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Oil Futures Curve Forecast: Downward Shift And Increased Contango

Michael Roat profile picture
Michael Roat


  • I anticipate a downward shift across the oil forward curve, meaning lower oil prices across the entire curve.
  • I expect the short-end future prices to decline at a faster rate than the long end as storage capacity constraints re-remerge. This would steepen the curve and increase contango.
  • The chances of a V-shaped recovery in the global economy and oil demand over the next 12 months are minimal.
  • Undervalued oil tanker companies as storage and contango trade plays are the best way to invest in this idea.

I will start with a simple statement. If you are not willing to take delivery, you should not be long oil futures right now, because storage constraints are what it is all about. Oil futures prices went negative last month because people realized this, and it is still as much of a problem as ever. South Korea and India have reached storage capacity. Goldman Sachs predicts the United States is next here within weeks, which means we have yet to see the worst from an oversupply perspective. The image below is the current Cushing, Oklahoma storage stocks, with the black dotted line showing capacity.

(Image courtesy of WSJ and EIA)

Oil longs are getting excited that the EIA is reporting 5-8 million barrel crude builds rather than 10 million. These are still huge inventory builds and are on pace to test capacity storage limits. Below is a chart from the WSJ showing the largest US commercial crude inventory builds in history.

According the Journal, a fleet of oil tankers carrying 40 million barrels of Saudi oil is due to arrive in the U.S. golf coast in mid- to late May. This is "about seven times as much as the US gulf took from the country in a typical month last year". This oil was pumped pre-output cuts, which means the Saudi-Russia price war oil is still making its way around the world and the cuts will take time to take effect on supply. Even if oil demand has bottomed, it would more likely stabilize at a low level rather than vault back up to 2019 levels.

The same can be said about corporate earnings, as Jim Chanos has pointed out to the stock longs. The common argument is six months from now the economic and business environment will be better, and the

This article was written by

Michael Roat profile picture
I have approximately 8 years of experience trading and 10 years of researching, specifically relating to central banking and credit cycles. I have developed a keen ability to synthesize and understand complex macroeconomic information very effectively and quickly. I have an in-depth understanding of international capital flows, foreign exchange rates, and global bond, equity and commodity markets. I have extensive experience tracking economic data and developing macro-economic investment theses. I specialize in and often express views relating to currencies, monetary policy, real (inflation-expectation-adjusted) interest rates and bond yield differentials. I avidly read and process daily economic news, analysis and market data. I can contribute to relevant economic thinking and discussion as well as generating and assessing investment ideas using the knowledge I’ve developed through first-hand experience trading in competitive financial markets.Disclaimer: I am not a registered financial advisor. I am a newsletter provider and nothing published under the name Michael Roat or Tri-Macro Research should be considered financial or investment advice.

Analyst’s Disclosure: I am/we are long DHT, FRO, TNP, TNK, NAT, STNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Call options.

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Comments (36)

Thanks for the well-written article to which i agree.
Did you follow Craig Stevenson in his Call? He was very cautious. I was surprised. I was surprised about that because DSSI has exposure in product tankers - should hold up even better when crude storage story is over. I heard a bit disappointment about stranded vessels. So any thoughts about this cautious attitude?
Michael Roat profile picture
Yeah I read the call transcript. I agree more with Euronav in the sense that even when the inventory draw phase begins its will be later than Q4 of this this year and the contango isn’t going away. So even beyond logistical reasons, when inventory draws begin spot or near term oil prices will be lower than further out on the curve, so Traders will continue to book tankers for profit. Chartering schedules are varied so I agree more with the slow release of ships back into the fleet idea. When de-stocking of oil begins, the near term oil inventory and supply will still be more than ample so the contango won’t evaporate.. Also moving into a recovery in global demand the order-book is low and fleet is old so it’s not a catastrophic hangover type situation. There may very well be a hiccup next year but overall I think tankers will have a relatively speaking smooth recovery cycle and the share prices have already bottomed. See my response below to Tim Conway as well. Thanks.
Thanks Michael for the fast reply. Scorpio was near to Call for a new supercycle for product tankers. Euronav very positive, INSW Same. So interesting to see how this will play out. Maybe DSSI were frustrated about not catching all the good rates. - One Remark: there is a Chance for a second wave of Covid-19 in Fall / Winter. That would extend the time for storage needs. And this „Option“ is clearly not priced in yet.
JWVGOETHE profile picture
The thesis gets stronger by the day. And one wonders if the hydrocarbon folks are at all privy to what the actuaries, MDs, NGOs, laboratories and various other SMEs from the G20 are seeing, saying, and (often privately) thinking. There has been a war for some six (6) months, and the risk profile is still far from well known (as where it is for items such as Ebola). How we respond to the increase in new cases post re-opening will be telling. Science and policy also support the oil tanker thesis, is my point. Thank you for the article.
canyonwlf7 profile picture
NAT drop daily
Because NAT is more hype than substance.
Great article, valid points. Hoping that oil longs can only believe in a fake reality for so long. $DHL
"According the Journal, a fleet of oil tankers carrying 40 million barrels of Saudi oil is due to arrive in the U.S. golf coast in mid- to late May. This is "about seven times as much as the US gulf took from the country in a typical month last year". This oil was pumped pre-output cuts, which means the Saudi-Russia price war oil is still making its way around the world and the cuts will take time to take effect on supply."

A key point most of the tanker bears aren't understanding.

Thanks for the article, very nice.
Will those tankers with the Saudi oil be able to offload ?
The tanker stocks keep falling. Is the market so irrational right now that investors are missing out on this opportunity?
Timothy Conway profile picture
Thanks for a great article, Michael! Tanker-sector journalist Greg Miller's article from last night (May 7) is really worth reading, and contains numerous key insights. He assembled lots of quotes from the CEOs of EURN and INSW on their conf. calls yesterday to show that both the contango trade AND the actual storage problem for crude & refined product producers are going to be with us longer than the tanker-bears are thinking. Bearish analysts Jon Chappell and Joakim Hannisdahl are wrong that this is only about a short-term contango trade. Bullish analysts like Randy Giveans of Jefferies are going to be proven right. You will, too! :- )

Floating storage is far from dead in the water
Greg Miller, Senior Editor Thursday, May 7, 2020

Disclosure: long DHT
Michael Roat profile picture
Thank you for the link.
Michael Roat profile picture
Good read. I was also taking a look at the Euronav conference call transcript and I agree with Hugo De Stoop (Euronav CEO). To paraphrase there are two scenarios when floating storage is drawn down and ships are released back into the fleet - slow or fast. It will likely be a slow process because for one, ships are chartered for longer and various timeframes. Second, the contango is unlikely to evaporate quickly because if all the floating storage is quickly released into a global demand scenario of around 100mbpd it would keep down the front end prices and encourage traders to play the contango game which means oil storage on tankers would remain for profit rather than logistical reasons.

So there will be an interim phase where tanker rates comes down in maybe 12 months or so but I think investors are looking at that as too near term of a possibility and are also exaggerating the negative effect it will have on rates. With the orderbook at 23 year lows and an aged fleet, if there is a big pickup in global oil demand, actual transport rates will move higher on that type of demand in the longer run. So I think it will balance out and be a relatively smooth process between the near term storage demand, inventory drawdown phase and long term return to shipping demand. Tanker companies have already bottomed for the next several years in my view. BUY rating in my opinion for the near term and long term.
Free Cash Flow 50 profile picture
While we certainly don't know what 2021 will look like, the consensus is that it'll be a crap year for rates. Given the age of the fleet, it'd be great if companies would begin scrapping now to front run what they see as a bad year. Contango is likely over with and if demand continues to drop, scrap early to help rates. I know they are playing the game of thinking they can put an old rust bucket out on charter but it is looking increasingly likely they won't be able to as demand increases and the destocking begins in force. If we are at a new oil equilibrium of around 90mbd or whatever it ends up being, in my mind, tankers need to adjust for that new reality and shrink the fleet accordingly.
That is interesting. My gas per gal just went from $1.41 to $1.65 in 10 days. My calculation says that is higher and not lower.
Yeah because gas at the pump always equals the price of oils direction.

At the very least there is weeks of time difference between the two.
I heard a lot of people that don't understand how it works say that gas should be free because WTI went negative for a few hours.
Belaire profile picture
Thank you for this article. Is there an ETF for tankers ? I normally hold just TNK but a 'basket' of tanker stocks seems appropriate now as they each have a their own mix of boats, perhaps routes and preferred customers. Too much minutia for me to pick just one winner.
Robert.Stueve profile picture
Not that I found on the etf search database
Michael Roat profile picture
I am not sure about a tanker ETF. The basket I am long in the disclaimer is pretty well varied and includes different size crude carriers and product tankers as well. I would add Euronav and DSSI to a tanker basket as well.
Dividend Investor 101 profile picture
I am long on the tanker stocks too. I think supply is still stronger and demand and the storage issue could still become a problem and oil prices could go down. Thanks for the update. I really like the long-term historical chart of rates.
If storage reaches its limit in the USA the physical oil stagnates in the pipeline and can trade negatively as few buyers are left, this then causes a natural balancing of the market as supply gets cut etc
I read this morning USA and Canada are down 4,5 mil bar a day so we are near a total of 15 mil bar a day cuts which may imply the market, still in a surplus today, will balance 1st half June
The difference between a spot month futures and the next is determined by what the trade will pay for the switch calculating their carry costs plus profit (not if the warehouses are full as WTI is an in store contract)
Michael Roat profile picture
Goldman's Currie says land storage will run out and oil wells will have to be immediately shut off and it will force a sharp rebalancing. That is his view. Mine is, there is a difference between land and floating storage. So the smart shale companies are already chartering tankers to keep production and cash flowing. Because an oil company that doesn't pump oil doesn't make any money. Hess Corp is an example of this linked below.


In the longer run, I think the real oil bull market will be driven not by short run production shut offs in response to collapsing demand and storage capacity limitations, but a long term lack of investment in new production capacity. So when the global economy moves past this, likely due to a vaccine at some point, there will not have been enough investment in new oil production capacity and it will lead to a shortage. New investment in oil exploration and production has come to a screeching halt and the writing is on the wall for significantly higher prices in 2-3 years. But again, that's much more of a long term story as it would be accompanied by an increase in demand.
Eric Neuwirth profile picture
Thank you Michael for an outstanding article.

Your view on the dollar makes me question my long position in the gold miners, but since that is not the main point of your article, I'll save that discussion for another time.

On the other hand, I agree with your view that oil tankers are the best way to play the continuation and steepening of contango in crude. This will be the catalyst that gets the previously unloved tanker names moving higher.

Charts of the tanker stocks support this. The cup and handle formation in $DHT’s five-year chart remains in tact. I've been saying for several weeks that the catalyst for a $DHT breakout above $8 will be the unexpected crude inventory builds that occur when world economies do not re-open as smoothly as markets may be expecting. And while you and I are still in the minority with this view, now is the time to build a position.
Michael Roat profile picture
Thank you. In my view, undervalued tanker companies are a much more profitable way to speculate against oil than producers or futures which have already declined a lot.

I took some significant profits on RGLD put options when it fell to around $70-$80 a share. I still hold the short position and it's still profitable but obviously lost value since RGLD has jumped back up. Holding the options as they expire January 2021. I agree about the re-opening not going as smoothly as expected.
JWVGOETHE profile picture
Hello Eric. If I may, as to "[...] world economies do not re-open as smoothly as markets may be expecting. And while you and I are still in the minority with this view [...], I would suggest that ~ "behind the scenes" the folks ~ "modeling out policy" agree with you. From what I see and hear at least, during their "internal" calls, the influential subject matter experts are frankly dreading some of these rather poorly planned re-openings (in the USA at least). Cheers, Ben
TimUwe profile picture
It seems to me if storage reaches its limit, then oil is worth nothing until that surplus is gone. Stored oil prices will equalize and also remain low at current demand. Demand for the remaining year looks bleak, at least for investors. But great for consumers. The 64 dollar question is will oil demand pick up, when and who will sell out first?
Me too.
Interesting perspective. Thanks!
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