Posted on 12/16/2008 1:18:24 AM PST by bruinbirdman
Oil companies and traders are storing at least 50m barrels of oil in supertankers in a clear sign of supply outstripping demand as the global economy slows.
The surge in floating storage, – enough to meet France’s oil imports for a month and the biggest since late 2001–, is likely to push the Opec oil cartel, which is due to meet on Wednesday in Oran, Algeria, to make a deeper production cut to reduce stocks. Storing oil in tankers is unusual as it is significantly more expensive than inland.
Abdullah al-Badri, Opec’s secretary general, said on Monday:“Stocks are very high. We have to act. We see a very sizeable reduction [in production].”
Chakib Khelil, Opec president, said: “Everybody is supporting a cut.”
Oil prices rose briefly above $50 a barrel, recovering from a four-year low of $40.50 earlier this month. Oil later traded $1.30 down at $44.95 barrel on concerns that Opec’s cuts would not be enough to prevent further stock building.
Several Opec officials have suggested a 2m barrels-a-day cut, the biggest in recent history, and were also hoping to persuade Russia – the world’s largest oil producer outside the cartel – to make a reduction.
But with Russia’s oil output already declining because of a lack of investment, any commitment is likely to be seen as a political gesture rather than an actual reduction.
Whatever the size of Opec’s cut, the floating storage surge is a clear sign the cartel is losing its battle to cut supplies more quickly than demand falls.
Jens Martin Jensens, managing director at Bermuda-based Frontline, the world’s largest operator of supertankers, said that as many as 25 supertankers – each holding about 2m barrels – were being used as floating storage worldwide. Other traders suggested a similar number, pointing to companies such as BP and Royal Dutch Shell and traders such as Vitol and Koch as the holders of the oil.
Opec ministers said in November they intended to reduce developed countries’ oil stocks from the equivalent of 56 days of demand to 52. But the surge in floating storage indicates that tanks are brimming, in spite of Opec’s having announced 2m b/d in cuts. Indeed, inventories have risen to almost 57 days’ demand.
The International Energy Agency, the western countries’ oil watchdog, said the surge was the “result of abundant prompt supplies having a hard time finding customers”.
Cry me a river.
Geez....it was a mere 6 months ago or so that we were told Evil Big Oil was storing oil in supertankers offshore to withhold it from the market to drive prices up.
It’s all so confusing.
In the worst year ever for oil, investors can lock in the biggest profits in a decade by storing crude.
Traders who bought oil at the $40.81 a barrel on Dec. 5 could sell futures contracts for delivery next December at $54.65, a 34 percent gain. After taking into account storage and financing costs investors would earn about 11 percent, according to Andy Lipow, president of Houston consultant Lipow Oil Associates LLC. The premium, known as contango, is the biggest for a 12-month span of futures since 1998, when a glut drove crude down to $10.
Stockpiling crude may provide higher returns than commodities, stocks and Treasuries as the U.S., Japan and Europe endure simultaneous recessions for the first time since World War II. Crude sank 70 percent in New York since peaking at $147.27 in July. The Standard & Poor’s 500 Index fell 38 percent this year and two-year government notes yield 0.9 percent.
“The bottom line is that you buy crude at a low price and lock in a profit by selling it forward,” said Mike Wittner, head of oil market research at Societe Generale SA in London. “It’s low risk. The contango can definitely pay for storage and the cost of capital and leave plenty left over.”
Royal Dutch Shell Plc sees so much potential in the strategy that it anchored a supertanker holding as much as $80 million of oil off the U.K. to take advantage of higher prices for future delivery. The ship is one of as many as 16 booked for potential storage instead of transporting crude, said Johnny Plumbe, chief executive officer of London shipbroker ACM Shipping Group Plc.
The question is how much will production have to be cut until supply is less than demand?
I hope that means that the price of oil, and of gasoline keeps going down. It’s already $1.36 in Oklahoma (for a low price...). I’m hoping for 99 cents a gallon... :-)
Regular gasoline prices are mostly $1.24 and $1.25 per gallon here in Salem VA. Along the Salem interstate 81 exits, the price is $1.59 at some gasoline stations.
I'd like to see oil stabilize at about 75 a barrel.
Just the opposite. It means that investors are confident enough to pay storage costs believing the rise in prices will result in more profit later even after paying the additional expenses.
Look at the futures market and you can see how quickly they believe it is going to rise. Up $9 in five months.
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