A steep contango that saw energy majors profit from pumping millions of barrels of oil into storage since Q3 2008 is set to decline in the second quarter.
A contango market structure occurs when prices for delivery out into the future rise above nearby-by supplies, making it economical for a company to store oil instead of refine it.
BP, which owns almost one fifth of crude oil storage at the Cushing, Oklahoma, US, facility reported Q1 supply and trading contributions to earnings were almost $500 million (379 million) higher than what would be considered normal because of the contango.
The contango has now narrowed from the $5-6 per barrel seen earlier this year to about a $1 per barrel, and despite almost record low storage costs, it is unlikely that more oil will be going into storage.
We don't anticipate that this level of contribution is likely to persist in subsequent quarters, Byron Grote, BP chief financial officer, says. We would actually expect (supplies in storage) to be probably drawn off during the course of the second quarter.
Canadian independent oil explorer Nexen, which also has storage facilities at Cushing and at Hardisty in Alberta, also reaped the financial benefits of the
contango.
The companys Marvin Romanow says it earned CAD$83 million (52 million) in cash flow in Q1, much of it due to the company's storage of oil to take advantage of contango, a strategy still in use.
This has been such a common strategy that people have filled up virtually all the fixed storage around the world and they've now gone to floating storage to do that as well, Romanow states. But the shape of the forward curve will change and as it moves down we'll store less oil, we'll use the tankage that we have to follow blending strategies that will allow us to make a return.
