Oil Storage, Oil prices and why to short!

Discussion in 'Commodity Futures' started by crosjn, Sep 7, 2006.

  1. crosjn


    Almost no one talked about it but the WSJ ran an article about 3 weeks ago talking about world oil storage capacity. Article specifically stated oil storage is (A) cheap (B) filling up. Article said in about 6 months, available storage is going to be full based on current RISING levels. That's the article - the rest of this is my BS speculation.

    This was complete news to me (as I thought like everyone that demand was way outstripping supply.) But, I hear traders talking about (and a government report provided the same info) a approx $20/gal speculation premium in the current price of oil. Why would speculation add a $20 premium?

    In commodity speculation, the fear of taking delivery (who wants 1000 head of cattle) balances the ability to buy and hold. If oil storage really is available and cheap -- then the fear of taking delivery is alleviated and the sell pressure for commodity traders isn't in balance. This creates a market aberration where artificially supply is removed from the market by storage... This very nicely explains a $X speculation premium in the market.

    It doesn't take much then to theorize what's going to happen in 4-6 months (less if demand continues to decrease!) The suppliers of oil storage will raise prices as storage becomes scarce (that's just supply and demand.) Then, two things will happen, significantly more oil will go straight into the market as traders will not want to store it. Aalso, oil already in storage will actively go into the market because it won't be cheap to store it any more... Suddenly, you have significantly more oil in the market and your going to see prices drop - a lot.

    Discuss! :)

    (I posted this same basic article in another forum buried in a response to another topic. Sorry about the cross-posting but I'm new and didn't know such a perfect forum existed!)
  2. Interesting, but comprehensive oil storage data is likely so difficult to aggregate and benchmark. Also in Asia there is much new storage capacity coming online.

    Interesting theory but difficult for layman quantify ... likely only to see it in crude price after the fact.