Bunker down for the Contango Fandango that Scotland's missing out on

Bunker down for the Contango Fandango that Scotland's missing out on

by Jonathan Stanley
article from Tuesday 28, April, 2020

OIL HAS TAKEN QUITE A BEATING in recent weeks. A rollercoaster of policy gaffes by Washington and European countries has seen oil demand slump from Covid-19's forced shutdown of the global economy while the Saudis and Ruskies have been passing the responsibility for cutting output between them like a pair of autocratic chuckle brothers.

Cue the price of West Texas Intermediate, a blend of high quality low sulphur crude oil, falling in demand to such as extent it's price turned negative last week. This means producers were paying someone to take oil from them!  How can oil be worth less than nothing?

Well it comes down to the cost of having to store something nobody wants... yet.

Every barrel of oil pumped this year will be burned this year. Just not yet, because current supply outstrips current demand. There is money to be made here though if we are canny enough to see how. The difference between the current and future price of a commodity is called contango. In the oil trade, money is made buying and selling oil in storage and that includes while it is travelling in tankers!

There is even a tradable derivative based on oil storage capacity. The problem is the world's storage tanks are filling up. Worse, high value distillates such as gasoline, middle distillate (diesel) and vacuum gas oil are more expensive to store largely because they burn much more easily. This means even if demand for these products shoots up in the coming months, refineries can only refine so much oil at a time. They are a potential bottleneck in supply.

If only there were an economy with a stable legal framework, buckets of supercheap land, a cold wet (fire unfriendly) climate and existing oil supply infrastructure in proximity to major European oil product markets... that wasn’t run by a bunch of Holyrood Hillbillies lobbies, unopposed by sock-puppeted green meanies. Imagine a Scotland not of Fergus Ewing but J.R. Ewing!!

Scotland has spent ten years debating how to store unreliable intermittent wind power by buying batteries and flooding eco-sensitive glens when we are sat on prime real estate for the global contango fandango!

Imagine massive shiny new tanks brimming with paraffin for planes, petrol for Peugeots and diesel for...well, lorries. Longannet is a brownfield site across from Grangemouth, only a quarter of Flotta has been turned over to the oil terminal there. Why not another half? Imagine the future of Prestwick as a hub with enough paraffin stored a mile or so away, supplied by a short pipeline? It would have uninterruptable strike-proof fuel supplies. There must be a premium in that for the United States Air Force. 

Why bother thinking about how to build a sovereign wealth fund on falling oil output when you can MANAGE the world's, largest oil based wealth fund simply by taking a small transaction tax on oil storage leases? The infrastructure is there already, the question is only how much storage capacity is in place between the oil terminals and the refineries. Sullom Voe already has large crude storage capacity. Let's build more. Western Europe, and NATO, would benefit hugely from having petrol, military jet fuel, and diesel on tap.

In the days of steam we called this bunkering. Bunker ports dotted the British Empire, with Aden being the archetypal coaling station. Empty desert, no economy, and million of tonnes of coal from across the Empire waiting for a passing heavy cruiser to burn it. Heavy fuel oil is still called Bunker C fuel and is used by tankers, ore carriers and cruise liners alike.

With a large market immediately south of the border, North Sea oil fields, and huge refineries over the water in Antwerp and Rotterdam it's clear we are the secure epicentre for a new oil boom that the London markets can access. Once oil products are being stored by the tens of millions of tonnes, Scotland could be the key for the West to break the back of OPEC and Moscow's little games. Enter steadier supplies of the most important global commodity and an extra role for Scotland in a new and more Global Britain while making best use of our oil infrastructure.

Saddle up partners, the Contango Fandango could make us all a small fortune if only those pesky Holyrood Hillbillies could only see sense.

Picture by Toglenn - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=9723958

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