US SPR refill could bring low risk profits

OREANDA-NEWS. March 24, 2015. Traders able to deliver crude to the US Strategic Petroleum Reserve (SPR) in May stand to gain a \\$1.70/bl to \\$3.15/bl profit, depending on whether they sell to the SPR on a June or July-delivered basis.

The Department of Energy (DOE) will purchase up to 5mn bl of sweet crude, to be delivered from 1 June to 31 July, to replenish crude stocks that were released in a test sale last year. The DOE said it expects to "accommodate some early deliveries in May," however. Any sellers able to deliver in May stand to profit from the contango structure of the forward curve.

In a contango market crude delivered further in the future is at a premium to crude delivered sooner.

May-delivered WTI settled at \\$47.45/bl on Monday, at a discount of \\$1.70/bl to June delivered WTI and an even larger discount of \\$3.15/bl to July delivery.

Typically, buying crude oil at a May-delivered price and selling at a June or July-delivered price requires the purchase or leasing of storage space, which cuts into some of the gains incurred in a contango market. Moreover, traders in a contango who invest in futures contracts to lock in the higher price of crude further in the future, are required to make margin payments, thereby tying up capital.

Any trader able to participate in the early delivery to the SPR benefits from the contango market while forgoing the typical costs associated with a contango play.