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By: MW Mon, 07 Sep 2009 20:37:43 +0000 Great piece!
But actually it takes 3 to contango!

(1) Consumers of the commodity who are not willing to pay higher spot prices than the storage arbitrageur is willing to pay. (See for instance the Nat Gas contango in a fast falling spot price market.) In other words contango usually only exists with surplus supply.

(2) Speculators or Commercial buyers who are willing to buy the market forward such that prices are higher forward than spot. These are the folks who by being willing to pay higher prices in the future than prices now, allow the storage arbitrageur to make near risk free profits by buying spot and selling forward. Indeed (as oil last year) if there is super speculator demand then they can outbid the consumer in 1 above allowing contango to exist in the absence of supply glut.

(3) The storage aribitraguer – the insider with access to capital and storage who can take advantage of the trade. Whilst legally strictly speaking a speculator, however in reality this is as near to a risk free trade as one can get.

Why does the arbitrage get large and the contango get steep … well in some markets it is non-existent: Gold for instance – since the barrier to entry is small. Almost anyone can buy a few Gold bars stick them under their mattress (uncomfortable!) and sell them forward.

In others it is huge (look at Nat Gas spot at $2.20 against the November futures contract at $3.75 where the contango carry is at a stunning 55%) because (a) the barrier to entry is very very high – who has access to caverns to store Nat Gas, to pipelines to transport it, to swap lines to convert Henry Hub to Hubs near storage and so on? and (b) seasonal demand will lift price in Winter when most Nat Gas is consumed (almost 2 x the summer) and (c) storage is very limited.

By: Mallory Margueron Sat, 13 Jun 2009 05:07:23 +0000 The question which should be asked here but isn’t: why has the contango been so steep?

By: The Bell Mon, 25 May 2009 10:51:39 +0000 Like the Macarena, but more deadly.

It supposedly takes two to contango – that would be, at least one who makes or legitimately purveys the goods, and another party entirely betting the outcome in terms of availability and consumer predisposition when the goods are due to meet market. Vision and a certain willingness to take risk in exchange for profit potential being not unreasonable to reward.

When however arbitrageurs so very much fancy themselves that they become so-called entrepreneurs of the grotesque ilk described in this article, the two parties above have become one and the same, which is odd to say the least and decidedly not visibly accountable by the rules of regular capitalism, including the fiscal principles underlying this economy.

The inevitably resulting market scarcity of essential commodities is synthetic, not to say jacked-up, while the means by which the preneur involved came by his betting cash for this game of his own making is questionable at best, no matter how much of it there is nor how freely it flows, and flows only his way only – not the same way it seems to flow – namely, away – from at this time generally cash-strapped taxpayers.

The contango being danced here is more like something out of Fight Club, except that here the partners aren’t even pretending to be two different people. Instead of fighting nobly against one another to see who gets the upper hand or as it were stays erect longer, they are ogling and plying one another with seemingly infinite amounts of Spanish Fly to see what manner of offspring their hellish union might produce.

Reuters readers are not alone in having a hard time telling apart this form of casino capitalism gone wild from felony insider trading. Let’s call this song exactly what it is: insider trading whose extent and venality appears destined to sabotage the entire economy formerly known as capitalism, from within. And we all know what’s supposed to happen to inside traitors- I mean, traders.

By: NS Mon, 18 May 2009 12:55:15 +0000 Mr. James: you provide no basis for your statements. If this is true, then explain demand destruction in petrol products and the excessive profits of US oil companies (over a trillion via testimony on to Congress) in the first 6 months of last year. I have the business report of the first half of last year which Goldman-Sachs made 2 billion just in futures oil trades. Just one brokerage, just one commodity. And what exactly did they produce for these profits, certainly NOT ‘price discovery’.

Profits are not evil but the expectation of marketeers of manipulated triple digits verses the earned high single digit one is a root problem to this market and the equities markets. The ability to determine Value is what is destroyed in this environment and confidence.

I challenge you to look at the wheat spot last year and tell me the same thing again. If you read more closely, you will note that ethanol production, cap and trade are based on these occlusive markets and not one which this reader finds favorable or desirable. Its unsubstantiated and is also unsustainable. Read again a little more carefully.

By: MrBill, Eurasia Mon, 18 May 2009 08:20:51 +0000 John Kemp is writing in clear, and perfectly understandable English, although he does introduce some technical terms to the uninitiated as he tries to explain ‘basis trading’. As a former basis trader in soft-commodities, and later a futures & options trader in oil & gas, I can tell you that basis trading is absolutely nothing new, and has been going on for centuries. Research rice trading in ancient Japan. The key to successful basis trading is supply and demand analysis. That the government is handing out free money to banks is the whole purpose. They are trying to kick start demand again. Banks with access to cheap money can lease tank farms and help suck up some existing supply from the market until demand recovers. They do not magically produce end demand from users. That is up to the economy as it recovers. Alternatively banks can on-lend money to solid companies involved physically in commodities, metals and energy. That cost of capital is only one part of the equation. If credit was more expensive then the contango would increase. Not decrease. As excess profit is arbitraged away. Anyone with a spreadsheet can replicate these basis trades. But you still have price or market risk. What John Kemp is describing is professional investors taking measured bets on market direction. They are also competing against themselves, so the balance between supply & demand is not a one-way bet as the article might imply.