Traders and tanker-owners set to cash-in, say KPMG
Oil traders and tanker-owners are set to cash-in on falling oil prices as tumbling prices have caused the market to move into a steep ‘contango’, meaning that investors are willing to pay a premium to receive oil at a later date, according to KPMG.
The depressed demand picture coupled with the abundant global oil supply has seen oil prices fall to near six-year lows. As a result of this, the price for oil in the spot market has traded below the price of oil for future delivery, a market condition known as contango. This differs to a normal backwardation structure where the price of a futures contract trades below the expected spot price.
KPMG says that traders with storage ability will be able to cash-in on the contango market by storing the oil and locking-in higher future prices. At today's prices, September 2015 Brent crude oil futures are trading at a $6.35/barrel (€5.4/barrel) premium to February 2015.
George Johnson, Executive Advisor in KPMG's oil and gas practice said: “The widening contango we've seen over the last few weeks will benefit traders with access to storage facilities. This means traders are not forced to sell at the current spot price; instead, they can store the oil and lock-in a higher future price - providing shareholders with almost risk-free profits. In a contango market the trader with storage options is the one holding the aces.
“Over the coming weeks traders will be reviewing their storage economics with a view to capitalising on this market phenomenon which looks set to stick around for a while.
“Tanker-owners also look set to benefit from the Brent crude oil contango situation as traders seek alternative storage options. Further weakness in the Brent structure will almost certainly make floating storage a viable option”
However, while traders and tanker-owners are set to benefit from the situation, KPMG warns that smaller upstream oil companies operating below break-even levels may struggle.
Anthony Lobo, Head of UK oil and gas at KPMG, said: “There's little comfort out there to suggest prices are due for a significant upside correction any time soon – so further selling pressure is a real possibility. Smaller companies and marginal shale producers without strong balance sheets and access to funding, may struggle to weather the storm, particularly if there are further price falls in the pipeline. We've already seen significant cutbacks to capital expenditure for 2015 across the industry as a whole; however, we're yet to see scale-backs to production.”