The following questions are based on the WSJ article "Oil Costs Less Than Zero Now, but Above $30 This Fall. 4. In the article, Reid l'Anson says: "If you can find storage, you can make good money". Explain how you could create an arbitrage strategy in the future markets if you had access to costless storage for crude oil. 5. Your friend just called you, she wants to buy crude oil future contracts expiring in May for price of $37.63 and sell future contracts expiring in June for a price of $20.43. She claims she can generate an arbitrage profit of $58.06 per barrel. Do you agree with her statement? Explain why or why not. 6. You work for an oil refinery. Last year, you bought crude oil contracts at a future price of $50 in order to hedge against a potential increase in oil prices. Today, oil prices are negative, and your manager is angry that the refinery is forced to buy oil at $50/barrel. Explain to your manager the idea of hedging and defend your decision to buy future contracts a year ago. D DOW JONES Oil Costs Less Than Zero Now, but Above $30 This Fall Dow Jones Institutional News; New York; 20 Apr 2020. U.S. oil futures plunged below zero for the first time Monday, a chaotic demonstration of the dwindling capacity to store all the crude that the world's stalled economy would otherwise be using. The price of a barrel of West Texas Intermediate crude to be delivered in May, which closed at $18.27 a barrel on Friday, ended Monday at negative $37.63. That effectively means that sellers must pay buyers to take barrels off their hands. The historic low price reflects uncertainty about what buyers would even do with a barrel of crude in the near term. Refineries, storage facilities, pipelines and even ocean tankers have filled up rapidly since billions of people around the world began sheltering in place to slow the spread of the deadly coronavirus. Prices remain in positive territory for barrels to be delivered in June. In the most actively traded U.S. futures contract, crude for June delivery lost 18% on Monday to close at $20.43, while oil due to be delivered to the main U.S. trading hub in Oklahoma in November ended at around $31.66. Those higher prices, like the recent surge in stocks, reflect investors' optimism that the global economy will bounce back later this year, and that sufficient demand for fuel will return to soak up some of the glut that was building even before borders closed, factories idled and billions of people stopped driving and flying. Yet prices around $30 a barrel, which is below break-even for many producers, still suggest economic worries ahead, some analysts say. "It's absolute bedlam," said Chris Midgley, director of analytics at S&P Global Platts. "I hate to hear who's on the wrong side of this." Monday's trading was exacerbated by the looming expiration of the May futures contract on Tuesday. The price of oil futures converge with the price of actual barrels of oil as the delivery date of the contracts approach. Contract expiration also flushes out speculators who have no intention to take delivery of barrels of crude. Exchange-traded funds, which control a large number of futures contracts, are among those that must sell at expiration. The forced selling adds downward pressure to prices. Though producers from Alberta, Canada to Midland, Texas are racing to shut in productive wells, they haven't been able to close of the spigot fast enough to avoid what energy executives have been referring to as "hitting tank tops" and running out of places to store crude and petroleum products, such as gasoline and jet fuel. Even before the price went negative, the spreads between oil to be delivered now and later were at record levels, presenting a rare opportunity for traders, who are filling up tankers with crude and setting them adrift. "If you can find storage, you can make good money," said Reid l'Anson, economist for market- data firm Kpler Inc. Lease rates have soared for very large crude carriers, the 2-million-barrel high-seas behemoths known as VLCCs. The average day rate for a VLCC on a six-month contract is about $100,000, up from $29,000 a year ago, according to Jefferies analyst Randy Giveans. Yearlong contracts are about $72,500 a day, compared with $30,500 a year ago. Spot charter rates have risen sixfold, to nearly $150,000 a day. Day rates rise as the spread between oil-futures contracts widens. The basic math is that every dollar in the six-month spread equates to an additional $10,000 a day that can be paid for a VLCC over that time without wiping out all the oil-price gains, Mr. Giveans said. May delivery futures of Brent crude, the international benchmark typically used to price waterborne oil, ended Monday at $25.70 a barrel. The contract for November delivery settled at $36.39. The $10.69 difference is less than the record spread of $13.45 reached on March 31 but enough to justify a $100,000 day rate. At the end of March there were about 109 million barrels of oil stowed at sea, according to Kpler. By Friday it was up to 141 million barrels. The collapse in current oil prices, combined with the expectations that a lot of economic activity will resume by autumn, has resulted in a market condition called contango -- in which prices for a commodity are higher in the future than they are in the present. One of the great trades in modern history involved steep contango and a fleet of oil tankers. In 1990, Phibro, the oil-trading arm of Salomon Brothers, loaded tankers with cheap crude just before Iraq invaded neighboring Kuwait and crude prices surged. The trade's architect, Andy Hall, rose to fame, bought a century-old castle in Germany and became known for a $100 million payday. Present market conditions have inspired emulators. In the past four weeks, nearly 50 long-term contracts have been signed for VLCCs, Mr. Giveans said. Jefferies has identified more than 30 of them as being intended for storage, usually because they are leased without discharge locations. The coast of South Africa offers popular anchorage since it is relatively equidistant to markets in Asia, Europe and the Americas. "We've seen more floating-storage contracts signed for 12 months in last three weeks than we've seen in the last three years," Mr. Giveans said. Companies that own and operate pipelines and oil-storage facilities could gain as well. Consider the difference between Friday's prices for West Texas Intermediate to be delivered in May, which was $18.27 a barrel, and in May 2021, which closed at $35.52: A $17.25 spread could be locked in by buying contracts for oil to be delivered next month and then selling contracts for delivery a year later. Assuming monthly costs for storage owners of 10 cents a barrel -- as Bernstein Research analysts did when they ran back-of-the-envelope storage math in a recent note to clients -- and that leaves a profit of $16.05 a barrel. Companies don't usually disclose unused storage capacity, but it is possible that bigger players such as Energy Transfer LP, Enterprise Products Partners LP and Plains All American Pipeline LP could have room for tens of millions of barrels, the Bernstein analysts said