Contango is a term used to describe the situation when the future price of a commodity is greater than the current price plus the cost of storing that commodity.
That means you can buy on the market today, sell a future and lock in a GUARANTEED profit.
Shell Oil is doing just that right now. They are storing oil in unused tankers. By selling a future (vs. an option) they have pre-sold what they have just bought on the open market an locked in a profit.
This can only happen when the hedgies don't have access to capital, or are too risk adverse-- because otherwise they would close the gap via arbitrage trades.
Does this mean oil prices will go up. Likely yes. Should you hedge the price of gas or oil if you are an industrial consumer? That answer is less obvious because the COST of the hedge is high right now (because the future price of oil is high relative to the current price).
The smartest industrial fuel hedge we've seen is putting in a biomass boiler (or a gas/biomass dual boiler). While oil and natural gas trade within a band, the price of wood chips is not very highly correlated to oil. When prices of natural gas goes up, industrial customers can switch to green chips, wood pellets or better yet torrefied wood.
In aggregate, the cost of a biomass boiler is much less than the cost of a financial hedge right now.
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