Oil Prices May Get Teeny
This is a Benjamin Button oil market. Reliving its twenties already, it now faces the decidedly awkward prospect of heading back into its teens.
Crude oil actually made a run back toward $30 a barrel on Wednesday, after the Energy Information Administration reported a drop of 800,000 barrels in U.S. crude oil inventories last week. Yet the same report showed that imports fell by 7.7 million barrels in the same week, so a turning point this was not. Oil was recently back under $28 a barrel.
Here are three charts showing why oil bulls might soon regard that as a good price.
The big thing weighing on oil is the amount of it sitting in storage tanks. Keep your eyes on storage tanks around Cushing, Oklahoma. It's a pipeline hub that also serves as the physical reference point for the Nymex crude oil contract. Right now, Cushing's tanks appear to be brimming.
When land-based storage reaches capacity, thoughts turn to storing oil at sea. But storage at sea is expensive and thus causes spot prices for oil to trade at a wider discount to futures to compensate for the added expense. Now take a look at the spread between the spot price and the sixth-month contract:
Part of the reason more oil is heading into storage is that refiners aren't processing as much as they were. There is a seasonal effect at play, but also an economic rationale. A report on Wednesday that Valero was throttling back at its Memphis refinery because too much gasoline was building up spooked the market. Why should refiners process so much crude oil when margins look this?:
To remedy this situation, refiners need to negotiate lower prices for their main raw material: crude oil. That shouldn't be too hard with storage space running out and producers seeking a home for excess barrels. Oil prices beginning with a "1" could be with us soon.
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Timothy L. O'Brien at email@example.com