Oil price activity

The Telegraph says:

“Rotterdam, Europe’s biggest port, is running out of room for more oil, US reserves are at a 19-year record and tankers are being used as floating storage off Britain’s south coast, even though OPEC is reducing production. “From a commodities point of view, world trade is appalling and the demand is just not there,” said Ahmad Abdallah, commodities analyst at Gavekal, the economics consultancy. “All inventories are rising – they are bursting at their seams.”   Oil prices rose to a five-week high last week above $53 a barrel in line with the recent bull run on the world’s equity markets.  Yet despite an OPEC decision last November to cut output by a record 4.2m barrels a day, a move which began to come into effect in February, the fall in demand has been even more striking.  Goldman Sachs estimated last week that global storage capacity could be exhausted by June….

Mr Abdallah said official estimates of oil usage for this year had been based on more optimistic assumptions than economic reality. An average of analysts’ predictions reckons on a reduction in demand of 1.5m barrels a day for 2009 over last year, while the International Energy Agency is predicting a fall of 2.5m barrels, but an estimate based purely on current economic growth figures would put the overall decline at 3m.”

If all above-ground storage becomes full and global demand continues to decline, either prices have to drop, or producers have to leave more oil in the ground. Period. The recent increase in prices is likely due to speculative trading. Given that speculative firms control a significant proportion of the above-ground storage, that actually increases the likelihood that producers will have to cut back more, as it seems to me that the speculators will sit on their inventories for quite a while waiting for a price that meets their target.

Perhaps a tactic that would make sense to OPEC could be to increase production to force prices down to the point where the speculative hoarders have to exit; and then cut production again. It seems to me that control of oil prices is in the hands of Fed-backed bankers rather than producing countries at this point. Since OPEC’s interest is to have oil prices at a level just high enough to avoid consumers switching to alternative energy sources, it’s surprising that there hasn’t been more heard about putting in limits at the CFTC for oil traders similar to the regulations in place for agricultural commodities.

Here are several charts from the US EIA for context:WTI


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