Falconaire Physical Oil Advantage

shutterstock_64278385What the Falconaire network of oil producers are doing is hiring supertankers to store oil at sea for up to a year in order to take advantage of the big disconnect between current oil prices and the futures trading price of crude oil for delivery at the end of 2015. It’s a strategy oil traders used in 2009 to profit on a recovery the last time oil prices crashed.

Here’s how the trade works. The oil trader leases out a supertanker for up to one year at a discount to the current market lease rate and then fills the tanker up with oil at the current price of around $50 per barrel. It then takes advantage of what is known as contango in the market, as the trader can sell that oil on the futures market, where it is fetching $8 more per barrel for delivery at the end of 2015. The oil trading company can then sit back and wait to collect its multimillion-dollar profit.

The profit potential is pretty compelling. A Very Large Crude Carrier, or VLCC, which can hold 2 million barrels of oil, can be leased for up to 12 months for around $40,000 per day. Meanwhile, oil can currently be purchased for $50 per barrel, which is about $100 million in oil per VLCC. However, the trader can sell oil on the futures market at $58 per barrel for delivery in late 2015, locking in $116 million for the shipment. Even after paying the shipper $14.6 million to store the oil for a full year, the trader can make a $1.4 million minimum in guaranteed profits. However, the traders aren’t necessarily selling futures contracts now to lock in a few million dollars in profits as there is a much larger profit potential by simply storing the oil and waiting for a big rally in oil prices, which would allow them to earn a much larger profit.