Oil Storage
May 15, 2009
– Comments (7)
Mish has a post about how wholesale prices are declining, but what got my attention in the post is that it is the second time recently that I have read about increasing oil storage happening. That means that oil is not being consumed and when storage capacity runs out it should put downward pressure on oil prices. It is interesting that prices have increased when there is so much demand destruction. I speculate that in the shorter term that some businesses figure it is better to store it when they have the capacity to store it and prices are low relative to the recent price bubble.
I had a look back at my posts about oil and demand destruction. I was early in predicting the price going down, but not wrong in my evaluation of the fundamental reasons that we would have to see what has happened. I think oil was around $100 when I wrote that post and it continued up to $147 before retracting.
Looking back there was a post about demand destruction and Opec's response to that, their desire to see oil back at $75/barrel. Opec can desire that and work on reducing their supply with that goal but I tend to think they will have to also reduce output to make up for an increase in new supply from other places to succeed. I doubt that they can control the price without first letting it go down and stay down for a while so it knocks the competition out. I believe that Canada's tar sand oil is nicely profitable at $75/barrel. Drilled oil is much cheaper to extract then tar sand oil. All the new projects coming online likely carry debt loads that need to be paid back so they are not likely to reduce supply and so there is why I think Opec will have to reduce supply even more in order to succeed.
I still think oil is a good bet long term, but shorter term I tend to think the lower prices will be around for a while.
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