Banks Using TARP Funds to Speculate in Oil Markets

Prepare to be deeply offended. Banks to who the US government has given billions of dollars of loans are using this money in order to speculate in global oil markets. First, let's start off with the news brought up yesterday on Daily Kos by Scout Finch. Around 80 million barrels of oil are being stored at sea.

Norway's Frontline (FRO.OL: Quote, Profile, Research), one of the world's biggest oil tanker owners, said on Friday oil firms were storing "about" 80 million barrels of crude oil at sea, possibly the highest in a quarter of a century....

30 to 35 Very Large Crude Carriers (Very Large Crude Carriers) capable of carrying two million barrels each and 10 Suezmaxes with a capacity of a million barrels each were being used by oil firms for floating storage in the last few months.

Now, you may be asking yourself, why the hell would oil companies be storing up oil at sea. The answer is something called the contango trade.

This situation, where the price of a near-term future contract is worth less than oil for delivery in several months, is called contango. It's the norm in oil markets, with the price gap representing the cost of storing the oil and locking up investors' money.

But such a distance between contracts is unusual, sparking industry insiders to term the phenomenon -- which reached an apex in late December - "super contango."

When the price spread is greater than the storage cost, "there is an opportunity to arbitrage at a profit without risk," said James Williams, an economist at energy research firm WTRG Economics.

The article also makes clear how this works.

The ongoing economic turmoil has pummeled oil prices and created record levels of contango. On Dec. 19, the expiring January contract ended at $33.87 a barrel, $8.49 lower than the February contract. That's the widest contango between two successive months' contracts, according to Platts.

With a price gap that big, oil investors can pocket lucrative profits by simply buying the January contract, taking the physical oil delivery and storing it, and at the same time selling contract under the higher-priced February contract. When that contract expires, they can deliver the oil they've had in storage since January.

Ok, so there's this scramble to find places to hold the oil, because these geniuses have bought contracts to take possession of the oil in the next week, and hold it until the end this time next month. And because they bought the oil for $33.87/barrel but are selling it at $42.36/barrel, they pocket the difference ($8.49/ barrel) minus storage costs, plus financing and insurance costs. And we can get a rough idea of how much that is as well.

Supertanker storage deals are being done at about $75,000 a day, according to Petropoulos. Assuming the ship has a 2 million- barrel cargo, that works out at $1.12 a barrel over a 30-day period. Traders also need to pay financing and insurance costs.

Phibro LLC, Citigroup’s commodities trading unit, has the carrier Ice Transporter stationed off north Scotland, according to people familiar with the matter. Shell, Europe’s largest oil company, has booked the supertankers Leander and Eliza.

Oil traders hired two more ships to store North Sea crude off Scotland’s Orkney Islands. The 2 million-barrel supertanker Luxembourg is scheduled to arrive at Scapa Flow on Jan. 21 while the 600,000-barrel transporter Atlantic Galaxy is already there, said Captain William Sclater, operations manager at the port.

The carrier Ice Transporter has a capacity of 1 million barrels of crude. We can't say for certain that this ship has the exact contract I outlined above, but let's just use it for an example.

So let's see, that's 1 million barrels purchased at $33.87/barrel comes out to $33.87 million. The gross take for delivery in February is $8.47 million. We know that the storage cost is around $2.325 million. So that means before that before insurance, the net is $6.145 million. A Even when accounting for the cost of insuring a ship that simply sits in harbor, this creates a tidy little profit.

And remember, it's not just oil companies engaging in this behavior. Citibank is involved in this through its trading unit. This is the same bank that has already received $45 billion in taxpayer dollars to stay afloat and is clammering for more cash because they say that they simply don't have enough money provide credit to industrial firms like GM and many other smaller firms that need to take loans now to cover themselves for the duration of the recession.

These bastards have managed to recreate the same schemes that the they used to suck investment out of the industrial sector that produces jobs and items of actual value and divert it to to poorly veiled con games in the financial sector that produce nothing of actual value to the economy. At the same that the US auto industry is being rung through the ringers so that they can get the operating capital needed to keep 3 million Americans on the job, these geniuses are trying to make money out of nothing at all through speculation. And as the housing crisis has demonstrated, the machinations of the financial sector in creating instruments that produce nothing of value but line their pockets, eventually come crashing down.

Update Over at Daily Kos, Freetradeisyourepitath pointed out something that I had overlooked. It may very well by that banks are not only the sellers of these future contracts, but also the buyers.

So, for example.

Say that a bank has a contract to buy oil in February at $42.36/barrel, but because there's this hoarding going on, the price plummets to $22.18/barrel. Well that means that the buyer takes a loss of $22.18/barrel. So on 1 million barrels that's $22.18 million. And let's consider that there is something like 80 million barrels presumed to be on the line here. That's 1.77 billion in losses in just one month's worth of contracts.

If the contract is with another bank, we the taxpayer's are going to be expected to pony up the cash to fill the hole created by that.

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Comments

hording

hording would decrease supply and thus is an attempt to increase the price. (towards bottom of post, you've got it upside down there)

I'm a little confused, can you spell out how banks are using TARP money specifically to speculate in commodities?

I mean I believe you when they are busy trying to obtain gains by commodities speculation and how pathetic that is considering how much money the U.S. taxpayer has given them and also how pathetic that is they cannot act as banker to the U.S. manufacturing sector as they should....

But is there a direct tie in to the TARP money (beyond the fact the government gave them more money than the entire Citigroup is even worth) to the commodities trading unit?

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We can't

establish directly that banks are taking TARP funds ans using them in order to do this, but we do know that the only source of capital out there now is TARP funds.

On the hoarding issues. You're right that hoarding increases oil prices in the short term.

But the problem is that this has to be consumed at some point, and we are at the point at which now more oil can be stored. The oil storage facilities at Cushing, OK, where North American trade takes place are full.

At some point, there's simply no place else to stick the oil.

And at that point, this purchasing for future contracts disappears.

Which means that the price increase crashes.

It's a speculative bubble akin to what happened in the housing market. And when it comes crashing on down, the people holding overvalued assets, in this case the buyers of futures contracts, have to take the hit.

Because when traders purchase oil futures, they have to sell that oil in the spot market unless they plan to use it themselves.

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well I would say

that's what commodity futures traders do, but somehow on a critical commodity that doesn't seem really appropriate. ;)

Maybe a return to regulation which was going on during the oil bubble.

I would claim they are not creating a bubble but more trying to stop the deflationary spiral, which is a minor interim bubble de facto.

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