Contango leads to mass sea storage

23/04/2009

Millions of barrels of oil are being stored at sea because it is more profitable to sell crude in the future than it is in the near-term.

A scenario known as contango in investment circles is encouraging oil firms to store millions of barrels of oil at sea, awaiting a better price for the commodity.

Contango is a situation when it is more profitable to sell oil contracts that have a delivery date set months or years in the future than it is to sell near-term delivery contracts.

Speaking to Reuters, Jens Martin Jensen, acting chief executive of Frontline, one of the world's largest tanker owners, said that up to 100 million barrels of oil are being stored at sea, halted en route to refineries where they would be processed into products such as heating oil.

"Three months ago it was probably close to 50-60 million barrels and then of course 12 months ago maybe there was nothing in storage where the oil price was," he said.

The opposite of contango is known as backwardation, where traders are encouraged to sell crude contracts to make an immediate profit.