The Super Contango Puzzle

"I would say, the long-term demand for oil is there. The supply won't be there. So, long-term, I think the price will be much higher than it is today" ~ Marc Faber, 2009 Outlook on Crude Oil.

Billionaire oil tycoon Boone Pickens, chairman of BP Capital, predicts oil will reach $75 a barrel within a year and go back up to $140 a barrel when the global economy turns around. ~ CNBC Interview, 13 Jan 2009

The oil market is currently in super-contango. That is the forward prices are much higher than current prices. Normally, it costs more to buy a barrel of oil for delivery six months from now than it does to buy a barrel of oil today. Sounds nice, but since this profit opportunity is so obvious it should get arbitraged away almost instantly by speculators. In short, a situation like this should never happen — certainly not for long periods, anyway. But it has:

So what's going on? One possible explanation is that most of the easy storage is already full. But even if that's the case, there's yet another option: oil producers can pump less oil now (essentially "storing" it in the ground) and then pump it out in July for delivery at the higher price. But apparently they're not doing that.

There are two possible explanations:
(1) the oil producers are already pumping at full capacity, so they can't promise to pump extra oil in July even if they want to therefore the very sharp forward prices, or

(2) oil producers are so desperate for cash that they're willing to take money now even if it's way less than they could get for the same stuff six months from now.

---> #1 doesn't seem to be true. So that leaves #2: thanks to plummeting oil prices, OPEC countries are in serious economic turmoil and desperate for any cash they can get their hands on right now.

I have no third explanation - other than the government is selling front month oil to drive down prices. Possible given rising inventories? But in summary either the oil exporters are desperate for cash or OPEC is lying about oil capacity and they are really constrained – or a combination of the above.