Posted on 05/15/2009 9:39:35 AM PDT by TigerLikesRooster
Tight storage may lead to huge oil price drop
Posted by Rune Likvern on May 12, 2009 - 10:00am in The Oil Drum: Europe
Topic: Demand/Consumption
Tags: backwardation, china, china oil storage, contango, oecd, oil prices, original, tanker storage, us oil consumption, us oil storage [list all tags]
The present contango in oil prices bears all the hallmarks of an oil market where supplies are well above present fundamental physical consumption.
The recent large inventory build of petroleum, under a steep contango which now is flattening, within the big oil consumers (like the OECD countries and China) have left some with the expectation that major economies soon will begin to grow again, and that the contango now signals increased oil demand and higher oil prices in the future.
My analysis indicates that in recent months, as much as 2 -3 Mb/d of global petroleum supply has been used to build inventories. This is about to come to an end, because available storage is getting closer and closer to full and contango has begun to flatten. When additions to storage cease, the resulting drop in demand can be expected to lead to substantial downward pressure on oil prices.
(Excerpt) Read more at europe.theoildrum.com ...
Ping!
I hope it’s in time for 4th of July! We’re pulling a camper up north and it can be pricey,
“See the USA in a Chevrolet...”
No, wait.
“See the PRC in a GMC ...”
How’s that?
Ditto. We’re taking our annual “long” trek south to California. But actually, I’d hope it eases the crunch on the airlines.
the resulting drop in demand can be expected to lead to substantial downward pressure on oil prices.
That would be nice if it were not for the fact Erkel will add $5.oo dollars a gallon in taxes!
Cool. My tactical Diesel reserve is likely to need refilling towards the end of the summer to get through the worst of the Hurricane Season.
LOL! Yeah, that’s how it used to be.
I'm working to corner the market on 1990/1991 Suburbans in excellent body condition to see me through the next 30 years. I'll be seeing the USA in GMCs and Chevrolets for a while yet.
“You can trust the man, the man who wears the star
The BIG BRIGHT TEXACO STAR!”
"Where's the Fire Chief?", as he gives you the ticket.
“Fire Chief” —> “Fire, Chief”
I’m guessing that speculators are stashing oil away in case Israel hits Iran and Iran’s response disrupts oil pumping and transport.
If GM can just hang on by its fingernails, then ramp up production SUVs, pick-ups and Hummers.
Of course, as posted above, Urkel Maobama will likely jack up taxes and soak up at least all of the benefit of the price decline.
Good article.
El Nino is coming back, the hurricane season may be quite quiet.
HAHAHAHAHAHAHAHA!!!!!!!!!!!!!
Anybody who thinks those gangsters who manipulate the petro-energy markets have ANY intention of allowing oil prices to deprecitate would probably buy a certain bridge in Brooklyn.
From the Arab Oil Shieks to the investors in oil futures, they all manipulate the markets. They are doing it now, they did it last year and they will never stop.
I hope this guy is correct. BTW, can someone explain the term, contango?
We just bought a Suburban to haul our camper, so I am in agreement with you!
When crude oil dropped below $40 a barrel,oil companies cut back on refining to keep the prices up;gas here in northern Illinois went up to 2.45/gal yesterday.I told my kids it will be over 3.00 by Fathers Day and well over 4.00 before Labor Day.I hope I’m wrong,but we’ve been down this road before.
Good, My tactical reserve may last for a longer period.
Urkel, LOL, I hadn't seen that one before.
We’re starting a trip next Friday. Home to Ohio, on to Hershey, PA then touring Philly.
We booked it early because we did a late trip fall of 2007 to Niagara falls and got killed in gas prices. Especially in Canada.
When one is paying more for gas than the rest of the trip, it’s almost worth it to stay in hotels (except the bedbugs, yuck)
Contango - A condition in which distant delivery prices for futures exceed spot prices, often due to the costs of storing and insuring the underlying commodity. opposite of backwardation.
Contango is when the price of the oil (or other commodities) some day in the future, in short often referred to as “futures”, is higher than the price of oil today. This offers market participants an incentive to buy oil today and store it for future use or sale.
Some participants buy oil contracts today, then turn around and sell them into the futures market. Using this approach makes it possible to pocket an almost no-risk profit. This also helps explain the 100 + Mb of oil and petroleum products presently stored on tankers waiting for deliveries.
One could also buy it now and burn it later, at a savings/profit.
With Bush, the Oil Man's buddy, they knew they could rape us blind - and did.
With Obama, the Environ-Wacko, they know they can essentially do the same thing. Obama WANTS high prices so we use less energy. He thinks it will reduce "global warming climate change", leave more energy for his friends in third world ratholes, and punish America for its "evil" past, not to mention please the idiots on Move-on.org and their friends the environmental wackos.
Oh and might add that Hussein bows to his master, King of the house of Saud.
That “Star” belongs to Hugo Chavez....
Thanks for the ping.
Hasn't the Sierra Club made a solar powered camper puller yet?
In contango the price is lower in the future. I think you got it backwards. Normal backwardation is higher in the future than today’s spot price. That is why contango is unusual because it violates the normal risk/time trade off.
Excuse my cut and paste job. Was doing a little Farrah Fawcett research and thought I had copied your trailer sentence. LOL
Baraq’s fault.
Shout it to the housetops!
I'm just quoting (cut and pasting) what I read. Call it whatever you want. It would seem to be an opportunity for temporal disintermediation to the extent that the price difference was above the combined cost of storage and the cost of money.
How? If in contango, futures prices for a given maturity date are falling. In normal backwardation, futures are rising.
Wouldn’t that be buying high and selling low? Maybe Thackney can explain it.
I visit this site regularly and they’ve been discussing it this week: http://tonto.eia.doe.gov/dnav/pet/pet_pri_top.asp
You might want to do more research before calling people out.
You can apologize at any time. I'm waiting.
LOL!!!
No problem!
This is the graphic I found. I would think that the risk premium would be higher in the future, at least that is how the chart looks to me. It doesn't seem to match your definition, but I don't know a thing about the futures market. Hopefully, some FReeper will have the pity to tell us. ;-]
Looks to me that the graph is labeled backwards compared to what I’ve found through trivial research. Given the current state of the oil futures market, one might consider buying ahead (as I’ve done for my personal consumption rather than pure speculation).
I think you are right, but it shows up on the first page of a google search images. I read the entire article along with some of the comments. Your personal consumption angle is the wisest. The speculation angle looks very speculative.
On another post, Thackney said all the insiders he knew were expecting higher prices or something to that effect.
I suppose if inflation kicks in it would affect the U.S. dollar denominated price of oil. Maybe it is being used as a hedge out of dollars? Which is what the Chinese appear to be doing.
A few months ago (oil = $35/bbl), I wanted to buy a personal (rest of my) lifetime supply. Apparently that market is not served by the securities market. That makes me an unhappy camper.
I’d thought about that, but heard that actually taking physical delivery isn’t easy. Were you really going to store crude oil or gas/diesel?
I checked with an oil company that has a local refinery and potential local geologically appropriate storage features, but they are not interested in small/retail hedging.
That left personal storage (only two large tanker trailers), but my neighbors already complain about hardware in my (well vegetatively screened) backyard. I'm not sure how long Diesel (we bought two Diesel cars when gas went over $2 4 yr ago) can be stored, but am still looking into possibilities beyond the current ~ 6 mo capacity.
Getting crude oil to be refined later makes logical sense, but has all sorts of logistical issues. Storing finished product has less logistics, but potential aging issues.
No known retail solution identified yet.
Fascinating. I would be curious to hear the outcome once you know. Thanks in advance.
http://www.fuelbank.com/
I'm not that interested in being Bernie Madoff'ed, but there are some other local org's in a similar vein in a few US geographic locations. Not sure how they have worked out over the long run.
No.
When current prices are lower than expected prices, the market is in contango.
When current prices are higher than prices expected in the future, the market is said to be in backwardation.
http://www.eia.doe.gov/pub/oil_gas/petroleum/presentations/1999/high_propane_stocks/sld017.htm
See also:
http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/stocks_text.htm
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.