Mind's Eye Re: Can You Cotango?

I should add this is one of the ways the rich tax the rest of us with
no democratic mandate.

On Mar 7, 2:13 am, archytas <nwte...@gmail.com> wrote:
> Surprisingly, perhaps, this isn't me and rigsy doing the Latin
> American at some embassy party of the past.  It's about trading oil
> and other commodities and the very strange efficiencies of such.  Not
> that I would have declined with someone on hand to hold my service
> issue revolver, of course.
>
> Producers of (say) oil enter into contracts with investment banks and
> transfer ownership of the production on a short-term basis.  They get
> dollars for cash flow interest free, but also agree to buy back the
> oil on a given date (after all, investment bankers drink champagne).
> The producers now need to sell less oil to refiners, which gives them
> chance to broker the price up - which we pay for at the pumps.  Just
> another way to rip off the jolly old consumer.
>
> Another effect in this is that the demand for forward contracts for
> the producer to buy the oil back again drove the forward price higher,
> and this created what is defined as a 'contango' market. In fact, it
> was so pronounced it was called a 'super-contango'.  What happened as
> a result was that traders began to buy oil, and to sell it forward,
> since the contango difference in price enabled them to pay to insure
> and finance the oil; to lease tank storage, and even to charter the
> fleets of tankers which sat as floating storage off the UK coast
> through spring and summer 2009.  Passive investors, for their part,
> lose money in such a contango market, because the oil lease contracts
> are rolled over from month to month at a loss to them, since they
> would (say) sell June delivery oil contracts which they are in no
> position to perform, and have to buy July delivery oil contracts at a
> higher price.
>
> When no one wants to buy into the financial instruments created in the
> above (which is about cash flow before the quick buck initiatives
> start), the producers have to buy back oil that has never left their
> wells.  This has a knock on effect called backwardisation, unless a
> wad of characters turn up with more dollars to buy oil futures
> believing the price will go up.
>
> The 'secrets' of  much of the financial services industry are all
> rather like this - and the trick is to do something obviously highly
> inefficient and parasitic, claiming to 'make markets'.  The role of
> the rest of us is to pay up at the gas pump.  Have you been cotangoed?