Commodity Buzzword Bingo: Contango and Backwardation

Posted by Bob Kessler

The crude oil tide has turned.  For several years the oil terminal at Cushing OK has been receiving more crude than it could ship out.   There were two related reasons for this circumstance.  First, there was not enough pipeline capacity to move Balkan crude down to the gulf coast refineries.  Second, traders felt confident that the cost of oil would continue to rise.  That meant storing purchased oil for future sales could actual increase the value of the trade substantially. 

This condition is called Contango

Recently southbound pipeline capacity has increased.  Companies have reversed and repurposed existing pipelines.  Others have built new pipelines.  The southern portion of the Keystone XL pipeline is coming in the future.   That means the flow of oil to the gulf has increased.  It has also reversed the localized Contango condition.  Trader's are concerned if they hold on to the oil too long, they could lose money. 

This concept is known as backwardation

This means that the futures price is lower than the spot price.  Under backwardation, storing oil is not attractive.  What does this mean from an oil terminal perspective?  A flurry of activity to move the oil that has been stored, more demand for oil movement, but less demand for tank space.  Oil movement has a higher risk and lower profit margin for terminals.  Contango backwardation resized 600

*Source wikipedia: Graph showing contango and normal backwardation market conditions in the forward market

Moving oil as efficiently and safely as possible helps defray costs and maintain margin for terminals.  PortVision's TerminalSmart system is specifically designed to improve the supply chain and improve marine terminal efficiency.  You can learn more about TerminalSmart on PortVision.TV.  Or visit our TerminalSmart page.

PortVision 360 AIS Vessel Tracking

Posted on Sep 17, 2013, 3:59:00 PM

Topics: Blog