Fed Rate Decision Will Affect Oil Storing Costs

Big oil traders cashing in on a market that rewards storing oil and waiting will see their hefty profits shrink if the U.S. central bank raises rates this week.

The U.S. Federal Reserve’s likely decision to hike interest rates by 25 basis points on Wednesday would raise the financing cost of holding oil in storage, potentially cutting profits on such ‘contango’ trades by as much as a tenth, analysts and traders say.

Oil prices have fallen 16 percent since the start of the month, so the increase equaling one penny in financing could appear as little more than a rounding error.

But, for traders in the physical market, who hold oil in thousands of tanks at the Cushing, Oklahoma storage hub, it could take a bite out of one of the safest and easiest trades.

In Cushing, traders can make over $2 million in profit by just pumping 1 million barrels of crude into steel tanks, waiting for six months and then reselling it.

With increased rates, that makes borrowing money from the bank to finance inventory more expensive.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza