Thursday, September 30, 2010

Oil: more Hoarding in Plain Sight?

- by New Deal democrat

Back when Oil was over $100/barrel, I wrote an article entitled "Hoarding in Plain Sight", suggesting that part of the tightness in the Oil market was governments the world over adding to their strategic oil reserves (a program which Bush had begun at the end of 2006 and continued until the very top of the market - with his typical business acumen /snark).

It appears that the idea of Peak Oil has penetrated business decisions sufficiently that substantial amounts are being hoarded again, not by governments this time but by private energy firms.

Here is the graph of gasoline stocks published yesterday by the Department of Energy:

As you can see, from last autumn through this spring, stocks were running about 5% higher and outside of their normal range. In the last couple of months, this additional storage of gasoline has increased to about 10% above normal.

The reason for this appears to be the belief that the economy will expand sufficiently within the next year to justify prices about $10 higher a barrel (over $85) than they are now, as measured by futures contracts at the Chicago Mercantile Exchange. Interest rates are so low that speculators can make a profit even though they must pay for a year's worth of storage, according to Seeking Alpha:
ConocoPhillips paying $41,000 a day to keep a storage tanker capable of holding 3 million barrels of oil floating in the Gulf of Mexico .... [It] is just one of hundreds of oil tankers sitting idle in waters around the world, as energy companies and investment banks await higher prices for crude.

.... [T]raders expect prices to surge higher next year as growth solidifies. That's why contracts for crude set to be delivered six months from now are worth more than crude at its current prices - an anomaly known as "contango." Thus, speculators such as ConocoPhilips are willing to pay a premium to keep large quantities of oil idle at sea in the hopes of selling the cargo next year for a higher price.

The price advantage to buy and hold crude more than doubled to $5.76 a barrel last month from $2.60 at the end of July....

Falling tanker rates and low-cost financing also have contributed to the contango by making it less costly to store oil for long periods of time. The cost of storing a barrel of oil offshore has dropped 24% this year....
The problem with this is, as we have seen as recently as this spring, such a price is sufficiently close to the 4% of GDP mark (now about $90/barrel) that for the last 60 years has served to choke off growth in the the US economy and caused it to stall. In other words, even if the bet is correct, it probably won't be for very long.

This overhang of excess stocks may paradoxically put a lid on US gasoline prices. Should the economy not grow as expected, these gasoline stocks may have to be liquidated at least in large part, thereby driving gasoline prices down.