Urbane Gorilla!

Oil Price Fundamentals: Ignore the Hype

I think a little clarification is in order. Contango just means that the futures prices for oil (in this case) are higher the farther out you go. In other words, March futures cost more than February futures. Backwardization is the reverse.

Coincidentally, the cost to rent a tanker is cheap right now and there are spare ships available that can be used as storage. The day rate is about 8% of what it would have cost to store oil last year and as there is a reduction in demand for oil, there are a lot of spare tankers idling away.

Your statement "contango occurs when investors sit on a commodity " is not really correct. Contango occus when buyers are willing to pay more for a further out contract. The availability of spare tankers which can be used for storage is coincidental to our world recession.

Needless to say, this will make some oil producers happy (Shell has been reported as jibbering with elation and they are taking full advantage of the situation. Sau\di Arabia has also been noted as having oil laden tankers in various ports... They'd probably be happier selling right now.)

At any rate. Contango and Backwardization are just state of the futures contracts and the sipping/storage issue is coincidental.

jegan