Oil-Contango Trade That Boosted BP Profit Fades: Energy Markets

Ian Taylor, president and chief executive officer of Vitol G
Ian Taylor, president and chief executive officer of Vitol Group, attends the 15th Asia Oil & Gas Conference in Kuala Lumpur. Photographer: Goh Seng Chong/Bloomberg

The profit from stockpiling North Sea crude, a strategy that helped boost BP Plc’s earnings by $500 million in last year’s first quarter, is evaporating amid rising refiner demand and oil-field maintenance.

The price advantage for traders who buy and hold Brent crude for a month instead of delivering it immediately has shrunk 70 percent to its lowest in almost a year, ICE Futures Europe exchange data show. Vitol Group, the world’s largest independent oil trader, said on June 24 the trade no longer makes sense.

Summer demand during the driving season has pushed current Brent prices up 3.6 percent this week. Later-delivery prices have been higher than those for front-month contracts for the past two years, making it profitable to buy and store oil on ships. The amount of crude held on tankers hired for long-term storage has fallen 60 percent this year to 17 million barrels as of July 2, according to ICAP Shipping International Ltd.

“The bulk of that excess inventory has been worked off,” Paul Horsnell, head of commodities research at Barclays Capital in London, said in an interview. “The incentive to add to floating storage has disappeared.”

The discount, or contango, for August Brent futures versus September fell to 19 U.S. cents a barrel on London’s ICE exchange on July 2, the smallest difference in 11 months between the two contracts nearest to expiration. It was at 22 cents today, compared with an average 98 cents last year.

Brent crude for August settlement traded for $75.59 a barrel as of 15:57 p.m. local time.

BP Profit

London-based BP said “interesting trading opportunities.” helped it earn $500 million more than normal in the first quarter of last year. The advantage offered by the contango wasn’t as strong by the final three months of 2009, Chief Financial Officer Byron Grote said in an interview on Feb. 2.

Storing oil at sea costs 65 cents a barrel a month, more than the 29-cent premium on ICE futures, according to data from Simpson Spence and Young, the world’s second-largest shipbroker, and Bloomberg. That compares with a storage cost of 84 cents a barrel in January last year, when the spread reached $3.

Rental income from supertankers on the benchmark Saudi Arabia-to-Japan route slumped 71 percent to $21,080 a day since June 16, according to prices from the London-based Baltic Exchange. As much as 100 million barrels of oil was kept at sea in April last year, enough to supply Europe for five days, according to Frontline Ltd., the world’s largest supertanker operator.

‘No Sense’

“You only store oil if it makes sense to do it and today it doesn’t make sense,” Ian Taylor, chief executive officer of Vitol, said in London on June 24. “All the major bits of floating storage both in crude and distillates have disappeared from the market.”

The increase in demand has soaked up much of the crude in storage. U.S. refineries operated at 89.8 percent of capacity in the week ended July 2, according to the Energy Department, the highest level since January 2008. In Europe, operating rates surpassed 80 percent for the first time in a year in recent weeks, Vienna-based consultants JBC Energy GmbH said on July 1.

“You’re coming up toward the peak seasonal demand period in the third quarter, where refineries are coming back from maintenance,” said Lawrence Eagles, head of commodities research at JPMorgan Chase & Co. in New York. “That is very clearly having a tightening impact on the spreads.”

Inventories are also falling at Cushing, Oklahoma, the delivery point for New York Mercantile Exchange futures contracts. Stockpiles fell 0.5 percent last week, the Energy Department reported yesterday. Crude in New York ended yesterday’s session at $75.44 a barrel, up 1.9 percent.

Loading Programs

Daily shipments of the four principal North Sea crude grades that comprise Dated Brent were scheduled to drop 22 percent in June to their lowest in at least three years, as fields close for maintenance, loading programs showed.

Combined loadings of Brent, Forties, Oseberg and Ekofisk crude in the North Sea were scheduled to average 964,900 barrels a day last month, compared with 1.235 million barrels a day in May, according to the programs. The June loadings are the lowest since August 2007, when Bloomberg began collecting the data.

While the Brent price spread has narrowed this year, it widened to 31 cents a barrel this week, signaling some traders are becoming less concerned about the availability of oil.

“You can’t expect this tightness to continue in perpetuity,” said Eagles. “It could carry on for another two or three weeks. As we get into September, October, you would expect to see seasonal maintenance again hit the refining sector, and that will ease some of the crude demand.”

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