In the last 9 months, daily crude oil prices have fallen from a high of $147 dollars a barrel to today’s price of $42 per barrel. Six months ago, companies throughout the energy industry were rushing to get their oil supplies to the markets, as prices soared along with their profits. Refineries were running at full capacity to keep up with demand, and oil producers throughout the world expected this bonanza to continue to the $200 a barrel and beyond. Since then, prices have collapsed even faster than they rose, and what is more concerning for the oil producers, is not that prices have reversed so quickly, but that extreme volatility has now entered the oil market, making planning, production and delivery almost impossible. The problem with volatility is that historically this is a sign of an unstable market whose direction is uncertain. Between the end of 2008 and the current week, oil prices have soared by 40%, only to reverse and fall just as sharply. Last week the price of a barrel of crude oil fell by over 11% in just one day.
With such wild price swings and volatility in the oil market, producers are now turning their attention away from production, to the vital issue of storage, as they scramble to hold ever larger quantities in store until prices stabilize. As a result the worlds oceans have now become a sea of floating oil storage vessels, otherwise known as supertankers.With onshore storage running out of capacity, these huge vessels are now being ordered to either drop anchor, or simply move at slow speed back and forth, and it’s not hard to see the reasons why. As Adam Sieminski, the Chief Economist of Deutsche Bank noted “ a trading company can buy oil at the spot price of nearly $40 a barrel, store it, and then sell a contract to deliver it in a year for about $60. You pay between $6 and $10 a barrel to store it, and you can make $10 a barrel” As you can see it’s not hard to work out the maths! However, different companies have very different reasons for storing oil whether on land or in a tanker.The large multinationals for example are hoping that prices recover by reducing the supply to the market, whilst private trading companies are storing oil in the hope of higher prices.
Whilst this volatility in oil prices is hitting the producers and consumers hard, perhaps more importantly is the affect on investment in new oil technologies. Some analysts are now forecasting that this in itself will be enough to force oil prices higher in the medium term. One such project is the Alberta sands oil reserves in Canada’s frozen forests of Northern Alberta, where current estimates put the reserves at a conservative 2 trillion barrels ( eight times the size of Saudi aArabia’s reserves ), a figure that is likely to increase as technology and extraction techniques improve. At present however, this investment is under threat, as falling prices have virtually stopped any future investment due to the costs of extraction and removal, threatening the viability of the entire project. Compared to conventional oil extraction for light crude at around $2 per barrel, the Albert sands costs are approximately 5 times that, at $10 per barrel. It is projects like this, and others, which may ultimately dictate the future price of oil. Commodity trading, whether as a a speculator or physical buyer is about about understanding the relationship between supply and demand. In these current turbulent markets, this relationship is unreliable at best, and distorted at worst, and until the current prices swings and volatility calm, trading in oil will be a risky business for everyone.
