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.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.