Tight storage may lead to huge oil price drop

The Oil Drum: Europe ^ | 05/12/09 | Rune Likvern

[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.

[netmilsmom]

LOL!!!

No problem!

[1010RD]

I hadn't realized we were arguing or that I was calling you out. Too sensitive, given that you simply cut and pasted. I am here to learn. I've been visiting that site and was referring to this:

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. ;-]

[Paladin2]

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).

[1010RD]

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.

[Paladin2]

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.

[1010RD]

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?

[Paladin2]

There are places (OK) to store crude short term, but don't seem to be interested in small/retail accounts. The national strategic petroleum reserve apparently stores oil long term at a fairly low cost.

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.

[1010RD]

Fascinating. I would be curious to hear the outcome once you know. Thanks in advance.

[Paladin2]

There are some things similar to this:

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.

[thackney]

If in contango, futures prices for a given maturity date are falling. In normal backwardation, futures are rising.

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

[1010RD]

Thanks.

[Landru]

"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."

Agree totally; however, the buggers have effectively *broken* capitalism as it is.
Now one can't get blood out of a stone any more than they can *eat* their oil.

Petroleum's a lot like newspapers.
Both have a freshness period after which it's either, "old news" or in the case of refined petroleum, it rots.

[thackney]

No problem. I see that graphic you had been reading. The labels are backwards.

[rwfromkansas]

This better be the case.

Oil has not shot up much over the past month, but gas sure has.....even though oil was dropping much of last week.

Gas is 25 cents more expensive than just 3 weeks ago, which is BEYOND ridiculous and NOT SUPPORTED BY SUPPLY AND DEMAND AT ALL.