Tight storage may lead to huge oil price drop

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.

The chart above shows one component of inventories--US inventories. The chart indicates that US oil inventories (green) have been increasing since after the September 2008 hurricanes, and, in fact, started increasing as early as May 2008. Brent oil prices (red) decreased between June and December, but recently have been slightly increasing.

Below the fold I give a summary of US, OECD and China petroleum inventories, inclusive of oil stored on tankers, and indicate what I expect will happen to near term oil prices.

Contango - is not a place in Chile

First a brief look on definition(s) of contango;

  • Contango is when the price of the oil (or other commodities) some day in the future, in short often referred to as “futures”, is higher than the price of oil today. This offers market participants an incentive to buy oil today and store it for future use or sale.

    Some participants buy oil contracts today, then turn around and sell them into the futures market. Using this approach makes it possible to pocket an almost no-risk profit. This also helps explain the 100 + Mb of oil and petroleum products presently stored on tankers waiting for deliveries. Read more about this here

  • Contango thus adds demand beyond the existing fundamental physical consumption, and most of this added demand ends up in storage. There are of course also market participants who do not want to take physical delivery of oil future contracts as these expire. This occurs because oil is sticky, toxic, and requires specialized storage facilities. Oil is not bought and stored the way gold is, for instance.
  • These futures "expire" on the third Friday of every month. If a buyer holds a contract through expiration, the buyer has to take physical delivery of 1,000 barrels (which is the size of one contract) of oil at a depot. This could be in Cushing, Oklahoma. Some buyers (investors) do not want to do that, so these buyers sell their current contract(s) before it expires and buy the next-month contract.

    This is referred to "rolling" the futures position forward.

  • This is also where "contango" comes in. If the price of the next-month contract (like say, July) is more expensive than the price of the near-month contract (i.e., June), the buyer effectively loses money on the "roll." When that happens, the market is said to be in "contango.".
  • The opposite is commonly referred to as "backwardation."

Figure 01: The diagram illustrates the present contango and shows the closing prices for Brent blend as of May 6th and 8th 2009.

The diagram illustrates that the contango flattens the longer into the future it goes. This suggests that participants can maximize profits by holding oil as a short time period as possible (thus also reducing risk).

An update of the storage situation

An increased inventory build by companies and refineries may reflect a fundamental change by these participants from just in time (JIT) inventories to building inventories in anticipation of a tighter supply situation in the future. (IEA has on several occasions pointed to the possibility of a supply crunch in 2011 - 2013 due to lack of investment in new oil production).

Increased inventory could also be rooted in anticipation of good OPEC discipline in observing their present quotas and hints about further cuts in the quotas. Furthermore, statements by OPEC that US$ 70/Bbl constitutes a “fair” price may give the impression that OPEC’s is committed to strengthening oil prices by adjusting supplies.

The demand side may be fueled by expectations and public assertions that the present recession will end soon, and that the big economies again will enter growth by the end of this year.

Figure 02: This diagram illustrates the development in U.S. total crude oil and petroleum storage as of May 1st 2009 inclusive of SPR (Strategic Petroleum Reserve).

This diagram illustrates that inventories have not been at their current level since 1990. The diagram also illustrates that there normally is an inventory draw down during the heating season (winter) but that this did not happen the past heating season. Instead, there was a total net build of 95 Mb as of May 1st 2009.

Figure 03: The diagram illustrates U.S. total petroleum consumption for the period 01st January 2001 through April 24th 2009. Consumption data (blue line) is plotted against the primary (left) y-axis. A 52 WMA (Weekly Moving Average) is added to smoothen the wild swings in the data. The crude oil price (weighted average), black line is plotted against the secondary (right) y-axis. NOTE: Primary (left) y-axis is not zero scaled.

US petroleum demand first was affected by the growth in oil prices early in 2007. The price spike in July 2008 accelerated the downward demand trend. Demand has been driven further down with the slowing economy.

Figure 04: The diagram illustrates the development of U.S. commercial crude oil, gasoline and distillate stocks from January 1990 until 01st May 2009.

The diagram illustrates that normally during the heating season, U.S. crude oil inventories remain flat or are drawn down. The exception seems to be the last heating season, where a strong inventory build took place.

At some point there eventually will be little free physical storage left. At this point, it will become increasingly difficult to purchase oil for storage. Because of the lack of available storage, this link in the demand equation will decline. Eventually, the oil in storage will appear as available supply sometime in the future.

Owners of oil in storage (mostly refineries) could draw down storage to temporarily temper future price increases.

Figure 05: The diagram illustrates U.S. daily total inventory movements for the period 01st January 2008 through May 01st 2009 (based upon weekly figures), green dots connected by a green line plotted against the primary (left) y-axis. Against the secondary (right) y-axis is the average weekly oil price plotted, red squares connected by a black line.

The diagram shows through the 4 WMA (4 Week Moving Average) that in the months of April 2009, the build up U. S. inventories occurred at a rate of close to 1,5 Mb/d. Using a 26 WMA brings this rate to above 0,5 Mb/d. From the start of 2008 until the hurricanes affected GOM (Gulf of Mexico) production in September, there was a net build in total petroleum inventories of 25 Mb (Million barrels) suggesting that total U.S. inventories were maintained as long the oil price remained high.

According to IEA Oil Market Report as of April 2009, OECD excluding the U.S. saw total inventory build of around 53 Mb from October 2008 through February 2009, and China saw a build of approximately 17 Mb totaling 70 Mb. This translates into an average build of close to 0,5 Mb/d, and there is reason to believe that the inventory build for (OECD - USA + China) has continued at this rate.

Combining these indications, we find that for the countries constituting 2/3 of the global consumption as of 2008, have in recent months been building at a rate above 1 Mb/d. If the most recent data from U.S., the sum of the inventory build indications suggests this rate was around 2 Mb/d during April.

If the storage build from OECD and China could serve as a proxy for the rest of the world, this would suggest that they were building total inventory at a rate of around 0,5 Mb/d. There is reason to believe that the rest of the world has seen a lower rate of storage build, but to quantify this becomes hard. However as an approximation, it will here be assumed that this rate has been half of China’s recent 0,1 Mb/d, around 1,5 % of consumption.

This suggests that the rest of the world, with estimated consumption of 30 Mb/d in 2008, has been building at a total rate around 0,25 Mb/d.

At some point, available storage will be filled. What will happen then? Will demand suddenly increase to make up for the amount that would have been added to storage? It is difficult to envision this happening. Instead, that it seems likely that there will be a sudden drop in demand.

Tanker storage

There is a limit to how many tankers that can be used for storage (or reduction of the seaborne transport capacities) before it starts to affect tanker rates. This is because oil tankers are in some ways comparable with pipelines. The present economic downturn has depressed tanker rates and made their use for storage, if not economic, more attractive than the alternative--dropped anchors, empty and no income.

If additional storage continues, the world’s operating tankers will at some point will reach their fundamental capacities. Then tanker rates will again grow, making it more attractive to use the tankers for transport than for floating storage.

According to this article, shipping analysts estimate that around 100 Mb of crude oil and 25 Mb of refined products were stored at sea as of end late April. This storage will someday change from demand to additional supply.

Assuming that this built up in storage at sea, 125 Mb, has taken place during the last 6 - 7 months suggests that this added 0,6 - 0,7 Mb/d to global oil demand.

Oil now stored on tankers will at some point enter the market. This could add an average supply of 0,3 - 0,4 Mb/d over a year (and more over a shorter time span, if panic breaks loose). Moreover, as most of the readers know, pricing happens at the marginal barrel and small changes in the demand - supply equation may result in big price changes.

More about tanker storage may be found; here and here.


As I have shown in this post, data from the recent months suggests that as much as 2 - 3 Mb/d of present global petroleum supplies have been entering storage, and this is about to end due to lack of storage.

This (2 - 3 Mb/d) admittedly sounds like a lot, even adjusted for the decline in consumption and shut in capacities within OPEC. However, given the price growth of approximately US$ 15/Bbl, or 25 %, between the middle of March this year and now, it could have given some exporters an incentive to open their taps a little beyond their quotas.

At this point, I see little evidence that would justify a reinforced contango in the near future. Physical evidence like storage levels and reported and estimated total storage onboard tankers suggests a presently well-supplied oil market.

The situation in the oil market now bears some similarities to the situation in 1998 when oil prices temporarily went below US$ 10/Bbl--not that I believe prices will drop that far this time. The drop could be very large, however.

Eeks! Is it time to sell all of my oil and oil-related stocks?

They've been creeping back up after cratering a while back. And then what - cash or gold?

From my cursory glance, figure 5 tells me that there's no relationship between storage and price - !?

And isn't 120 million barrels just 1 1/2 days supply? Doesn't seem like a lot to me... Hurricanes are coming in less than a month, and driving season, and doesn't oil usually go up in the Summertime?

It's OK if I'm wrong but that's just what I'm thinking...


Figure 5 shows price development versus (average daily) total petroleum storage movements (withdrawals or build), and from that perspective the figure is a poor indicator to tell anything of the relation between storage and price.

I think a better indicator is to follow total storage and how that deviates from previous seasons.

This winter has seen strong and unseasonal inventory builds not seen in a while.

These are 120 million barrels that have no geological constraints.

Keeping in mind that pricing happens at the marginal barrel an inventory build over a year of 120 Mb adds a demand of approx. 0,3 Mb/d.

If this inventory later is used as a supply source and lets for the illustration say that it is emptied during one year, this will add supply of approx. 0,3Mb/d.

Then this will have the same effect on the market as an increase of supplies of approx. 0,6 Mb/d from one year to the next.

Through the recent years oil prices has normally grown during the summer, but there are some differences around this time.

- Rune


Thanks for checking in. I expect an interesting Summer.

How's the water temperature in the GOM these days?

These are nice charts. Although consumption of oil has fallen somewhat in the US, the largest use of oil is in making gasoline. Domestic consumtion of gas has fallen less than 1 percent in the first quarter of the year vs. year ago. The largest users of distilates, trucks, railroads and airlines have seen reductions in use of 6 to 12% from what I have read in the Journal of Commerce.

But with the stimulus program ready to kick in, hundreds of thousands of barrels of diesel will be used for construction equipment besides gas used by the 1 to 2 million workers used in these projects. The use of asphalt is likely to be substantially above last year's for the same reason. Gasoline consumption will likely be above last summer's level as more people take driving vacations instead of more expensive air travel. US DOE statistics show that driving uses as much fuel per passenger as flying.

The main question that has to be answered to predict a price move is:
Who is storing this oil?
If it is producers, then they will have incentive to sell at some point sooner than later. If is large users like China or India then maybe the oil in storage is just waiting to be consumed by their economies which are not contracting like US. If speculators are doing the storing then, who knows?

The diagram above shows development in US gasoline consumption (with a 52 WMA ; 52 Week Moving Average) to smoothen the swings in the weekly data. Plotted against the left y-axis this is not zero scaled. In the diagram is also plotted the average weekly gasoline price.)
The diagram illustrates that growth in gasoline consumption came to an end as the average annual gasoline price went above $2,60/gallon and declined as crude oil and gasoline prices continued to grow. As gasoline prices retreated to $2,00/gallon, decline in consumption decelerated and is now mostly believed driven by the economic slow down./i>

Distillate consumption is, in my opinion, a far better indicator of the fundamental strength of the economy than gasoline consumption.

Who is storing this oil?
That is a good question, and the answer to that could give a clue to what expectations these participants have.

From what I have read some of it is stored by oil companies (that also owns refineries) suggesting that they expect prices to grow in the future. However, these market participants have been wrong on previous occasions and could of course be again.

Does anyone here think that the oil companies are increasing inventories so as to generate a dramatic drop in prices -- and thereby crush investments in alternative energy and energy efficiency?

It seems to me that I've read this book before, back in the late 1980s and early 1990s.

Perhaps I am only being paranoid ...

It would be interesting to look at the historical build in inventories plotted as days-of-supply for the world rather than just barrels. Clearly, the world's demand for oil on a daily basis has risen tremendously over the last decade (where were China and India then?).

I have a feeling that the press are touting a large inventory build where there isn't - at least that is what Matt Simmons is saying.

Anyone else have any thoughts on this? A large drop off in price would be a disaster for the energy industry.

I am also wondering whether we can now expect to see more demand WW as the emerging economies start to heat up again?

What folks forget is that oil HAS to be a certain price to make it viable to even go drilling for oil. Bring down the price too far and the tar sands & deep water suddenly go offline.

The oil industry, like other businesses that "build and develop" things needs a certain dollar point to make it worthwhile. The market knows what that price is and it's not going to fall.

80 bucks in 18 months.

Offshore oil supply does NOT go offline when prices drop, especially not in deep water fields. Once committed oil companies race for first oil and produce at maximum to generate cash flow, regardless of the price. What goes off is spending on slowing natural field decline and marginal production onshore when the cost if operating the wells or drilling new ones is above revenues from oil or gas prices, e.g. shale gas in the USA. The major threat from falling demand, rising stocks and low prices is an accelerating global decline from old fields that will sooner or later swing the market into shortage instead of surplus. How soon or how late is hard to call, but it is not measured years but months.

It would be interesting to look at the historical build in inventories plotted as days-of-supply for the world rather than just barrels. Clearly, the world's demand for oil on a daily basis has risen tremendously over the last decade (where were China and India then?).

I have a feeling that the press are touting a large inventory build where there isn't - at least that is what Matt Simmons is saying.

Anyone else have any thoughts on this? A large drop off in price would be a disaster for the energy industry.

I am also wondering whether we can now expect to see more demand WW as the emerging economies start to heat up again?

Here is the US Crude Oil Days of Supply graph from the EIA:

I think that it is pretty clear that the industry has been moving toward a Just In Time inventory system in the 20 year or so time period from about 1984 to 2004, primarily IMO because they have the SPR as a backstop. It looks like 1995 was the inflection point between an average of over 25 Days of Supply to an average of less than 25 Days of Supply. So, recent inventory levels are high based on five year numbers, but not based on pre-1995 numbers.

Having said that, it seems to me that something's gotta give. I don't see how we can keep seeing a combination of rising oil prices and rising inventories.

As long as the Fed keeps printing money and giving it to the banks, we can keep seeing a combination of rising oil prices and rising inventories and just about anything else that normally wouldnt make sense.


Global physical oil consumption is clearly down (for the US it is down approx. 1,5 Mb/d according to data from EIA). Someone proposed that using US consumption (25 % of global petroleum consumption) as a proxy for global consumption this would suggest that global physical consumption now is down with approximately 5-6 Mb/d year on year.

As storage both by EIA and IEA is reported considerable up, the days foreward has grown rapidly.

Ref. also westexas comment where a chart of this is added.

I have used the data as these are published by EIA and IEA and the data has not been subject to a third party revision.

There seems to be a lot of expectations out there about the economies heating up again, could explain the growth in oil prices.

- Rune


Thanks for the heads up on the possibility of drop in oil prices. However, your Figure # 5 shows that oil prices dropped mostly because of the recession and demand destruction. In fact until January, those who bought futures contacts lost money. Therefore, assuming that the enormous amounts of money being poured into the economies by various governments around the world will start the economies going again, then demand for oil also will pick up. If the recession continues, based on the link you have provided (http://www.investorschronicle.co.uk/MarketsAndSectors/Markets/article/20...) there is still plenty of storage capacity available. Here is what the article says: “The good news is that the world isn't yet running short of floating capacity. According to a spokesman at Frontline, the leading tanker company, there are over 500 large tankers globally, able to provide plenty more floating capacity before producers really need to worry.” Never the less, it is clear that we are not out of the woods yet and caution may be prudent. bzl14

I saw a comment further down that the world presently had a bout 520 huge crude carriers.
Most of these will be occupied by moving crude from exporters to importers, and I am not certain of the exact figure. However to me it is clear that at some point the number of tankers that can be used for storage will be limited by the need of tankers needed to move oil around.

- Rune

Of course this leads you to need to explain the collapse in tanker rates.

The world is swimming in oil but it looks like oil tankers are no longer needed to collect it.


If we had seen even a shred of evidence that tanker rates where under some pressure then I'd buy into we are moving enough oil around to have large inventory builds and offshore storage.

Three pieces of information that are independent point to this storage build being very questionable.

1.) VMT
2.) Tanker Rates
3.) The oil price


Page 9 you can see that the rate of change of VMT has started to leveled off significantly.
I'm not aware of anyone predicting this :)

The odd man out is the storage claims.

Now as far as distillates go


We had a strong build in imports even though the US has become a fairly big exporter of distillates.

Another interesting part of the puzzle.

If I had to guess I'd say some people are not expecting a huge glut in oil anytime soon.

With respect to distillates, I know one of the issues is that Mexico cannot produce the very low sulphur diesel that is now required, especially for US trucks crossing the border. So they send us crude oil, we refine it, and send it back.

TWIP has import data, but only guesses at export data. One has to wait for monthly data for exports. Based on monthly data, the US has been a net exporter of distillates since late 2007. This has not changed in 2009, based on monthly data through February.

I agree my point was why the large import of distillates ?

This increase only served to help the inventory situation grow.

With the demand curve like this.

I don't have a simple explanation for the sudden urge the US had to import distillates.
I have a complex one that does not fit in the margins of this post :)

The world is swimming in oil but it looks like oil tankers are no longer needed to collect it..

Could that be due to a decline in consumption?

Three pieces of information that are independent point to this storage build being very questionable.
1.) VMT
2.) Tanker Rates
3.) The oil price

All your listed points towards a decline in consumption.

If I had to guess I'd say some people are not expecting a huge glut in oil anytime soon.

However, what about the others?
Only time will tell.

Correct me if I'm wrong, but memmels point was that if tanker rates are so low then there cannot be such high levels of storage, the more oil that is stored the higher the tanker rates would go.

I like the quote [forget by exactly who]: "The market can be irrational much longer than you can be remain solvent."

Thus, it would not surprise me to see the market retest towards the earlier $36/bbl low, assuming OPEC & Russia do not volunteer to curtail production further.

It appears to some economists that the US will remain stagnant for some time despite the best efforts of Obama, Bernanke, and Geithner to 'push on a string':

May 12 (Bloomberg) -- Economists downgraded their projections for a recovery from the deepest U.S. recession in half a century, now seeing the jobless rate exceeding 8 percent through 2011, a Bloomberg News survey showed.

..“The worse the labor market is and the longer that lasts, the more difficult it’ll be for consumers to recover,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. “The economy isn’t going to come roaring out of the box here.”

Schwarzenegger: State budget deficit has nearly doubled

SACRAMENTO – The state budget deficit has nearly doubled in the past two months, climbing past $15 billion, Gov. Arnold Schwarzenegger disclosed Monday.

The sober news comes a week before a May 19 statewide vote on a set of ballot budget-related measures that, if defeated, would push the deficit past $21 billion, Schwarzenegger warned in a letter to legislative leaders.

The latest polls continue to show voters leaning against five propositions, 1A through 1E, that would have a direct bearing on the state's finances. The measures' defeat would compound the state's troubles, the governor said.

“The severe economic downturn that California, like the rest of the nation, has been facing has worsened substantially,” Schwarzenegger wrote. “These changes in the state's economic and revenue pictures have caused a significant new budget problem to emerge.”
IMO, the Guvinator ought to give Cali a full dose of Peak Outreach so that the voters will vote for a balanced budget [even better a budget surplus], instead of letting them remain ignorant and continue to shoot themselves in the foot.

The first thing that comes to mind with an article like this is that the author has technical knowledge of the futures market in oil and is speaking to those who have less knowledge than he does, hence the explanations of the concepts of "contango" and "backwardation". Now, my question is this: Does the author hold any short positions in any stock or commodity which could be affected by selling pressure generated by this or similar articles? It should be a standard practice for authors on theoildrum.com to disclose their positions, both short and long, in energy stocks and commodities.

Helo stream47,

Presently I am not holding any positions in any stock or commodity.
This means zip and zero, so presently I do not have any financial interests in any (if) stock or commodities movements generated by this article.

And I agree that as author on TOD I should have made such a statement either in the opening or the end of the article.


It isn't that simple. Firstly in that case all those posting comments on this page should also be declaring their positions. Secondly there is loads of discussion on tod about what prices are going to go up or down, what industries will crash or prosper. So we should all be declaring all the time to the point of tedium.

More realistically every writer should just say what they have to say and all readers use their wood-blocks to judge how sound or otherwise the information and comments may be.

If Rune were just someone making comments, then it's different. People who make comments don't really have any official status with theoildrum.com, and so people take them more or less seriously according to their own individual biases and experiences. On the other hand, Rune is a member of a select group of contributors, 6 in total, who are listed as personnel of the theoildrum.com site. Rune's opinions count more on this forum than do yours or mine; just look at the number of people who are making comments to the effect of "Are prices really going down? Maybe I should sell my shares in energy stocks..." Rune's opinions get listened to, and probably acted upon, and so it makes a lot of sense to require contributors and editors to disclose their investment positions relative to the information and opinions they post on this site. Other sites, such as SeekingAlpha.com and MarketWatch.com do this, and this site should require the same.

Two questions.

1.) If this storage level is real why the price movement ?
2.) Why should the price crash when storage is full one would assume that the cost of storage must be rising rapidly now with the last tanks more expensive then the first. The chances of it being profitable to fill any remaining storage or tankers given the lack of contango is small the concept of full is not required how can we even have price increases now ?

Put it this way if you take the numbers presented here as the truth then the price of oil should have already started downwards since its gone the opposite of where it should have and contangos flattened then the price of oil well out the futures curve should not only head down in the past it should now do so rapidly about two weeks back. Further price increases will only sharpen the difference.

Next of course the potential bottom price given that we have had such large builds is very low 20-30 a barrel. Since the current oil supply has allowed healthy builds even a further 2mbd cut by OPEC would have little effect you would need at least a 4mbd cut which will take time to enforce and I seriously doubt that most of OPEC can stomach another large cut esp since the price would probably crash soon.

And why on earth are people still storing oil as the price is increasing given the obvious situation. And of course once people start selling your going to have a rush to the exits and the price crashes.

Bottom line is OPEC cut obviously did not work if you believe the storage numbers a cut sufficient to actually drain storage any time soon is simply highly improbable far more probable is if this price collapse happens many OPEC producers will give up and try and cash flow and break quota leading to even more pricing pressure. This would eventually force KSA to punish these cheaters by flooding the market with oil and 10 dollars a barrel is a very good possibility.

Or is it ?

No smart player would still be building inventory.

One thing for sure is the moment of truth is technically well in the past so any day now if we really are where the numbers suggest we can expect the price of oil to collapse at least for the next 2 years if not longer.

I've been discussing this with Pup55 who has followed oil inventories for several years.


He is skeptical of the numbers and I trust his opinion.

I'm fairly confident that the current inventory numbers are not let us say equal to how oil inventory has been calculated in the past. Why this is true is open for debate but given the current price I simply cannot believe the current inventory represents what we think it does.

I'll also add that the only time in the years since I've been following the oil market that I felt the price of oil did not follow the real availability of oil within +/- 5% was during the hurricanes all other times I felt fairly comfortable with the relationship between fundamentals and the market price even at its recent low in 30-40 makes since given Armageddon might have been just around the corner back in the end of 2008.

I think the market is telling us that the storage numbers especially for the US are bullshit and I'm in agreement. The market is telling the US to show its hand and I think that a big bluff has been called.
We will see fairly soon but I have no problem siding with Mr Market.

I'd not be surprised to see the oil market actually go into backwardation in the next month or so with the front month rising strongly. My opinion is its either going to do that soon or its seriously out to lunch and this report is correct and we crash and should have seen falling oil prices for several months anyway.

Even the DOE is getting in on the act: SPR build since Aug:

Obama plans to fill U.S. oil reserve by early 2010 | Markets | Reuters

Meanwhile Enbridge actually scrapped 500 kb of extra rusty Cushing storage.

I'm waiting on Pup55 to look into this over at peakoil.com


However here

B.16 Proprietary data

Offer quantities and prices are not considered proprietary information. If any other information submitted in connection with a sale is considered proprietary, that information shall be identified by e-mail to the address indicated in the NS, and an explanation provided as to the reason such data should be considered proprietary. Any final decision as to whether the material so identified is proprietary will be made by DOE. DOE's Freedom of Information Act regulations governing the release of proprietary data shall apply.

I find this statement fascinating.

As I mentioned in Pup55's thread I believe that the SPR is now capable of working as a backstop for commercial oil transactions how exactly its being done I don't know. However this would explain the divergence of inventory claims vs oil prices mentioned in this post.


If the US is willing to allow SPR storage to back commercial inventory claims then the US can basically make up any inventory number it wishes. Given the fact we are at war in Iraq and have been for some time and also the terrorist issues the legal precedent for using the SPR in what ever fashion the President deems fit is probably possible. This is of course pure speculation but it does go a long way to explaining the claims of physical storage vs prices. However this makes the relationship between US storage claims and the real commercial oil situation impossible to determine.

I assume for example that this oil could if needed be "sold" back to the SPR even though it never physically left it in the first places. Needless to say one would expect US inventory claims to have little bearing on the market.

In my opinion US oil inventory data now can probably be better described as a subprime is contained statement or maybe better bank stress test results from our glorious leaders.

During the first 4 months of this year SPR grew with 17 Mb/d from around 702 Mb to 719 Mb.
This translates into an average increase of close to 0,15 Mb/d and IIRC SPR now can take around 726 Mb.
Anyway this demand will disappear as SPR is filled to the rim.

If this storage level is real why the price movement ?...I think the market is telling us that the storage numbers especially for the US are bullshit and I'm in agreement. The market is telling the US to show its hand and I think that a big bluff has been called.

As if on cue, futures look to be breaking through $60 this morning.

1.) If this storage level is real why the price movement ?

I have used the data as published by EIA and IEA. It would be messy if I were to question those data and present a personal interpretation of those.
Lately it looks like the price movements in oil have closely mimicked the stock market.
This does not necessarily mean that the market has got the fundamentals of the economy right.
As long there is growth in inventories, some of the demand is created by building inventories (this was explained in my post). If inventories are full there will be no place to put this “surplus” production.
One of the things experienced with systems operating close to capacity is that the “noise” increases which in the oil market would translate into higher price volatility.

I do not see that I have claimed that the response in the market is immediate. There is now way to exactly predict when change will occur and how big it will be, but looking at historical data these may give an indication of what direction the next change will come.

……..and I seriously doubt that most of OPEC can stomach another large cut esp since the price would probably crash soon.

You are making a subjective statement.

And why on earth are people still storing oil as the price is increasing given the obvious situation. And of course once people start selling your going to have a rush to the exits and the price crashes.

It could be in anticipation of higher prices, but also that those who bought oil overestimated consumption.
Yes, there could be a panic, and that one will not be pretty.

Rune Likvern

It could be in anticipation of higher prices, but also that those who bought oil overestimated consumption.
Yes, there could be a panic, and that one will not be pretty.

The problem Rune is the decision to store large amounts of oil regardless of the actual amount is not one you can make lightly. This is not day trading on the futures market is a big complex business.

The fact that I don't think the real storage levels match the claimed levels does not mean I don't think that people have not gone into storing oil in a big way my best guess is at least 100 million barrels.

Lets look at it this way here is what I would do if I had information that peak oil had happened and the decline rate was steep and I was a real bastard that worked for Goldman Sachs or Morgan Stanley.

First off I'd realize a golden opportunity existed to open a Oil Bank based on fractional reserve lending.
I could use all the tricks that work in banking and apply them to this new oil bank. Now since withdrawals are going to be more common than for regular banking I probably won't run a 10:1 reserve to claim level but something in the 2:1 - 3:1 range given oil has its own intrinsic time to deliver from the time its pumped to when its actually delivered in about the 3 month range I'd ensure I had enough oil to cover deliveries for about 3 months vs the contracts I had committed to. I will have to be able to settle some for actual oil delivery but I've got a wealth of data that lets me know what level I can commit to.

Think of this oil as just enough to cover demand deposits. If possible I'd also cut a deal with the US Government to use the SPR as and emergency backup for my plan. So I have both enough oil to cover expected demand and I have and emergency backup and finally I have enough that I can alter my position if needed to cover any unexpected shortfall.

Lets say I expect to make 1mbd in real deliveries and from the time I order more oil till it arrives is three months. From the day I open the doors on my oil bank till I decided to wind it down I'll be buying 1mbd and I'd need 90 million barrels to start and lets throw in some more for safety say 10 million barrels.

Now of course while I'm trying to create my oil bank I'd use every trick at my disposal to drive down the price of oil what ever I think I can get away with. And I'd steadily take delivery. For example I'd reserve all the storage on land I could find and claim the tanks where full but then leave the oil sitting out on tankers. Then when I had to I'd start landing the oil and reporting it as imports and add this to the oil I had in the tanks. But the trick is the tanks had set empty for months viola I just created two barrels of oil for the price of one. Hell I'd even be willing to buy oil that did not exist if I needed to. Maybe I know a refiner that had drained his oil storage during the hurricane I'd off to buy the oil in the empty tanks if they would transfer it to me and refill their tanks later on.
And of course games in the futures market. I'm not suggesting any of these scenarios is real but I can come up with numerous ones that verge on illegal and indeed cross the bounds that would allow me to build supplies as long as the market was in steep contango. If the market is crazy enough maybe it does not even need a lot of additional help.

Now at some point the reason I set the oil bank up in the first place will eventually assert itself. We really don't have enough oil and the contango will lesson and the market price will begin to rise.

Thats not a problem for me I have my oil bank I'm buying for delivery 3 months or more out the curve.
Flat contango and even backwardation just locks in profit. Since I expect the oil price to increase steadily I'm basically permanently in the money. Also if the market gets a bit soft I can grow my oil bank to handle 2 or even 4mbd of real deliveries. I'd have both the money and the vision to increase my ability to deliver oil to match any of the real producers. My strangle hold on the market and my own large future demand ensures a steady increase in price to keep my oil bank running. And of course I can always back down if I need to and purchase/sell less physical. So I have and exit strategy I can just dump the oil on the market but I could easily slowly wind it down over 6-12 months.

I can't imagine I'm the only person on the planet capable of dreaming this concept up.
If someone had just given me say 5 billion dollars I'd use it to get my oil bank up in running heck I'd be able to give the cash back in about six months of the profits from the oil bank and report a massive trading profit for my business from then on out I'd be making money consistently day in and day out.

I haven't hear any rumor of organizations heavily involved in the oil markets getting big wads of cash have you ?

Hi memmel,

If you have 5 billion dollars IMHO you would be better off "playing" with silver:-) The amount of silver bullion has declined by roughly 95% per-capita over the past fifty years. Fifty years ago there were about 3 billion people and 9 billion ounces above ground, today there are 6.8 billion people and 1 billion ounces.

Consumption has been greater than production for many years (call it peak silver). So at around 14 dollars/ounce the entire world's store is worth only 14bn dollar as opposed to say 4bn of oil per day.

1.) If this storage level is real why the price movement ?
2.) Why should the price crash when storage is full[?]

How about: because the price is only real market related, i.e., not real market determined, especially in any quick and automatic sense.

Or as Mabro put it back in '01:

The alleged economic rationale [for the price volatility] is that we are considering a market which sends signals about the allocation of resources. That would be perfectly correct if these price changes caused rapid adjustments in supply and demand. But they do not because the commodity traded is not physical oil but either a claim on future oil or a price differential which is no a commodity at all.

In still shorter form, 'the alleged economic rationale' is an efficient market artifact which fails to hold within the modern pricing regime. Price of crudes and real economy fundamentals can and have diverged.

How do the estimates in the STEO, which show global stock draws in December, January, February and March (April figures not yet out), mesh with this analysis? Is Rune's analysis more reliable than the EIA's estimates?


Data on US petroleum inventories used in this post are from EIA (Energy Information Administration of DoE) which publishes inventory data weekly.

For OECD ex. US and China storage data from IEA (International Energy Agency) Oil Monthly Report as of April 2009 have been used. In addition EIA data for other OECD countries have been checked vs IEA, and IEA data was used as this offered the most recent data.

- Rune

Well, up until yesterday, the EIA's STEO was estimating world inventories as reducing every month for the last 4 months of estimates. So it's unclear as to why you saw global demand falling so much. However, the latest STEO, just out, has enormous revisions and now shows only January as having a slight stock draw.

Of course, these estimates may be revised again but, for now, it looks like demand really is down.


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Eric Melin

Contrary to the Reuters piece linked in the article, clean products aren't stored in VLCC/ULCC/Suezmax tankers.

Rates for tankers have absolutely hit bottom; the index for measuring these rates is worldscale:

Worldscale - An index representing the cost of time chartering a tanker for a specific voyage at a given time. The index is given at Worldscale 100, which represents the price in dollars per ton for carrying the oil at that rate. The negotiated rate will be some percentage of the index value.

Capital Link Shipping | Glossary

Persian Gulf-Far East VLCC rate to w25 due to excess tonnage

Petroleumworld.com, May 12, 2009

The Worldscale rate for Persian Gulf-Far East voyages on double-hulled very large crude carriers is edging down toward the w25 level with tonnage for these vessels building up and fewer May cargoes covered so far, shipping sources said Monday.

"Worldscale 25 is the last protection level for owners," a chartering source with a Far East refiner said.

"[There are] many vessels at Fujairah." Most of the vessels coming to pick a crude cargo sit around Fujairah while they wait for their loading orders.

Meanwhile, South Korean charterer GS Caltex took the double-hulled Samho Dream for a Persian Gulf-South Korea voyage to move a 265,000 mt cargo, loading May 19-21, at w27.

"They [GS Caltex] got 10 offers.They were looking for w24, but owners were holding out," another chartering source said. "If 10 or more owners are offering then surely the market is very weak."

But the charterer added that with the bunker price going up, the owners may not agree for w25.

WS 25 Ras Tanura-Ulsan (South Korea) on the R.S. Platou T/C Converter for a Suezmax barely breaks even - payback on VLCC still seems moderately robust, but perhaps their cost models are based on better returns. These shippers are really on the ropes from the sounds of things, and perhaps the traders know they can be only pushed so far before real damage occurs.

Business Report - Single-hull ban may revive tanker market

The collapse in shipping prices, from a peak of $177 036 a day last July to this year's low of $7 173 on April 16, and a ban on single-hulled vessels as soon as next year could remove 20 percent of supertankers from service, says Fearnley.

New orders may be delayed or cancelled as banks restrain lending and owners conserve cash, ship owners say.

"The money needed to complete the order book does not exist in the world today," said Morten Arntzen, the chief executive of Overseas Shipholding, the largest US-based oil tanker owner. "We see a net reduction of the trading fleet next year."

•These futures "expire" on the third Friday of every month. If a buyer holds a contract through expiration, the buyer has to take physical delivery of 1,000 barrels (which is the size of one contract) of oil at a depot.

Rune, I see people making this error almost daily. It is simply not so! No one is ever forced to take delivery of any commodity. It does not matter if it is pork bellies or crude oil, buyers are never forced to take delivery if they hold a contract at expiration. And likewise sellers are never forced to make delivery.

IEA Oil Market Report, User's Guide and Glossary

Prices Expiry Date:
The final day on which futures trading in a particular month is permissible. Any contracts left open following this day must be settled by delivery or cash settlement.

"Or cash steelement!" Even if you hold any long or short contract the day after expiration you can still settle in cash.

Ron P.


Thank you.

I stand corrected.

The precision you made should have been included in the post.

- Rune

Then again, the settlement price might diverge substantially from the actual oil price (see what happened with last October's WTI contract). Hanging on to expiring futures is evidently safer for those able to deliver (or to take delivery).

Having followed grain markets for many years, I do not believe that the amount of commodity in physical storage has anything to do with prices. Prices are set in the futures market and the physical price follows the lead of the futures. Futures markets are just as the name says: about the future. They try to see ahead. Right now they see summer demand, inflation and a recovering economy.

In grains it is not uncommon for prices to fall when physical storage is nearly empty. This often occurs in anticipation of harvest in late summer and fall. Then when physical storage is bursting and nearly nonexistent after harvest, it is common for prices to rise. This process generally starts in December and reaches a climax at planting time the following spring and is usually over by July 4th.

What is happening with oil now is accumulation of inventory in anticipation of the summer driving season. As demand increases into warmer weather, prices for products will rise along with oil. Oil inventories will be drawn down as spring agricultural demand, booming car sales in China and summer driving demand uses it up. Upcoming reports of inventory draw down this late spring and summer will fuel the speculative bull run up further. This will continue until about August when the futures market bull will again turn into a bear in anticipation of falling demand during the winter.

This game is played over and over again in commodities. But few pay attention and learn.

"...in anticipation of the summer driving season"

...and given the doom and gloom 'lifting' a little I expect it will be a bumper one this year!


Tanker storage numbers and a bit of perspective.

Total VlCC fleet = 520

This time last year Half where loaded delivering oil, the average VLCC holds 1.8million barrels equals 468 million barrels of oil on the water.

With VLCC rates so low one would assume there are quite a few sitting around empty. Lets assume 10percent, this equals 52 VLCC's (47 million barrels of oil less). This would mean compared to this time last year there is probably 53 million barrels more oil on the water if one believes the stories about 100million barrels of floating storage are true.

1999 was the last time there was this kind of rubbish about. "A wall of oil approaching, massive oil storage at sea, Oil price about to crash" That of course turned out to be a complete fairy tail I suspect this time is the same..

Note my story linked above that has one estimate of 20 percent of this fleet being scrapped or converted, owing to the ban on single-hulls in effect by next year or 2015 with special exemptions, extended to the Philippines for instance. This would make the supply chain that much tighter, and the rates haven't been this bad for tankers since 1973. At the least it would make this notion of a floating cabal of crude that much more unlikely.

I have come across stories about tankers with weighed anchor outside of Rotterdam and the like, so presumably some parts of the world are Drowning In Oil. But I do agree, Big Whoop. It will all be offloaded in a matter of weeks. This potential effect on shippers is a much more important story, IMO.

The Author, whom I have much respect for, has made a few mistakes in tying world oil price to US inventory levels.

One is the statement to where we did not have a stock draw over the winter. We did, but you have to do a bit of statistics to see it.

Take the Weekly Petroleum numbers and average over 5 years and then seasonally adjust. You will see the draw pretty clear. Since started from a higher level it was masked. One has to look at seaonality to see if there was a real variance in stocks. I have the numbers in a spreadsheet, the author can e-mail me if he would like to see it.

Second. Contango is more of an indicator of lack of short term demand with an expectation of long term demand and higher prices in the future. Markets are normally in Backwardization, Contango is the rarity, generally...How is it functions is that when you have no real demand relative to the current supply, the near month contract crashes and allow the opportunity for producers to store and wait for higher prices. When demand picks up and that stored product starts to move through the system, the assumption is that the demand is there to pick up both current production and the extra in supply moving to market. If that is the case, the forward curve flattens and the market moves to backwardization. If, not, then the front month contract moved down and the producers start to store again as the contango will steepen. This all happens fairly rapidly. Final point on this second issue is that a flattening forward curve from contango to backwardization is almost always bullish for prices as the market interprets that as an indidation of demand.

Third. The effect of ETF's cannot be discounted. The appearance of oil based ETF's that buy a spread of futures contracts muddys everything. As retail and commercial investors buy ETF, the underlying contract gets bought as well. Thus an investor who is thinking, Oil will be $200 in two years...buys an ETF thinking that this is a great time to get in, he or she or it is buying also buying the front month contract, it will get rolled forward, but that puts price pressure on the front month contract even when the expecation and cause for purchase of the ETF has nothing to do with current supply and demand fundementals.

Forth. The amount of 'floating storage' is a real red herring. While there is quite a bit out there, it has no real impact. The size of the straw it goes through is the same. PADD III, is gulf coast and we have seen about 20 MMBO of storage being added the past few months. We have also seen a reduction in the amount of crude in 'floating storage' in the gulf from 60 to 40 MMBO. Those are from of my more confedential sources, but I trust them. Not all the oil floating around will go to the US. Most will go to china where demand has picked up considerably this past month. If you think about it, floating storage is no more that moving the reservoir from below ground to above ground. All that oil still has to go throught he same infrastructure. PADD II is Oklahoma, and most US domestic onshore production ends up there or gets accouted for there, I was more worried about Cushing getting full and pulling down WTI, than anything with floating storage.

Lastly, Peak Oil has happened. Maybe the hoarding has begun ;-)

Just my opinions...


Poobah,I must say that although I can follow your arguments,and the authors,in a general way,I don't know beans about the oil business,other than what I have learned here on the Drum for the most part.It seems to me that both of you have good arguments,and that one of you will probably be "proven" wrong by actual prices later BUT THE LOSER'S ARGUMENT will still be qualitatively correct but "invisible" due to bigger price movements caused by fundamental forces such as economic growth or lack ofthe same.

Your last remark about hoarding followed by the wink has my entire attention.I know enough science and biology,being an ag major in the long ago, to know that the cornucopians have thier heads up thier xxxes and I am willing to believe that the peak is here and now.We have already laid in enough diesel to keep our little operation running on a shoestring for a couple of years.

So I have a very serious question of the utmost importance to me and a great many other small farmers,survivalists,etc. I am a little afraid our nieghbors from miles around are going to be showing up on foot someday with five gallon cans.There are not half a dozen draft horses or mules within 25 miles,but there are hundreds of small farms that can support at least the nieghborhood population if diesel fuel (or gasoline-there a lot of small gas tractors around) is available,even without commercial fertilizer and pesticides.

What are the early clues-the ones that the public will miss- that the time has come to to empty the piggy bank and fill every barrel we can put our hands on?I keep a good eye on the Drum and the Energy Bulletin.Is this enough?Just how fast can a crunch develop,in the worst case short of say an unexpected war?Anybody?Iknow a few military types (most of them recently retired welleducated lifers) who in private say that given the general state of the world economy,jihad,energy crunch, food crunch,etc,that in thier personal estimation,the the possibility of a major war erupting within the next decade is uncomfortably high-high enough to lose sleep over it.

What are the early clues-the ones that the public will miss- that the time has come to to empty the piggy bank and fill every barrel we can put our hands on?

Off topic here but I don't think that there are any red flag clues you can really count on. My advice would be to keep your tanks topped off at all times just in case regardless of what the prevailing price is. There are plenty of weak signals already available that the public are missing but when ou put the whole picture together, as we do here daily, they add up to a very strong trend. Oh and I hope your tanks are undergound and well secured!

Lastly, Peak Oil has happened. Maybe the hoarding has begun

OPEC certainly are hoarding - IMO post-peak any producing country would be stupid not to maximise the return from a one-time-use commodity like oil, especially as adequate alternatives do not currently exist!

IMO if the future were predictable then futures markets would not exist - so IMO trying to second guess future oil demand and pricing is no different from betting on horses or the lottery or stocks and shares - ie: it's statistically not a good place to put your pension money! Only the market-makers consistently win in the long term!

What is the point of using 5 year averages?

The diagram above is a stacked version of figure 04 from the post. The reason why I chose crude oil, gasoline and distillates are that these are the products given most attention by analysts.
First, we may agree about what time periods are to be compared and both seem to draw their conclusions on data published by EIA.

As of the start of this year and until May 01st data from EIA reveals the following changes;

Kerosene: Build 3+ Mb
Residual fuel: Build 2- Mb
Propane: Draw 9- Mb
Unfinished oils: Build 9 Mb
Other oils: Build 7 Mb

The above numbers and the diagram make it hard to spot the draw mentioned in PooBah comments.
However, the poster is invited to post his numbers/diagrams proving his/hers point.

Hi Rune,

No Particular interest in the 5 year average more than the understanding that from Novemerb 28th until Dec 19th. there was a draw on Relative stock.

In all honesty, call me, or e-mail me, as the statistics are needed to see it. I am frankly embarrsed, I do not know how to attach files or graphics in this forum.

Perhaps I am wrong,

Perhaps I am desimenating the data incorrectly.

But from November to December there was a 9 MMBO draw on stocks from 315 MMBI to 306 MMBO. It is in the math. Do the math.

I might be wrong, I was never good at math after moer than 4 Gin and Tonics...


Hello PooBah,

I opted to look for a longer time span than 3 weeks as I think data over 3 weeks makes it hard to suggest trends.
Further it is important to agree upon what data are to be used.

If it is crude oil (commercial stocks) you will see a slight down tick in the period you describes in my Figure 04, while the general trend has been a "relatively" strong build in crude oil inventories post the hurricane season of 2008.


I agree that a three week plot a trend does not make,

But this is closer to what I mean.

Over the past 20 years the same basic pattern repeats during the year.

May to Sept Draw
Sep to Nov Build
Nov to Dec Draw
Dec to May Build

2008 and 2009 are not any different. But not as pronouced I will concur with you.

I like ploting the current stock level agains the 5 year seasonal average as you can see if you current stock build or draw is out of line with other years. We are over the average by 27 MMBO. Over the past two weeks we have come down from being over the average for this time of year from 34 MMBO to 27 MMBO. Highest I have seen it in ten years is 35 MMBO back in June of 2007. Price of oil was 71.00

I am looking at crude stock and not total liquids.

And you are correct in that we have had a relatively strong build since the hurrican season. My point is that on the specific question of inventories: from Dec 2005 until June of 2007 we had much stonger build sustained over 18 months of crude stock building from 3 MMBO to 35MMBO over the 5 year season average. during the 18 month stock build oil price rose from $39 to $73. Even from June 2003 the build started...June 2003 we were under our five year average by 34 MMBO. So in 4 years we 'added' 70 MMBO to our inventories and price moved up the whole time.

One just cannot look at inventories and predict a price spike or price drop. That's all I am really saying.

But great topic to bring up.



Thanks for calling in.

It now becomes clearer what you refer to.

Agree, inventory data is parts in the puzzle of trying to understand the present mega trends in the oil market.

However if some of the storage is about to be well supplied this has added to demand while it happened. If this demand vanishes/weakens and storage levels for all practical purposes are maintained this could create a (temporarily and until supply and demand again rebalances due to below ground and above ground factors) downward trend on oil prices.

Another way to look on storage data is days of forward demand it may cover, and this has grown (physical storage is up while consumption is down).

We should be expecting further increases in US oil inventories - but reductions in global inventories. Global inventories are what count. Global oil inventories are declining (see the EIA reports). Bear in mind also that Q2 is seasonally the lowest oil demand period of the year.

Caution should be used relying on the IEA's 2009 forecast for oil demand which is way too low (see point 3 below). The EIA's 2009 global oil demand forecast is the one which is more likely this year.

1. Contango narrowing (moving toward flat and possibly backwardated - which is the direction it has been moving) generally means that lots of free storage tanks are available. This means that there is a increasing shortage of crude rather than an increasing glut of crude.
2. US storage numbers are only one area in the world. US oil demand was worst hit in the recent recession (moreso than other OECD nations and much more than the developing world). Inventories in the US look bad - but this is to be expected and not a good indicator of what is happening globally.
3. The IEA demand forecast for 2009 is too extremely bearish at almost 1 million bpd under the EIA. Some feel that the IEA has been boxed into making such a negative demand forecast because their oil models are linked to OECD GDP forecasts - which were revised down very late into the recession. The IEA had originally forecast 2009 global oil dmeand falling sround 1.7 million bpd (similar to the EIA) but then the OECD further reduced their GDP forecast and the IEA (part of the OECD) had to reduce their oil demand number even more. The upshot is that basing any analysis on the IEA 2009 global oil demand figures may be too bearish and it is likely that the IEA will have to make their 2009 demand forecasts less bearish in the coming months.
3. There is no such thing as "almost" risk free profit in contago trades. It is a less risky trade than others - but is still a trade fraught with risks. The biggest risk is that the market suddenly flips into backwardation and you have your tanks full with oil that can only be sold at a lower price in the future.
4. Rolling a futures position doesn't "lose money". It merely resets the price at which the oil has been bought. If someone starts out with $100 in futures and rolls it in a contango market, unless the whole forward curve shifts down the next month that person will still have $100. The "contango" doesnt create any cash outflow by itself.
5. As "Starven Marven"'s comment above mentioned: oil tanker rates are currently at all time lows. If there were the glut of oil stored in them then these tanker rates would not be so low. Media reports tend to exagerate based on anecdotes, lag reality and sensationalize...but the current lease rates for tankers tells the true situation about floating storage.

It's not true that US demand was worst hit. Among the major economies, Japan's was hurt more. It stands to reason that exporters were hurt badly by last year's credit freeze and the attending world trade tumble.

There's an almost risk-free contango arbitrage (buy spot, sell futures).
So a lot of storage could be hedging-driven (or speculation-driven) as long as there are physical traders in a position to arbitrage.

Storage is still in the news. Surely the build in China is supporting the price.

There's an almost risk-free contango arbitrage (buy spot, sell futures). So a lot of storage could be hedging-driven (or speculation-driven) as long as there are physical traders in a position to arbitrage.

You can only have risk free profit if you have uneconomic storage operators.

You will find that oil tank owners are no fools. On a month to month basis they will adjust the cost to lease their tank depending on where market contango is (tank owners see the forward curve like everyone else).

This situation means that one almost always needs to enter into either a long term lease on tanks or buy tanks yourself in order to have the "almost risk free" option available to you when contango increases. However this is not an "almost risk free" situation as now as a tank lessee or owner you have the risk that the curve never goes into contango above your tank and financing cost and possibly even goes into backwardation - which is more common than contango over the long term.

In that case, it's the tank owners who make a risk-free profit. It hardly matters. If they're no fools (and they're not arbitraging themselves), they'll set the rates low enough so that people will want to fill them.

Regarding the "almost" risk free profit in contango trade, I was thinking that one could sell the oil for, say, delivery in November, and lock in the November future's price now. Wouldn't that work? It would seem like that would guarantee a profit, if the oil was bought at today's price, and the difference between the November price and now was more than the cost of storage.

As of April 28th (2009) Brent Blend closed at $48,64/Bbl.

As of now Brent is traded around $57,50/Bbl after having traded around $59,00/Bbl.

I have seldom seen such a steep oil price growth as recently.

My point here is that oil prices are up with $10/Bbl in two weeks.

- Rune

A lot of positive (less negative ;) economic data has come out in the past two weeks. The oil market reacts to new information immediately and the discrete nature of the release of new economic data can cause sudden revaluations of oil prices as opposed to a gradual change to new levels.

I don't know how these news are supposed to have much of an effect on demand for the front month.

It looks more like the market is irrationally following Wall Street and amplifying USD moves. This is of course not a new phenomenon but, going by the mainstream financial news outlets, it seems to have created a momentum by capturing the attention of hedgers (such as airlines) and speculators (such as the "technical" crowd).

WTI Spot price + day-to-day variability:

The Sep 22-23 spikes when the contract rolled over show up quite clearly. Looks like a seismograph!

Sep 22, 2008 was the expiry of the Oct-08 WTI contract (one of hundreds of benchmark oil prices). The open interest on expiry day is usually quite low. When open interest and liquidity is low, volatility increases. For this reason (and others) very few oil supply contracts are set against a single day's price. Most often an average of at least several days' prices over a lifting window (time period a tanker is being filled) or monthly averages (for long-term supply contracts) are used.

Thanks Rune for this very informative post,

IMO, it is very difficult to interpret stock levels since 2003. There is a big structural change after 2003 concerning the relationship inventory-oil prices.

Looking at the following approach (used by the EIA):

YE, ZYREN and SHORE, Forecasting Crude Oil Spot Price Using OECD Petroleum Inventory Levels, 2002.

The main assumption is that excess inventory levels when compared to a linear model (seasonally adjusted):

It does a pretty good job at predicting oil prices for the period 1988-2003, the residuals of the inventory model are then nicely anti-correlated with prices fluctuations (r= -0.71):

My feeling is that we cannot look at inventory levels in isolation but look for some exogenous variables that may have impact. Lately, I have noticed that stock market ups and downs are correlated with oil price fluctuations.

However, this model completely falls apart after 2003 and excess inventory becomes then weakly positively correlated with prices (r=0.44):

In fact, record low oil prices were predicted due to excess inventory levels:

I think the straightforward relationship that's often put forward between inventories and price (the one you show before 2003) depends on a widespread belief that no shortage is forthcoming.
Once stockpiles start to be built in anticipation of a possible shortage, this relationship breaks down.

The correlation between inventories and price from 2003 to 2007 might reflect overbearing perceptions of risk (war, chaos and/or inadequate investment in oil production). Looking at Saudi production, it looks like the correlation is strongest between the end of the Iraq invasion supply spike and the time when they produced less than their quota in early 2007.

The failure of supply to match demand in 2007 and early 2008 is apparent in that chart as well.

isn't the notion of "storage" to a large extend a matter of semantics? if oil is in the ground it is not counted as "inventories" but the moment you pump it into a tanker/tank it is in "storage".... Not to mention the oil which is in pipelines..

The value of the dollar is constantly changing, complicating any analysis of price to inventory.

Hello Samuel,

and thank you.

I recall that some years back many analysts used the chart showing how oil prices seemingly responded to storage levels and it may be that this relation now have become much weaker or completely broken, recent high oil prices with high inventory levels suggest this

This is interesting because it lessens predictability and may also become the source for more volatility in oil prices.

If I had the time I would have plotted recent weeks oil price movements towards the stock market, because it seems now like any news containing a dose of economic "green shots" move both in tandem.

I can not quantify this, but if there are less tankers transporting oil than last year, isn't there then are lot less oil stored on moving tankers? I believe the EIA, for example, only counts unloaded tankers when they actually arrive in port ready to unload - although counting methods on unloaded tankers are unclear and sometimes inconsistent.

Due to the time needed to ship oil from the Mideast, it may take up to eight weeks for oil travel to the US and be unloaded. If OPEC output is now less than current demand, it could take up to eight weeks before the effects show up in US inventory levels.

This is why I use three months as my response time for physical oil. I.e from when its pumped to when its finally in the tank next to a refinery.

Also I might add slow steaming was apparently widely practiced as the price of crude rose and along with it bunker fuel cost. This probably kept the tanker rates higher than warranted in 2008. Lets say they sailed 30% slower then we would have 30% more oil at sea. And of course if you add in the decline in production in Mexico leading to more oil being sourced out of the Middle East and Africa you get even more oil at sea.

As far as I can tell tanker traffic outside of the Gulf gets difficult to count so its problematic and many of the routes make multiple runs.

Here is one report on the tanker routes.


I once found a link with all the various tanker routes on it I think it was buried in a pdf :(


From memory I want to say that the tankers often go from the Gulf to the US then back to Africa and back to the US before returning to the Gulf. This is all from memory and I could be wrong but I was a bit surprised at how the oil tankers did not simply follow a simple route.

Here is probably the best link I can find right now.


I'd guess that given the current low tanker rates that slow steaming my also be back in vogue why rush if you don't have a cargo to pick up ?


Wärtsilä has introduced a new Upgrade Kit for Slow Steaming for RTA and RT-flex low-speed engines to enable shipowners and operators to make major savings in fuel costs while slow steaming their ships. The Upgrade Kit allows Wärtsilä low-speed marine engines to be operated continuously at any power in the range of 20% to 100%. This means that with the Upgrade Kit ships can sail continuously at sea speeds down to some 60% full speed.

So a 20-30% slow down in sailing speeds is not impossible.

But its not a miracle cure.


And a recent article.


HH: Yes, that’s true. We have something that’s called contango. The contango, and then we use oil tankers for storage, and that means that tankers are withdrawn from the market. That’s good for us. We are talking about substantial amounts. Secondly, also we see slow-steaming; the tankers go more slowly, and when you go down from 15 knots to 13.5 knots, that is a reduction of 10%, which is equivalent to 35-million deadweight tons which is a huge amount. I take a much more optimistic view. I believe that you in America, and China, on the international level will have to drag us from out of this. And you have put a lot of measures in hand and there is no question these measures will work.

The fact that slow steaming was still widespread as late as Feb 2009 and that tanker rates have finally collapsed points to a tremendous drop in the amount of oil actually being shipped.

Figuring about 40 million barrels moved by ship lets say slow steaming increased the tanker demand by 10% and oil storage in tankers by 5% for a total of 15%.

40 *.15 = 6 mbd.

So this implies that global oil production has actually fallen by about 6mbd to force tanker rates to collapse or at least world exports by tanker have probably fallen by this amount.

Now its probably a bit worse since many tankers are now simply laid up and not sailing at all those that are sailing are probably still practicing slow steaming so the overall tonnage at see has dropped.

I'd say 8mbd is more probable. Given the economic collapse and assuming world oil demand is down at least 6mbd this would put the world negative by 2mbd in production vs demand.

Also and you have to include this part the ban on single hull tankers really took hold about 2007.
So the phase out of single hull tankers had its on micro-economic effect on tanker rates over the last several years.
Its complex you have this
And this

But most of the major routes already rejected single hull tankers even though the ban is
not official in general just yet.


Going back in time and assuming that peak exports mapped to peak VLCC rates. We can look here.


This shows a fairly nice peak in summer 2004 before the most probable year of peak oil 2005 so we would
expect peak exports and demand on shipping to lead the actual production peak as the export land model kicked in on rising prices increasing internal consumption and negating a lot of the final production increase. This alone is pretty strong evidence that the real peak was indeed in 2005.

And last but not least things are going to get really bad in Oil tanker land as oil prices climb bunker fuel rates will climb forcing a lot of ships to be simply scrapped or converted to permanent floating storage.

The fairly steady fall in tanker rates since peaking in 2004 coupled with the steady fall in US VMT indicates that global oil exports have probably been falling since 2004. Numerous secondary factors have worked to keep outright collapse of the tanker market from happening until now. Its starting to look like the scrapping of the remaining single hull ships may not revive tanker rates.

Assuming 110 scrapped out of a total of 520 implies that a loss of 21% of the tanker fleet might not revive tanker rates assuming again 40mbd is shipped by tanker this implies a loss of about 8.4mbd in exports.

I'm betting that OPEC announces good compliance with the current "cuts" and a further 2mbd cut in production at the meeting in May. I think the rate of adherence with this last round of "cuts" will be slow taking about six months and match perfectly with and annual decline rate of around 10%.
But that is a pure coincidence.

Of course if this is correct one wonders what they will do in 2010 ? I'm guessing blaming the devalued dollar and "inflation" for rising oil prices along with speculators as fiat currencies esp the dollar devalue rapidly vs oil. Maybe also claim the rapid price drop in 2008 resulted in them losing a tremendous amount of spare capacity by say late 2010 as projects where dropped.


you have some interesting thoughts/points in your comment above.

I will just stay with one;

I'd say 8mbd is more probable. Given the economic collapse and assuming world oil demand is down at least 6mbd this would put the world negative by 2mbd in production vs demand.

You suggests in your reasoning that world supplies are presently running 2 Mb/d above present world physical consumption.

Yes, an interesting situation indeed.

If tankers are being used for storage, but shipping rates remain low, then this indicates that demand has fallen off a cliff.

So if imports are not on there way, net storage in using countries should be on the way down (which it is in today's EIA inventory report).

The more pressing problem is though: Has supply fallen even faster than demand, as implied by your analysis? If so, then we are on the cusp of a major reduction of inventories, as the two to three month delay from lifting to final off-loading has hidden the supply/demand imbalance. Shipping companies and oil tracking firms state OPEC exports are down 2.5 mbpd now.

The IEA states that oil demand will down 2.5 mbpd this year, which may or may not be the reason OPEC is down now the same amount. But none the less oil prices could still rise if demand is contracted by falling supply, and not economic weakness.

Platts Oilgram Price Report
April 29, 2009
Tankers : Ballasting VLCCs deflate shipping rates

West of Suez VLCC rates fell Tuesday, as an influx of ballasting tankers from the East put pressure on owners, undermining both the market for the 2 million barrel vessels as well as for smaller Suezmaxes. However, while rates dropped on Western routes, WAF-East rates were assessed higher.

"What seems to be happening is that VLCCs are ballasting to WAF, which will kill the Suezmax market and lift VLCC rates on Persian Gulf to East voyages," said one source. "In fact this is already evident, as rates in West Africa are down while the East is up today [Tuesday]," he added.

"All the markets are very very quiet and weak," said one source based in the Mediterranean. "The trend is for a reduction, the tonnage list is very long and so far not many cargoes have come out. If this week is quiet, as people think it will be, we have to consider that next Monday there is a bank holiday and therefore up until next Tuesday many more vessels will have opened up."


The first owner said there were many ships still on storage duty. There are 30-40 ships on storage in the Atlantic, so there is a limited addition of tonnage there available in the market, he continued.

I have a good quantitative reason to assume that the evolution of oil price is a bit more complicated process than the deficiency in storage. There are many dynamic forces acting around oil price with a net force creating sustainable trends in the deviation of the producer (and also consumer) price index for fuels from the overall PPI.
I am not able to place figures here, so have to refer to some posts in my blog



Storage is one of the parameters to follow, how important a factor it is will of course vary from person to person, but given the attention storage (levels) is given by media it clearly is a factor affecting many peoples expectations also about the oil price.

Rune - useful charts, but what do they mean? We've discussed inventory data here many times during the run up in price. And even though the markets wait with great anticipation for weekly inventory numbers, my own conclusion is that they are near impossible to interpret. Does high inventory signify hoarding (with expectation of rising price and scarcity) or does it signify a glut? You seem to be opting for the latter explanation.

I'd say that building inventories may be contributing to the run in price. In the grander scheme, storage is small. And if the supply and demand is too far out of balance then OPEC will cut again. I think if OPEC suggested cutting now then the OECD would be a howlin'.

Your Figure 3 is intriguing. What caused the bounce in petroleum consumption centered on Jan 09? It looks like US consumption has become very price sensitive - but I don't believe that.


I thought the charts mostly were self explanatory. Given the time span they show storage movements, the main point was to show that the data over some time shows a strong inventory build in the US the worlds biggest consumer of petroleum.

I would not read to much in inventory levels from one week to the next or from one month to the next month, but the anomaly this time is the strong storage build in the US as of end of the hurricane seasons last fall and also the stories floating around in the media suggesting a total of 125 Mb of crude oil and products being stored, ships at anchor. This amount of storage must have happend mostly post the hurricane season. So looking at the months from October 2008 as of end of April 2009 this increase in storage translates into a considerable demand and at some point this demand will vanish.

Presently the storage numbers points towards a "glut".

The purpose of the first diagram is to illustrate a contango.
The second diagram shows US total storage, and illustrates that presently it has reached levels not seen in a long time. The storage build reflects declining consumption, but suggests also that there is a surplus supply in the market.
The third diagram shows the development in US total petroleum consumption vs oil price during this decade.
The bounce seen could be caused by the holiday season (whch happened while the prices were low), that is also one of the reason to smoothen the curve with a 52 MWA., The sharp bounce down post last years hurricane season was due to delivery problems.
I find it hard based on anomalis like hurricanes and holidays season to draw any conclusions about changes in the price sensitiveness.
It seems to me you are reading something from the figure that isn't.

You seem to accept that pricing happens at the marginal barrel and storage in a grander scheme represents little of total consumption, but small supply changes (caused by storage draw or build) in a tight market may lead to huge price changes.

Do we know what present world physical demand is? Could it be 6 Mb/d lower than previous high?

The fourth diagram just shows movements in US crude oil, gasoline and destillates at storage.
The storage numbers does not suggest a tight supply situation, so why the recent run up in prices, lately as much as $10/Bbl in two weeks?

The last diagram illustrates that during high prices storage was for all practical purposes maintained, after the collapse there has been a strong storage build

wed update:
*** DOE reported 4-wk. trailing average gasoline demand down 1.2% y-o-y.

*** Crude stocks at Cushing, OK fell by 993,000 barrels to 28.8 mm barrels; by comparison, crude stocks at Cushing were 34.9 mm barrels on 2/6/2009.

Hello Nate,

These are certainly interesting times.
I think the weak drop in gasoline demand is mostly price related. Data on distillates will, in my opinion, reflect a more accurate picture of the underlaying economy and this is down 14,1 % with a year over year 4 week moving average and this despite the price decline since last year.

I start to wonder that presently the oil price is more correlated to movements in the stock market. Crude oil prices had a downward trend this morning, shut up as storage data from EIA was published (bullish signal) and and are now down and so are all the major US indices. If someone just now comes around with a press release containing news on a little economic "green shot" the stock indices will probably move upwards again. It could then be interesting to see what direction the crude oil price headed.

- Rune

I just noticed that USA gasoline demand has not really picked up this year as should be expected, and is still at Feb. level, at least 2% below last year, and about 4% below the expectation from historic increases. 2008 demand picked up starting in March, so 2009 is about 8 weeks late. Maybe there won't be a 2009 pick up. Refinery utilization is still very low, and total finished product demand seems to be down about 7% y-on y at early May, with everything but gasoline down more than 10%, while imports and USA production are relatively high. If these numbers are correct, then the high level of storage is probably correct, in spite of the doubts expressed above. Comments?? Murray

Hello Murray,

What you refer to as year over year changes are something everyone looking at the EIA data would observe.

I see no reason to doubt the US storage data from EIA. If I did, things would become very untidy.
With regard to storage at sea, I just have to believe what the media reports (after all these reports seems to be based upon interviews with ship brokers and/or shipowners).

I have no expertise in any aspect of this discussion, but keeping things simple, it seems to me that importers that have experienced prices above $50./b for a long time, and with some idea of geologic supply constraints and probable future high prices, would store everything they can get at $40.-50/b, regardless of the shape (contango or backwardation) of the relatively near term market. The big guys especially, having cut back on E&D investment, have capital available for "investment" in inventory that will surely be worth a lot more in the future. This could happen without any of the subtleties of Memmel's "oil bank". Even if they create a temporary "glut" when storage gets full and imports have to be cut temporarily, they can ride through the (probably brief) drop in prices. If they do a Memmel, they will declare full storage before it is full, decrease buying (demand) briefly, and use the resulting price drop to top off their inventories. My ignorance and simple minded view incline me to go with Rune, and expect a near term, short, but possibly steep, price drop before the longer term price rise resumes. I sure would appreciate some more reasoned inputs as to why this simple view is wrong. Remember, past behavior won't necessarily be a guide to the future if the big oil importers have chnged their paradigm to seize this opportunity. Thanks to a whole bunch of contributors for their thoughtful and insightful commentary so far, even if the differing opinions do leave me baffled for now. Murray

On thinking a little more about this, it seems likely that rational investors and speculators would expect a drop in supply in the next few months (mid-to-late -2010) due to known cutbacks in E&D and maybe maintenance, combined with some economy driven resurgence in demand to create certain supply shortfall in the next 12 to 18 months. Wouldn't real buyers buy and store everything they can now at present prices? Wouldn't they have to cut purchases if they run out of storage? If they do cut purchases (drop in apparent demand) wouldn't that drive down prices even in the face of bullish speculators?
NB - I just read that CERA has cut there post crisis supply growth forecast by about 50% or 7.6 mb/d.


It is hard to know what the portion of hoarding and/or speculation that has or is going on in the market anytime.

However I have seen data showing 2009 started with some speculative pressure that is now vanishing.

It could be that the storage build has been a result of expectations for a resurgence in the economies, if this does not happen chances are that present supplies will run higher than the underlaying physical demand. This will become clearer this summer. If demand now is still dropping and below supplies this could suggest a downward pressure on prices later this year.

I expect a price decline to be temporarily until the market again rebalances and for the future I will expect higher volatility in the oil prices with an upward trend.

Remember, past behavior won't necessarily be a guide to the future if the big oil importers have chnged their paradigm to seize this opportunity.

The above may be the core of the matter. "Conventional wisdom" may be in for some huge revisions.