Arbitrage Opportunity as"Super Contango" Spurs Stockpiling of Oil

In what is called a "super contango," oil producers and refiners are storing up crude oil in record amounts in expectation that prices will surge in the summer months.

While a contango is the usual for oil markets, where up to a several-month gap between the current price of the delivery of oil is lower than that in the spring and summer. What insiders call a super contango, is when that spread of time lengthens beyond the norm, like it is at this time.

The spread in price is measured by the costs of oil storage versus tying up the money of investors.

February delivery of crude fell to $37.59 a barrel on the NYMEX, almost $15 less than the contract price for July. That's much farther out than usual, and so dubbed a super contango.

For the New York Mercantile Exchange, their delivery apex is in Cushing, Oklahoma, where inventory is up by over 40 percent for the month ending January 2. It's been 4 years since it held that much oil.

Overall, U.S. inventories for oil storage has increased 6.7 million barrels for the week ending January 2, ending at 325.4 million.

This contango period is expected to lengthen even more, and so Cushing could potentially fill to their capacity of 42.4 million barrels, although only about 80 percent of that capacity is operable storage space.

Some companies are leasing oil tankers at sea, as storage space is getting more difficult to find.

In an effort to cut costs, a number of American manufacturers started to cut spending on fuel in an move to manage the bottom line, which could also have a significant impact on storage.

What all this means as far as investors go, is it's a potentially lucrative arbitrage opportunity, as the decision to store oil at these prices for possible large profits in the future is the financial impetus behind all this.

What oil investors can do with this large of a spread, is buy up a January Oil contract and take physical delivery of the oil and store it, and then sell the higher-priced February contract at the same time.

With almost no risk involved, it's definitely something to look into quickly for just about guaranteed profits.

The ICE Futures exchange in London had Brent crude for February dropping by $1.51 to end the session at $42.91 a barrel.

On Wednesday, we'll get a better look at oil stockpiles from the weekly energy report.