Glut of oil? - LA Times

Discussion in 'Commodity Futures' started by BCE, Jul 4, 2009.

  1. BCE


    Glut of oil could push gasoline prices back down below $2 a gallon

    Energy experts say oil supply is outstripping demand. Eventually suppliers will tire of paying to store all of the surplus oil and flood the market, they predict.
    By Ronald D. White
    July 4, 2009
    A year after oil hit a record closing price, the commodity's price is way down -- and may fall significantly further as supply continues to dwarf demand.

    Downward pressure on oil prices is so great that crude could trade for as little as $20 a barrel by the end of the year -- less than a third of what it traded for this week and an 86% drop from its peak last year, analysts said.

    That could push gasoline prices back down to $2 a gallon, prices last seen this March after last fall's slide slammed retail gasoline to its lowest value in four years.

    The reasons are simple, said Philip K. Verleger Jr., an expert on energy markets at the University of Calgary in Canada: The still-sputtering economy has lessened demand at a time when there is already a big surplus of oil.

    For eight straight months, oil supplies have been running about 2 million barrels a day higher than the global demand of 83 million barrels a day, Verleger said. Eventually, he and others predicted, suppliers will tire of paying to store all of the surplus oil and flood the market.

    "That is the largest and longest continuous glut of supply that I have seen in 30 years of following energy prices," Verleger said. "It's a huge surplus. There has never been anything like it."

    The market will eventually correct itself, pushing prices down, Fadel Gheit, senior energy analyst for Oppenheimer & Co., wrote in a note to investors. "Excessive speculation and a weak dollar have lifted oil prices to levels not sustainable by market fundamentals," Gheit wrote.

    Crude has traded in the range of about $70 a barrel for much of the last month, closing Thursday at $66.73. The markets were closed Friday.

    With so much oil available and so little need for that amount, investors, oil companies and even some banks have bought and stored surplus oil everywhere they can. By one estimate, before oil surged to its high this year of $73.38 a barrel in June, as many as 67 supertankers -- each capable of carrying 2 million barrels of oil -- were being used as floating storage.

    Verleger said it represented a largely risk-free investment for those who could sell that oil for huge profits on the futures markets.

    But the glut has gone on for so long, he said, that the cost of all of that storage is bound to rise. When it rises enough, some suppliers will refuse to pay and a lot of that oil will be dumped onto the market.

    "Oil will drop to $20 a barrel by the end of the year because this situation just cannot be sustained," Verleger said.

    Bob van der Valk, a fuel price analyst, predicted that oil would drop to $40 by the end of the year and that Californians would be paying about $2 a gallon for regular gasoline.

    "In normal years you have seasonally adjusted pricing, and 2009 is looking like our first normal year since 2006," Van der Valk said. "By year's end, oil and gasoline will be coming down."

    That would be a result similar to 2008, when crude oil futures went from their highest close of $145.29 a barrel last July 3 to less than $34 a barrel in December, and gasoline prices dropped accordingly.

    Other analysts said such thinking was premature.

    Phil Flynn, vice president and senior market analyst for Alaron Trading Co., said the real test would be in the coming weeks, when oil's direction would become clearer.

    "It's too soon to say that a correction is about to occur," Flynn said.
  2. Two things come to mind.

    First, Chrysler last year when they offered the $2.99 gasoline pricelock when the retail pump price was $3.99. Price soon got smacked down to something like $1.99 before creeping up to the current price $2.70ish.

    Next, is the Hyundai $1.49 pricelock.
  3. BCE


    That's funny. :) I forgot about that. Where I live it's $3 a gallon but did get down to $1.63. But also went up to $4.79 at it's highest. $2 works for me. They tasted that $4+ now they're reluctant to lower it.
  4. our cheapest regular was $1.38

    But I suspect that OPEC&Friends (Russia, etc.) will cut more times to reduce supply

    Would they rather sell 18X barrels at $50+ or 21X barrels at $30??
  5. Still on the OPEC/Russia bogeyman?

    You do understand that oil futures markets are decoupled from production and demand reality?

  6. That must be some experts.

    For some reason I think anyone who is storing oil on parked supertankers, etc. has already sold the winter months (i.e. locked in the spread) at the time they bought the oil & rented the storage.

    I don't think anyone would put on huge positions like that and then just wait until they get tired of paying storage. I mean maybe they did, but that sounds kind of stupid to me.
  7. Not to mention that Russia will supply at ANY price because they cannot afford to cut back (and thus not get paid).

    They don't have the salt that OPEC has when it comes to holding the line (though many OPEC nations sneak extra production as well).

    If you and everyone on your block makes a living selling lemonade at your own lemonade stand, and the price of lemonade went from $1 to $.30, would you try to cut back the amount of lemonade you wanted to sell so you'd lower your sales even more?
  8. Quote from fkbsuhites:

    Still on the OPEC/Russia bogeyman?

    never was on a "bogeyman"

    You do understand that oil futures markets are decoupled from production and demand reality?

    No they are not. Oil futures, like most markets, is a mixture of expectations, supply&demand, investors, suppliers and producers and hedgers, financial institutions, etc. For a while, speculators and those seeking a hard-asset refuges and others drove it and other commodities up, and then the air came out amidst reality, collapsing commodities prices and the financial crisis. The market is affected by seasonal tendencies, production disruptions, and other factors.

    Your statement is a belief and opinion, not reality. Everything can get out of whack, like when the Hunts tried to corner the silver market until prices came back to reality. But oil and others are not "decoupled".

  9. If only it were so...
  10. fhl


    It's heartening to see that there are at least a few people around here that are aware that futures markets are just that, FUTURES markets. Some people think that a future price of a commodity should be based on nothing more than CURRENT production and usage. It's hard to believe that those type of people have any awareness of markets, let alone trade them.
    #10     Jul 13, 2009