Words: Contango

The occasional “Words” feature on this blog aims to illuminate some of the more esoteric terms the common reader might encounter in fairly mainstream publications. This week’s phrase is contango:

Contango is

A) the pidgin form of English spoken by stevedores working in the Nigerian city of Port Harcourt

B) the period during which young men in certain sub-Saharan tribes undergo rites of passage

C) the situation in which the current or spot price for a commodity is lower than its forward price

D) the maximum number of shipping containers a cargo ship can carry

Highlight the text in the quote box below to discover the correct answer.

It’s option C. Contango is often used in reference to oil markets because petroleum is a non-perishable good that can be stored indefinitely while owners wait for future contracts to mature. Contango is the reason why, for example, eight supertankers—each of which can transport up to two million barrels of crude oil—remain anchored less than a hour’s travel from the Dutch port of Rotterdam. These huge vessels are serving as floating storage as the facilities in Rotterdam are already at capacity. The information is taken from a report in NRC Handelsblad, “The world is swimming in oil,” which attempts to clarify the economics underpinning this stalled armada:
“It is what we call a contango,” says Pieter Kulsen, who has been working in the oil trade for thirty years. Traders buy cheap oil on the spot market and later sell it for much more on the futures market. The price difference is more than enough to pay for the cost of floating storage, especially since the tariffs on land are higher because of the capacity problems. Lots of people are taking advantage of this situation.