Not Everyone is Losing Money

Posted by: Steve LeVine on January 08

Pure traders are the only ones left standing in the crude oil speculation business now that oil prices have collapsed, sending hedge funds, college endowments and pension funds scampering. And these traders have found a new way to make solid double-digit profits. It’s called betting on the contango.

What’s contango? It’s when the market as a whole bets that oil prices are going to steadily rise well into the future, and traders react by buying two contracts on the New York Mercantile Exchange — say, one for the purchase of oil next month at $41.24 a barrel, and a second contract to sell it in February 2010 for the going rate of $60.22 a barrel. For those lacking a calculator, that’s a cool 46% profit.

Here’s the catch — you’ve got to have some place to store the crude, and such places are so filled up that traders are now renting 2-million-barrel supertankers to store their contango bets.

I write about this as part of a story just posted on-line at Business Week.