Why do the Physical Players not take $3 g'teed profit

G

garywernick

Hi

Can somebody please explain to me why the WTI spread for May 10 to Aug 10 is currently about -$4 but the physical cost of holding a barrel of crude is at most $1.20c for this period

(According the EIA "$1.50/barrel if it had its own storage and $4/barrel if it had to rent storage tank space" http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/stocks_text.htm - does anybody know if this estimate includes the charge for interest?).

So if I was one of the people with lots of barrels of oil stored near Cushing why would I not sell the May and buy back the Aug and just sit physically on my oil for another three months and take a guaranteed $2.80 a barrel.

Presumably there is still some storage capacity left as last Weds inventories figures went down.

Am I missing something.

Gary
 
maybe they have a different estimate of volatility?

Or they fund their trade in a non-usd currency?

No clue, but these could be reasons or issues to consider
 
Quote from garywernick:

Hi

Can somebody please explain to me why the WTI spread for May 10 to Aug 10 is currently about -$4 but the physical cost of holding a barrel of crude is at most $1.20c for this period

(According the EIA "$1.50/barrel if it had its own storage and $4/barrel if it had to rent storage tank space" http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/stocks_text.htm - does anybody know if this estimate includes the charge for interest?).

So if I was one of the people with lots of barrels of oil stored near Cushing why would I not sell the May and buy back the Aug and just sit physically on my oil for another three months and take a guaranteed $2.80 a barrel.

Presumably there is still some storage capacity left as last Weds inventories figures went down.

Am I missing something.

Gary
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Gary,

Your spread logic is backwards. Long inventory=short futs as a hedge, so you'd already be short May(given your example). To lock in the $4, you'd need to buy the May/Aug spread, not sell it.

I don't know if Cushing is a whse or refinery, but transportation to get it there would eat into your $2.80 margin. If there is also premium/discounts on the quality of your crude that could be a factor(positive or negative to margin).

So if this trade is not being done, it's because the selling basis is too wide and/or higher back-month futs are expected.

Il Principe
 
There is a reason for the pricing. storage, risk, and a whole lotta other things.

If it were this easy, every hedge fund and investment bank would be all over this like ugly on a warthog...
 
Quote from TraderZones:

There is a reason for the pricing. storage, risk, and a whole lotta other things.

If it were this easy, every hedge fund and investment bank would be all over this like ugly on a warthog...
More...

You basically said what I was thinking, as there are arb players everywhere, but I also thought it was a good question. And the explanation was good too.

BTW, what makes you think warthogs are ugly?
 
Although I am not sure that I am totally convinced that this price differential is not exaggerated - presumably there is a real squeeze occuring on the storage at Cushing. Is there a warehouse or something out of action?
 
Is it possible that the guys with the oil tanks already have taken this trade? The spread price may have drifted into contango because all the people who could profit filled up their tanks.
 
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