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Oil Going To Over Supply?

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May 14, 2008 – Comments (6)

Mish has a different kind of post on oil

Oil price has not behaved the way I anticipated, however, this article suggests that oil supply has behaved as I anticipated.

Iran lacks enough storage for their oil supply so they are buying super tankers to store it in.  Having to buy super tankers to store oil can do nothing but increase the costs of supplying oil for Iran. 

Talk about messing up my caps game...  These guys are putting pressure on the number of super tankers available, so supply has gone from 56 to 30, tripling the day rental price.  What, do they have large interest in these shipping companies?  The supply of ships ought to have been out stripping the demand by now.  Who'd have thought they'd have turned into storage facilities...  That's one way to distort economics...

This is looking like one very periless bubble.  In the short term shipping rates more than triple because there isn't supply, and heck, if you are getting $127/barrel for oil, you can afford the shipping rates.  However, eventually the costs of storing oil in ships is going to catch up in a not so good way with the practice.  Talk about misallocation of resources and that is what happens in bubbles.

"There's a lack of on-land storage" suggests that oil supply is increasing, yet oil prices are not behaving according to true supply and demand fundamentals.

And, with the high oil prices, supply will continue to increase, so Iran will have to cut production, or find more storage, or the price will have to respond to the supply.

6 Comments – Post Your Own

#1) On May 14, 2008 at 8:45 AM, dwot (51.50) wrote:

Some days just too many interesting things to post about...  Here's an interesting quote from a report from the FBI:

“The potential impact of mortgage fraud on financial institutions and the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market.”

-Chris Swecker, former FBI Assistant Director, Criminal Investigative Division, Introductory Statement: House Financial Services Subcommittee on Housing and Community Opportunity, 7 October 2004

 It looks to me like the mortgage fraud division was grossly underfunded...

The key findings...

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#2) On May 14, 2008 at 8:51 AM, dwot (51.50) wrote:

Huh?  If super tankers are being used to store oil, what's happening here where this guy is saying supply is going down?

And, even more on mortgages... 

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#3) On May 14, 2008 at 10:35 AM, mandrake66 (93.81) wrote:

I know people have made lots of money doing it recently, but I swear I can just never bring myself to bet on oil in any way. There are so many distortions and surprises in what should be a very simple system.

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#4) On May 14, 2008 at 11:00 AM, FourthAxis (< 20) wrote:

I'm a huge fan of Mish, but I think Iran is blowing smoke.  As someone else pointed out "they need all the petrodollars they can get."  Let's just see where the Iranian administration's mind games get them this time.  I say higher oil.

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#5) On May 14, 2008 at 11:02 AM, FourthAxis (< 20) wrote:

"The 10 tankers hold at least 20 million barrels of oil, equal to about 5 days of the country's output"

...and less than one day of U.S. consumption.   

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#6) On June 04, 2008 at 3:54 AM, TheGarcipian (60.44) wrote:

But at 20M barrels of oil each, these offshore treasure chambers are now valued at $2.6Trillion each (with oil @$130/bbl), up a healthy 2.4% from just a half-month ago. That's a nice margin for doing nothing but storing the oil offshore. Seems like a lucky guess for them, but I think luck has little to do with it. It very well could be the traders who are pushing up oil futures are working with these conglomerates (there's a shocker). In any case, with each boat costing them less than $148k/day to rent, they could stay out at sea for a very long time and still turn a tidy profit, provided oil prices stay high. For example, if we consider that they were making some sort of profits when oil was at $75/bbl, each offshore storage tanker holds $1.1T in profits for them (20M bbls * $(130-75)/bbl). And with a day rental rate of $148k, they could leave those boats offshore for (1,100,00,000 / 148,000 = ) 7432 days before they'd lose any money. Seems well worth the investment to me, even if oil falls considerably from its lofty height now.

As with people who short stocks, playing dangerous games like these with supply and demand may end up undoing all the price gouging these wealthy buggers have been up to over the past few months. We'll have to see how it plays out...

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