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Dan Dicker

Dan Dicker

Dan Dicker is a 25 year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline and heating oil…

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The Carry Trade Returns

In 2008, as money rushed out of the oil market and prices continued to collapse, a bottom for oil was nearly impossible to find. But one commercial factor gave a singular reason to buy front month futures when prices neared $40 and below: A ‘free money’ carry trade. Such an opportunity is again emerging in 2015 and heralding a bottom in oil prices.

Let me describe what the carry trade looks like: When prices disintegrate quickly in the oil market, as they did in 2008 and today in early 2015, the money disappears much more quickly in the ‘near’ months: Oil for delivery in February of this year, for example, closed yesterday at $48.65 a barrel. But the price for oil for delivery for February of next year in 2016 is $56.18, or almost 8 dollars more expensive. This is a condition we call ‘contango’, where prices on the ‘back’ of the curve are higher than those at the front.

A 12-month contango of $8 is plenty to start to initiate a ‘carry trade’ for commercial oil producers and here is how it works: If you can secure storage (not easy), you can buy the front month oil, put it away for a year and collect $8 a barrel when you deliver again in 2016. Your costs are only the cost for storage and the ‘money float’ that you lose in ‘banking’ saleable oil for a year. In both cases, if you find cheap enough credit (very easy), you’ve got it made: You can collect about $5 a barrel of ‘free…

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