of mine in the shipping business told me of tankers sitting off the coast with no place to offload in June. At the prices per barrel that were being paid, inventories were piling up but not showing on the books because they couldn't be offloaded. This problem is still in existence, since now its a production issue - oil nations have to produce more to make the same revenues.
I don't see high ($100+) oil prices again until the government "stimulus" hyperinflation kicks in. Which won't be for about 12 months.
is there an update on this trade please? i am looking for warehouse space in oklahoma
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