Crude Supply and Bottlenecks
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!