If cushing is not full, why aren't people buying at $2 a barrel now and storing for one month, selling the June contract at the same time and collecting a $20k profit per contract?
Pretty tough TBH, unless someone is planning a war in Middle East and is grabbing up the contracts and you know about it...
Good question. The answer is because they don't think it will be profitable. Why aren't you?
These physical goods are much harder to store than bits.
For example, any container over 55 gallons is subject to EPA regulation and counts towards the total permitted site quantity. Storing more than 1,320 gallons above ground requires the site to have an approved SPCC (Spill Prevention, Control, and Countermeasures) plan.
You can store 42,000 gallons below ground but that requires excavation, permits etc.
Basically: it's difficult to do on short notice.
Further reading: https://www.epa.gov/ust/aboveground-storage-tanks
One point made when that fire occurred was that the tanks are placed in earthen basins, so that when tank fails, the flaming fuel just fills the basin, minimizing risk of spreading to neighboring tanks.
Either things settle back down to normal at some point, in which case you've made some revenue, but probably not recouped your investment. The Cushing facility managed to build 7 million bbl capacity in the early 90s for $60 million. I expect it would cost $80-100 million to build today. Current (inflated) storage costs are 50 cents per barrel. Let's say that rises a LOT and skyrockets to $2 - that's a gross of $14 million per month. Assuming $0 in overhead, you'd need for this contango to last for another 7 months to break even. If we assume something like a 30% margin, then you'd need it to last around two years.
Alternately, things don't return to normal. The market becomes depressed enough that airliners barely fly, and the global world consumption falls. The oil you're storing becomes cheaper to the point that storing it costs more than buying it, and there's nobody to sell it to. Your customers default, and your investment quickly becomes the thing that bankrupts you.
It is ironically the portability of oil-refined products (gasoline, diesel) that makes it so appealing for things that aren't stationary -- planes, cars, etc.
When is the physical settlement of the contract? My understanding is that physical settlement of the May futures contract is 21 April (that is, tomorrow).
So you don't have a week or two to build your big tank. It needs to be finished tonight.
https://www.cmegroup.com/trading/energy/crude-oil/light-swee...
My guess is that the build time is 1-2 years with 5 years of permitting up front. I also imagine building capacity is capped with a limited number of trained engineers/welders.
You hear about a sale on cereal for $0.01 a box. Great deal but then you find out that you can't walk there, you can only take Lyft/Uber and it costs $100 each way to get to the store. So in reality its not as good a deal as it sounds.
Hard to follow this analogy
And all of those facilities are full. The ones that aren't are charging an arm and a leg for storage services.
A lot of speculators were betting that oil prices were going to go up and had rented ships and filled them with oil they though was cheap, before COVID-19 even hit. Since then, oil prices have absolutely cratered.
Are speculators leasing the tankers on a month to month basis? What happens when/if the tanker isn't offloaded at the end of a contract?
It’s a pretty efficient market
See this article (Suspect rates have climbed even further as the storage trade becomes more lucrative.
https://www.forbes.com/sites/gauravsharma/2020/03/12/superta...
No one needs oil right now so if you take physical delivery it’s going to be sitting there for longer than a month.
They would not be the one holding that particular bag.
It may come to the point that you're paying some to take the contract.
The problem is that you have to store the oil for a month which is pretty expensive right now.