How to trade oil
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The oil-storage tradealso referred to as contangoa market strategy in which large, often vertically-integrated oil companies purchase oil for immediate delivery and storage—when the price of oil is low— and hold it in storage until the price of oil increases. Investors can choose to take profits or losses prior to when the oil delivery date arrives or they can leave the contract in place and physical oil is "delivered on the set date" to an "officially designated delivery point".
In the United States, that is usually to CushingOklahoma. When delivery dates approach, they close out existing contracts and sell new ones for future delivery of the same oil. The oil never moves out of storage. If the how does oil trading works market is in " contango "—the forward price is higher than the current spot price —the strategy is very successful. The strategy works because oil prices for delivery in the future are trading at a premium to those in the spot market - a market structure known in the industry as contango - with investors expecting prices to eventually recover from the near 60 percent slide in oil in the last seven months.
Inglobal capacity for oil storage was out-paced by global oil production and an oil glut occurred. The concept started to be used by the oil traders in the market in early By the end of October one in twelve of the largest oil tankers were being used more for temporary storage of oil, rather than transportation. From June to Januaryas the price of oil dropped 60 percent and the supply of how does oil trading works remained high, the world's largest traders in crude oil purchased at least 25 million barrels to store in supertankers to make a profit in the future when prices rise.
Trafigura, Vitol, Gunvor, Koch, Shell and other major energy companies began to book oil storage supertankers for up to 12 months. Each VLCC can hold 2 million barrels. By 5 Marchas oil production outpaces oil demand by 1. Crude oil is stored in old salt mines, in tanks and on tankers. The United States Strategic Petroleum Reserve SPR is the world's largest supply of emergency crude oil— how does oil trading works barrels— stored in huge underground salt caverns along the coastline of the Gulf of Mexico.
The SPR is a "deterrent to oil import cutoffs and a key tool how does oil trading works foreign policy" but it has rarely been used. On October 20,a report by the U. According to the report, the amount of oil held in reserve exceeds the amount required to be kept on hand since the need for foreign imports of crude oil have decreased in recent years.