News

    Oil Storage at Record Levels as Speculators Await Higher Prices

    Multimedia

    Audio

    When news reports mention the price of oil, they are usually referring to the price of a barrel of the benchmark West Texas Intermediate crude, and that price often depends on how much of it is in large storage tanks near the small town of Cushing, Oklahoma. Paying storage costs may prove profitable if oil prices go back up in coming months as some experts predict they will.

    Cushing is a town of just over 8,000 people, halfway between Oklahoma City and Tulsa, an important U.S. oil and gas production zone. Cushing is the location of between five and 10 percent of total U.S. domestic petroleum storage and the delivery point for the New York Mercantile Exchange crude oil contract.

    Contango is the term oil traders use to describe the profitable price spread that can develop between the spot price of oil and the higher price they can obtain for future delivery. If the future price is high enough, the person selling the oil can pay all the storage costs and still make a good profit.

    Oil market analyst Phil Flynn of the Alaron Trading Corporation explains how it works. "You may only pay $40 a barrel, but you could sell it today, lock in a future price much, much higher, just a few months down the road and take advantage of that. You could lock in, per barrel, a $3 or a $5 or, if you could hold the oil long enough, maybe even a $10 profit."

    But Flynn says speculators responding to the recent contango have dramatically increased the amount of stored oil and caused the spread to diminish. He says the monthly supply report issued by the U.S. Energy Information Agency Thursday shows an abundance of idle oil.

    "We got hit with a flood of crude. Crude oil built like [approximately] over 6.5 million barrels in just one week. We went from a year ago worrying about peak oil and the world running out of oil to having an oil glut of basically historic proportions," he said.

    What Flynn is talking about is the way investors, buyers, sellers and speculators react to market fundamentals. But the role of speculators, particularly in the oil market, came under intense scrutiny last year when the price of oil soared to over $147 a barrel.

    In May, the International Monetary Fund reported that "speculation has played a significant role in the run-up of oil prices." In June, the Massachusetts Institute of Technology issued a report that called the spike in oil prices a speculative bubble that could not be justified by normal supply and demand factors.

    But many of the experts who follow the oil and gas industry closely say the price rise was driven by market forces and that it is likely to happen again. University of Houston Finance professor and Director of the Global Energy Management Institute Craig Pirrong says there is no evidence to support the case against speculators.

    "If speculators are the ones willing to pay the high price, they should be the ones who end up holding the barrels. That certainly was not the case during the summer when prices were very high. We would have seen, under those circumstances, sort of a ballooning of inventories during the summer, and that is not what we saw," he said.

    Pirrong says demand for oil was driven down by the recession, and that has led to cutbacks in production by many oil companies. Eventually, he says, prices will rise because of the drop in production and the increase in demand that will come with an economic recovery. "Basically, there has been a huge brake put on capital expenditure in the business and exploration, et cetera, as a result of the current financial and economic downturn. But when the economy turns around, and we are back in a situation where capacity has not expanded and demand picks up, then we could see a big spike in prices, and then that will galvanize a whole different political dynamic," he said.

    Pirrong says it is all but impossible for anyone to predict the exact timing of the rise, but he says the market is very efficient in setting the price.

     

    This forum has been closed.
    Comments
         
    There are no comments in this forum. Be first and add one

    Featured Videos

    Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
    Turkish Kurd Islamist Rally Stokes Tensionsi
    X
    April 29, 2016 12:28 AM
    In a sign of the rising power of Islamists in Turkey, more than 100,000 people recently gathered in Diyarbakir, the main city in Turkey’s predominantly Kurdish southeast, to mark the birthday of the Prophet Muhammad. The gathering highlighted tensions with the pro-secular Kurdish nationalist movement. Dorian Jones reports from Diyarbakir.
    Video

    Video Turkish Kurd Islamist Rally Stokes Tensions

    In a sign of the rising power of Islamists in Turkey, more than 100,000 people recently gathered in Diyarbakir, the main city in Turkey’s predominantly Kurdish southeast, to mark the birthday of the Prophet Muhammad. The gathering highlighted tensions with the pro-secular Kurdish nationalist movement. Dorian Jones reports from Diyarbakir.
    Video

    Video Pakistani School Helps Slum Kids

    Master Mohammad Ayub runs a makeshift school in a public park in Islamabad. Thousands of poor children have benefited from his services over the years, but, as VOA's Ayesha Tanzeem reports, roughly 25 million school-age youths don't get an education in Pakistan.
    Video

    Video Florida’s Weeki Wachee ‘Mermaids’ Make a Splash

    Since 1947, ‘mermaids’ have fascinated tourists at central Florida’s Weeki Wachee Springs State Park with their fluid movements and synchronized ballet. Performing underwater has its challenges, including cold temperatures and a steady current, as VOA’s Lin Yang and Joseph Mok report.
    Video

    Video Somali, African Union Forces Face Resurgent Al-Shabab

    The Islamic State terror group claimed its first attack in Somalia earlier this week, though the claim has not been verified by forces on the ground. Meanwhile, al-Shabab militants have stepped up their attacks as Somalia prepares for elections later this year. Henry Ridgwell reports there are growing frustrations among Somalia’s Western backers over the country’s slow progress in forming its own armed forces to establish security after 25 years of chaos.
    Video

    Video Bangladesh Targeted Killings Spark Wave of Fear

    People in Bangladesh’s capital are expressing deep concern over the brutal attacks that have killed secular blogger, and most recently a gay rights activist and an employee of the U.S. embassy. Xulhaz Mannan, an embassy protocol officer and the editor of the country’s only gay and transgender magazine Roopban; and his friend Mehboob Rabbi Tanoy, a gay rights activist, were hacked to death by five attackers in Mannan’s Dhaka home earlier this month.
    Video

    Video Documentary Tells Tale of Chernobyl Returnees

    Ukraine this week is marking the 30th anniversary of the world's worst nuclear accident, at the Chernobyl nuclear power plant. Soviet officials at first said little about the accident, but later evacuated a 2,600-square-kilometer "exclusion zone." Some people, though, came back. American directors Holly Morris and Anne Bogart created a documentary about this faithful and brave community. VOA's Tetiana Kharchenko reports from New York on "The Babushkas of Chernobyl." Carol Pearson narrates.
    Video

    Video Nigerians Feel Bite of Buhari Economic Policy

    Despite the global drop in the price of oil, Nigerian President Muhammadu Buhari has refused to allow the country's currency to devalue, leading to a shortage of foreign exchange. Chris Stein reports from Lagos businessmen and consumers are feeling the impact as the country deals with a severe fuel shortage.
    Video

    Video  Return to the Wild

    There’s a growing trend in the United States to let old or underused golf courses revert back to nature. But as Erika Celeste reports from one parcel in Grafton, Ohio, converting 39 hectares of land back to green space is a lot more complicated than just not mowing the fairway.
    Video

    Video West Urges Unity in Libya as Migrant Numbers Soar

    The Italian government says a NATO-led mission aimed at stemming the flow of migrants from Libya to Europe could be up and running by July. There are concerns that the number of migrants could soar as the route through Greece and the Balkans remains blocked. Western powers say the political chaos in Libya is being exploited by people smugglers — and they are pressuring rival groups to come together under the new unity government. VOA's Henry Ridgwell reports.
    Video

    Video Russia’s TV Rain Swims Against Tide in Sea of Kremlin Propaganda

    Russia’s media freedoms have been gradually eroded under President Vladimir Putin as his government has increased state ownership, influence, and restrictions on critical reporting. Television, where most Russians get their news, has been the main target and is now almost completely state controlled. But in the Russian capital, TV Rain stands out as an island in a sea of Kremlin propaganda.

    Special Report

    Adrift The Invisible African Diaspora