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Page added on January 29, 2015

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Where Is All That Excess Oil Going?

There’s a term traders use when the price of a commodity like oil has fallen because of oversupply but seems guaranteed to rise again.

It’s a market that’s “in contango,” says Brenda Shaffer, an energy specialist at Georgetown University. “It almost sounds like a sort of great oil dance or something.”

And Shaffer says that some oil speculators see an oil market that is in contango in a major way.

“Some people out there think that oil is going to get more expensive so it’s worthwhile now to buy oil, lock it in, and have those supplies, have them stored and have them available to sell a few months down the line, if you actually believe it’s going to go up,” she says.

The last time this happened was in 2008-2009, after the price of crude oil plummeted to about $35 barrel amid a global downturn. At least 70 million barrels were stored on tankers until the price rebounded.

Crude oil is now selling for less than $50 per barrel, less than half its price last summer. It’s almost certain to go up again. But when?

Some international traders are betting that the price will head north soon. They are buying oil, putting it on tankers, anchoring the ships — and waiting it out. Basil Karatzas, a ship broker and adviser, says the tanker market is very active right now.

“Especially tankers for crude oil and particularly for very large crude oil carriers, the supertankers for transporting 2 million barrels of oil each time,” he says.

It costs about $15 million a year to store the crude oil on one oil tanker, according to Karatzas. Only a few international traders have the heft to buy and sit on this much oil, he says, companies such as Vitol, Trafigura and Gunsor Beheer. He says he’s inundated with calls from investors who want to take advantage of the contango and buy and store oil. But it’s not so easy to do.

“You have to have a special license; you have to be a registered trader with oil producers like Saudi Arabia,” he says. “If you are just a financial institution, you cannot just show up in Saudi Arabia and tell them I want to buy 2 million barrels of oil because I want to speculate. They will not sell it to you.”

Ken Medlock, senior director of the Center for Energy Studies at Rice University, says oil companies and countries are also trying to take advantage of the soft market.

U.S. companies store oil in huge tanks onshore. Medlock says producers such as Saudi Arabia, the largest oil producer in the world, are looking further afield.

“The Saudis have been very active themselves creating storage capabilities,” he says. “There was an announcement a few months back of an expansion of storage capability in Asia. So they’ve been playing into this as well.”

Medlock says the risk for traders is that the price could keep dropping and stay low for a prolonged period.

“Then the oil you’re holding on to, that you’ve been hoping to sell forward, if you haven’t fully contracted that out, you’re going to sell at a loss,” he says.

Medlock says trading in international oil is not for the fainthearted. But if prices turn in their favor, the traders stand to make a huge profit on the oil they are now storing.

NPR



19 Comments on "Where Is All That Excess Oil Going?"

  1. Plantagenet on Thu, 29th Jan 2015 4:44 pm 

    I was just in Gibraltar in southern Spain. There were 35 (!) oil tankers anchored out—they completely surrounded the rock. The oil speculators imagine that when the oil glut ends, they will be able to sell the stored oil at a profit—but if the global economy really goes down and oil prices continue down, then the oil speculators are going to be doomed.

  2. Makati1 on Thu, 29th Jan 2015 8:27 pm 

    That number of tankers will soon be maximized, Then what? With a surplus of surplus, the price has to drop even farther, for even longer, until the surplus is gone. And how much per day does it cost to rent a tanker to sit in port? I suspect the gamblers are going to get blasted in this game, and they deserve it.

  3. Go Speed Racer. on Thu, 29th Jan 2015 8:29 pm 

    We are now at peak peaking. All the things that are peaking, are at maximum peak. Oil, metals, water topsoil, welfare checks, con artist schemes, Hare Krishna’s, street bums, food stamps, spam email, garbage dumps. All at maximum peak, peak peaking.

  4. Perk Earl on Thu, 29th Jan 2015 10:31 pm 

    I was just in Gibraltar today and there was only 7 oil tankers offshore and only 3 were still full. I asked the locals and one told me they were offloaded due to a sharp rise in demand. The expectation is oil price will rise dramatically now! Just having a little fun with you Plant. lol.

  5. GregT on Thu, 29th Jan 2015 10:38 pm 

    According to Marine Tracker there are currently 32 (!) oil/chemical tankers anchored at Gilbraltar right now. Three of them must of sunk since you were there Plant.

  6. GregT on Thu, 29th Jan 2015 10:40 pm 

    Sorry about the (!). I wasn’t really sure if it was part of the official (!) oil tankers terminology or not?

  7. Rodster on Thu, 29th Jan 2015 10:51 pm 

    The global economy is in the shitter. That’s one of the reasons why tankers are full of oil. Zero Hedge posted anew article how the BDI has crashed and it’s at 1986 levels. Stuff isn’t moving cause not enough are buying.

    http://www.zerohedge.com/news/2015-01-29/wtf-chart-day-baltic-dry-index-crashes-lowest-29-years

  8. GregT on Thu, 29th Jan 2015 10:58 pm 

    So what are you saying Rod, that ‘the oil glut’ is causing the economy to be in the shitter? Or the economy being in the shitter is the cause of ‘the oil glut’. Because if it’s the latter, we don’t really have ‘an oil glut’, just a shitty economy.

  9. Plantagenet on Thu, 29th Jan 2015 11:27 pm 

    @GregT

    32 of them still at Gibralter…hmmmmm. I left there about two weeks ago to go to Granada and then Madrid. Thats really interesting Gregt

    Thanks!

  10. Rodster on Fri, 30th Jan 2015 4:19 am 

    GregT: “So what are you saying Rod, that ‘the oil glut’ is causing the economy to be in the shitter? Or the economy being in the shitter is the cause of ‘the oil glut’. Because if it’s the latter, we don’t really have ‘an oil glut’, just a shitty economy.”

    How about a little of both. As Gail Tverberg likes to point out in her blogs that the global economy is so interconnected and complex that one problem can cause a chain reaction and create feedback loops. As Short likes to say as well as Gail. You get to a point where oil is priced too high for the consumer and on the way down too low for the producers. So you have a pendulum effect. One effects the other and causes it’s own set of problems.

    That’s the problem with the mess we’ve created in BAU. Trying to figure out the one cause and effect to a problem. Sometimes one problem can be affected from multiple angles.

  11. Ralph on Fri, 30th Jan 2015 7:05 am 

    The owners of the oil in those tankers are not going to lose their money. They already have buyers for that oil, on the futures market. The cost of storing the oil in those tankers is about $1-2/barrel/month. The contango on the futures market exceeds those prices. Of course, the people who have bought those future contracts might lose their shirts.

  12. Go Speed Racer on Fri, 30th Jan 2015 8:03 am 

    I was in Gibraltar today, in her Majesty’s Secret Service there was a double-agent had to meet up trade suitcase for microfilms. Checked status of crude oil tankers and it matched according to schedule handed out from Money Penny at debriefing. headed for the mountains now in the Aston Martin, note to self watch out for snipers and listen to shortwave for latest number of tankers in the harbor.

  13. Davy on Fri, 30th Jan 2015 8:06 am 

    Speeder, can I have some details on the beautiful women. I can care less about your mission.

  14. Mike999 on Fri, 30th Jan 2015 9:48 am 

    So buying a hybrid or EV now would help make some .1% lose some money? Go for it!

  15. rockman on Fri, 30th Jan 2015 10:39 am 

    And we all do understand this discussion is strictly about the physical oil market. If one wishes to make speculative investments anticipating an oil price increase they need only buy futures contracts. No need to pay for storage. Given it’s not uncommon to have over 1 BILLION bbls under futures contracts every day that market makes the physical oil market look insignificant.

  16. GregT on Fri, 30th Jan 2015 2:45 pm 

    “So buying a hybrid or EV now would help make some .1% lose some money?”

    Sorry Mike, the .1% also make money from using oil to manufacture hybrid and EVs.

  17. Harquebus on Fri, 30th Jan 2015 9:29 pm 

    If the economic decline continues and is likely to then, the “glut” will be even worse and prices will fall further.

  18. Boat on Sat, 31st Jan 2015 10:31 am 

    http://www.eia.gov/forecasts/steo/report/global_oil.cfm

    Nothing about this chart looks unusual. Simple supply and demand.

    When it comes to world GDP growth everything I read shows high intensity energy industries will grow robustly. Jobs being replace by machines, not so much. Conclusion, energy is plentiful and affordable.People with an education/job skills are lacking and dragging economies down due to having to support them.

  19. ghung on Sat, 31st Jan 2015 10:41 am 

    “Conclusion, energy is plentiful and affordable.People with an education/job skills are lacking and dragging economies down due to having to support them.”

    Yeah, Boat, that’s one conclusion; one that ignores a world of externalities. That’s the problem with a narrow, specialised focus.

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