JP Morgan Stores Heating Oil at Sea in Hopes of Future Profit

JP Morgan leased a new supertanker just for heating oil, which the bank expects to rise significantly in price over the next nine months. (image: funpresident.com)

For many homeowners, oil—such as number 2 heating oil—means warmth for the winter. For owners of diesel cars, oil means you can get to work, while for truckers, oil means you can work. For JPMorgan Chase & Co., oil means money: the banking giant has hired a giant supertanker to bank oil for future sale, Bloomberg.com reported on Wednesday. JPMorgan hired newly built supertanker, the Front Queen, for nine months to store heating oil. Morgan is betting that heating oil prices will rise sufficiently to turn a tidy profit even after paying $40,000 a day to lease the Front Queen.

JPMorgan’s hardly the first to do this; as The HEAT Zone reported on April 3rd, a number of oil trading companies and large investors have been leasing supertankers, also known as Very Large Crude Carriers (VLCCs), to store oil for future sale at higher prices. At that time, 40 VLCCs were being used to store crude oil—around 80 million barrels worth, or a day’s supply for the entire world* (see below).

Since March, the amount of oil in storage has actually increased, with recent estimates of 90 to 100 million barrels afloat, based on information from leading industry sources, such as Total Oil Trading SA (TOTSA). And the amount stored afloat is just the tip of the iceberg—onshore storage is also at record highs. For example, U.S. domestic crude stockpiles rose last week by almost 3 million barrels, to nearly 366 million barrels.

What’s driving this? It’s not just the lower prices recently—though they’re not nearly as low now as they had been in the beginning of the year. After all, nobody makes money by buying low and selling low—for people to invest in a commodity, they need to believe that future prices will rise, so they can buy low and sell high. And that is the precisely the situation that exists now. The price spread simply has to be enough to cover the storage cost from now to then, as well as the time cost of the money tied up in the commodity. Right now, there are few good investment opportunities, so the time cost of money is rather low.

What is the value of JPMorgan’s bet? The Front Queen holds 273,000 tons of heating oil. Right now, the spot price for home heating oil is $553 a metric ton in Europe, while the August delivery price is $580 a metric ton—$27 more. At that spread, buying oil now and selling it later nets you $7,371,000. The Front Queen rental is costing JPMorgan around $12,400,000 total for nine months. If heating oil pricing holds a $27 a ton spread from now until the end of the nine months, JPMorgan would lose around $5 million dollars—which means that JPMorgan is betting that the price will rise even more between now and next March. In fact, just to break even, the price will need to rise an additional $18, to almost $600 a metric ton. Since (presumably) JPMorgan is looking to make a profit, they’re betting the price rise even more.

That means that JPMorgan is convinced that heating oil prices will rise significantly more than 8% over the next nine months. Anything less than that makes their bet a sucker’s bet, and since Morgan is one of the few big banks to emerge (so far) relatively unscathed from the financial sector meltdown—it’s probably safer to bet on them than against them, and assume that their own bet is based on good information and good analysis.

We can all hope that JPMorgan is right, and that oil prices will rise, and also narrow the spread between future and spot delivery prices. When the market dances the contango, it means that it assumes that tomorrow will be much better than today. When the contango shrinks, as TOTSA’s head of strategy and planning noted, “it will also be a good signal that the economy is actually recovering.”

HOT SPOT: Oil Supertankers are Freakin’ Huge
*That’s right—80 million barrels in just 40 ships. Each VLCC can hold, on average, 2 million barrels. They are the largest movable structures ever and dwarf such famous ships as the Titanic or the biggest battleship ever, Japan’s WWII Yamato; they’re even larger than a Nimitz-class nuclear-powered aircraft carrier, itself often described as a “floating city.” A supertanker on the move is like watching a skyscraper sailing the seven seas.

(image: nbnl.globalwhelming.com)