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Vet67to82 (< 20)

Crude Supply and Bottlenecks



May 05, 2009 – Comments (3) | RELATED TICKERS: DHT , ENB , DXO.DL.DL2

If the crude being purchased and delivered to Cushing, Ok is delivered as collateral against futures to be sold in the contango game ... then it's NOT supply, IT'S COLLATERAL, ... until the contango players give up and go home. As collateral, it can't leave Cushing. When you tie up the storage, then you tie up the pipelines ... how do the refineries get resupplied?   They DON'T!

 Is the price of crude beginning to make sense now?

As to the bottlenecks, here are 3, and people, you might want to ask why these keep getting left out? Left out by the analysts, left out by the reporters ... yet, everyone here is well aware the supply in storage IS increasing, yet the crude price keeps increasing as well ...

... like Paul Harvey used to say "... and now the rest of the story."

Sorry, but realistically, crude will probably run in a trading range between $43 to $60 over the next couple of months.

As part of the fundamentals, there are "bottlenecks" in the crude supply that always seem to be overlooked. Bottlenecks represent delays, and delays are almost always passed along in increased prices to compensate for the delays. Time value of money, future value vs. present value.

First, shipping is the most economical way to transport crude. The contango has taken 30+ very large crude carriers (vlcc) off transport duty and relegated them to storing about 1+ days total global demand. The "available" double hulled vlcc fleet (bottleneck 1) is smaller due to Floating storage. These ships aren't available to transport anybody else's crude. Fewer ships to transport 80 - 82 million bbls of global use PER day.  It's NOT a one day trip and the ship MUST take on ballast for the "empty" return trip, then offload the ballast before being able to take on it's cargo.

Second, when crude soared to $147/bbl. bunker fuel also went up +$500/metric ton. The shipping companies without fuel surcharges SLOWED DOWN. Yep, computer programs became available to find the "best speed" (bottleneck 2) to maximize dayrates by. Go too slow you burn money on the dayrate/voyage side. Go too fast and you burn "unrecompensed" bunker fuel that comes out of your bottom line. The slow down is causing port delays (bottleneck 3) in loading and offloading crude cargo and ballast. 

Bonus time: Bottleneck (4) is finally being played out at Cushing, OK. Cushing, Ok. is the USA pipeline hub and storage for NYMEX crude futures. Everyone, including me, failed to grasp the significance of what happens when the contango players tie up the maximum leased storage space in the tanks, and backup supply into the pipelines. Crude goes NO WHERE. You're a refinery ... you can't get crude ... you OFFER more money ... and you STILL can't get crude ... you shut down and do maintenance that'd you have to do anyway ... hoping time will solve the problem and the contango players will go away (ha, ha ha!).

True, global demand is down ... but the "players" are using the bottlenecks (1,2.3, and 4) to profit to everyone else's surprise.

Didn't know about bottlenecks?  Does this help in understanding the price of crude ... is it beginning to make sense now?   Soooo, who benefits from the bottlenecks?

Don't the stock prices of the shipping companies go up, and down , with the price of crude?

Don't the stock prices of the pipeline companies go up, and down , with the price of crude?

Don't the stock prices of the Majors go up, and down , with the price of crude?

Is there ANY incentive to speed up delivery, and eliminate the bottlenecks, if, in doing so, the price of crude drops ... and your stock price along with it?   Hmmmmmmm!



3 Comments – Post Your Own

#1) On May 05, 2009 at 2:01 AM, awallejr (57.04) wrote:

Good post, rec to you.  I think BP did state that they don't expect to profit as much off the contango play as they did last quarter.

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#2) On May 05, 2009 at 2:51 AM, KamranatUCLA (29.37) wrote:

you oversee 1 major thing.

I think global supply is shrinking faster than we thought. Iranian oil production has been cut in half since 1990, and it's anyone guess if they could even produce more if they had new equipments.

Oil in Mexico has dried up and again we don't know if there is more oil in that area.

The only place that we know there is plenty of oil is Saudi Arabia. There are several prroblems with Saudi Arabia:

1) Saudis are starting to get smart and there maybe an Iranian backed/style revolution in sight.

2) The estimates of how much oil there is in Saudi Arabia is very inconsistent: I have seen estimates from 7 years to 70 years.

3) Saudi population is getting nervous because it has been their only income. They have no clue how to survive without oil and they maybe think about a revolution to  have the remaining oil in their hand as a cushion.

4) Obama said something I liked: Ford T-model almost 100 years ago has the same gas-milaege as a ford focus in 2008.

If someone tells you that global demand for oil is decreasing because of global depression or whatever don't listen to them, because it's bunch of crap. 99% of factories run on natural gas or coal so does our enegry production. We are using gasoline mainly for transportation...a plane carrying 200some passengers from Los Angeles to Paris burns $28,000 worth of Gasoline (kerosin) 1 way. So cars and planes are really the biggest consumers of oil and non of that has decreased significantly with our recession.

In Europe gasoline was 10bucks a gallson in the 80s when I lived there.

We have to change things very fast in this country or you see people taking a bike to work soon, because no matter what the gasoline prices will go up in this ocuntry sooner rather than later.

The recent drop (from $150 to $40 ) was just a break that government and oil companies agreed to so U.S. companies have some time to re-do things without a collaps.

I garantee you that we will read about this agreement in 20 years.

This had nothing to do with free market, I garantee you that.

This finally bring me to the main point that I wanted to tell you:

Your analysis means nothing because this is not about free market, it is about avoiding a collaps with some planing. 

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#3) On May 05, 2009 at 3:00 AM, Vet67to82 (< 20) wrote:

Thanks.  Yes, and if you watch the last US EIA crude inventory report and the next ... I'm sure you'll see the inventory at Cushing is dropping ... finally.   You MUST also watch the USA SPR as the USA will allow "withdrawable" deposits to the SPR.    

As the contango spread narrows ... the cash incentive to play the game disappears and the contango players don't go home ... they look for greener pastures ...  the next spread imbalance.  


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