Where are all the oil tankers?

[Whomp]

Iran is leasing 20 supertankers @140k per a week because they have no place to go with their oil. Some refineries are down for maintainence along with less demand for heavy oil, in general. Inventory buildup? Market manipulation by the Iranians?

This could be an interesting tipping point for oil. Will the emerging economies continue to run budget deficits to subsidize prices? Venezuela's heavy oil exports are plummeting to the US and are currently importing gasoline as their main refinery they had with Exxon has nearly ground to a halt as Exxon exited the country.

For a few weeks now, observers have noticed that Iran is leasing tankers and storing oil in them. At about $140,000 a week or so, that is expensive storage. At first, conspiracy theorists were wondering if they were preparing for some kind of war or attack. But more conventionally, it may be they are having problems selling their oil. Their oil is not very high-quality, and there are only a few places that can take it and refine it. India, China, and the US are among the countries with refineries that can take Iranian oil. (And yes, George Friedman of Stratfor tells me some of it does end up in the US from time to time.)

India's refiners are telling Iran they no longer want their oil, preferring the higher-quality oil that is readily available in the area. So Iran has to decide whether to send it to China or "repackage" it so that it can end up in the US, while they try to get refiners in India to change their minds. Thus, they are leasing tankers to store the oil they are pumping. I called George about six this evening and asked him about the Iranian situation, as that is a lot of oil that could come on the market at some point, as well as a possible reason that oil supplies are down. George has analysts on top of this situation. He told me, "John, it's more interesting than that. It is not just Iran. Today we started checking on how many tankers Iran had, and soon discovered that there is a serious tanker shortage. Lease prices have soared in the past few weeks.

....

Is it 1980 All Over Again?

We may be getting ready to stage a very interesting economic experiment. Is Masters right that prices are driven by speculation, or is it supply and demand? Follow me on this one. I am not saying that this will happen, but it is an interesting scenario.

Many developing countries subsidize the price of oil to their citizens, so they do not feel the pain of higher oil prices. But the headline of today's Financial Times is that Asia is finally getting ready to cut their subsidies as oil rises to $135. The awareness that they need to allow market conditions to prevail is finally being acknowledged, as they cannot afford the subsidies. This is going to help drive down demand for oil over time.

As demand starts to fall, let's remember that the storage facilities for oil waiting to be refined are a finite item. If all those tankers end up needing to find a home at the same time, even as demand for oil is going down, you could see the price of oil go down rather quickly in the short term.

If you are leasing tankers to deliver oil that is already hedged in price, you want to get it to port as soon as possible so that your lease payments stop as soon as possible. You only hold it on the high seas if you think the price is going up by more than your carrying costs (the cost of money and leasing the tanker). If you start to lose money, you sell your oil on the futures market and get it to port as fast as you can.

Now, here is where it could get interesting. Oil is the biggest component of the commodity index funds. If oil drops and looks likely to go lower, then the massive buying of these funds we have seen in the past few months could dry up. As Dennis Gartman says, it takes a lot of buying to make the price of something to go up, but it only takes a lack of buying to make it go down. And if there is net selling?

If we see money start to flow out of the index funds (and ETFs) because of momentum selling, that means the funds are not only selling their oil components, but also the grain and metal and meat. If the index funds are the key component in the rise of prices, we should see the price of all commodities go down in tandem and in sympathy. If oil is the only thing going down as index funds go down, then it is a supply-related issue.

http://www.realclearmarkets.com/articles/2008/05/whither_the_price_of_oil.html

And this week's Economist

Spoiler :

The problem is exacerbated by a growing mismatch between the type of oil being produced and the refineries that must process it. The most common benchmark prices, including the one used in this article, refer to “light” crude, the least viscous sort, which produces the most petrol and diesel when refined. “Heavy” oil, by contrast, yields more fuel oil, which is used mainly for heating.

At the moment, diesel is in short supply and there is a glut of fuel oil. That makes processing heavy oil unprofitable for some refineries, since the gains from diesel are outweighed by losses on fuel oil. As refineries turn instead to lighter grades, it pushes their prices yet higher. The discount on heavier crudes has risen to record levels. But even then, points out Ed Morse, of Lehman Brothers, another investment bank, Iran is having trouble selling the stuff. It is storing huge quantities of unsold oil on tankers moored off its coast.

Presumably, Iran and other heavy-oil producers will eventually be obliged to drop prices far enough to make processing the stuff worth refiners' while. In the longer run, more refineries will invest in the equipment needed to crack more diesel out of heavy oil. Both steps will, in effect, increase the world's oil supply, and so help to ease prices.

But improving an existing refinery or building a new one is a slow and capital-intensive business. Firms tend to be very conservative in their investments, since refineries have decades-long life-spans, during which prices and profits can fluctuate wildly. It can also be difficult to find a site and obtain the right permits—one of the reasons why no new refineries have been built in America for over 30 years. Worse, new kit is becoming ever more expensive. Cambridge Energy Research Associates (CERA), a consultancy, calculates that capital costs for refineries and petrochemical plants have risen by 76% since 2000.

http://www.economist.com/displaystory.cfm?story_id=11453090

 

[Narz]

less demand for heavy oil

Really?

I wish I knew more about the geopolitics & economics of this issue (and had money to invest!). Some of the peakoil.com guys have made pretty good money in speculating these last few years (& discounting "expert" opinion which has been overly optimistic for several years running).

 

[Whomp]

It's been pretty easy Narz and really they haven't been speculating since the trend is your friend until the end when it bends.

If you look at oil producers (think tar sands), drillers(especially deep sea), alternatives (IE wind manufacturers for T. Boone Pickens 4 gigawatt wind farm), lithium producers (Chile in particular), steel producers (for developing markets and the 1000 or so apartment buildings going up in Dubai), iron ore producers(Brazil), copper (Chile/Indonesia), solar (Wal Mart's rooftops) etc. etc. etc.

The worst place has been the refiners since their margins are now paper thin.

There's a boom in consumption in all of these areas due to the fact for the first time we're seeing a global economic engine that's not US driven.

 

[CaptainF]

There's a boom in consumption in all of these areas due to the fact for the first time we're seeing a global economic engine that's not US driven.

Exactly. This is the big story going on today that we never hear about. The "natives" are getting better and better at capitalism every day.

 

[Cutlass]

Wouldn't it make more sense to stop pumping oil grades that the market is currently weak on than to store it? There's no huge surplus of the ships themselves, so there's only so many of them you can tie up before the cost of doing so goes up quite a bit.

 

[Narz]

lithium producers (Chile in particular)

What is the significance of lithium?

 

[skadistic]

What is the significance of lithium?

Rechargeable batteries of all sizes. They are replacing the NiCad rechargeables.

 

[Narz]

Oh yeah, duh!

 

[Whomp]

Wouldn't it make more sense to stop pumping oil grades that the market is currently weak on than to store it? There's no huge surplus of the ships themselves, so there's only so many of them you can tie up before the cost of doing so goes up quite a bit.

But with prices where they're at the goal is to get to market as soon as possible and there's nowhere else to store the stuff or lower price to meet the markets price demand.
Here's another piece of that article that's interesting with that in mind.

He then told me about flying into New York in the early '80s. Outside the harbor were 30 or so tankers just sitting, waiting for prices to continue to increase as they had been doing for some time. When they did not, they all tried to get into the harbor at the same time, and of course they couldn't. It was the top of the market. Prices dropped, and the owners of the oil had to go to the futures market to hedge what they could. I had heard that story, but George saw it with his own eyes.

 

[Cutlass]

But with prices where they're at the goal is to get to market as soon as possible and there's nowhere else to store the stuff or lower price to meet the markets price demand.
Here's another piece of that article that's interesting with that in mind.

He then told me about flying into New York in the early '80s. Outside the harbor were 30 or so tankers just sitting, waiting for prices to continue to increase as they had been doing for some time. When they did not, they all tried to get into the harbor at the same time, and of course they couldn't. It was the top of the market. Prices dropped, and the owners of the oil had to go to the futures market to hedge what they could. I had heard that story, but George saw it with his own eyes.

Yes, I saw that years ago. It's not uncommon for something of a speculative bubble to form with a commodity whose price is well up. However, the bubble is more the "light" oil than the "heavy" oil. As was pointed out, there's a shortage of refineries that can readily handle the heavy crude. So it's not quite a perfect substitute or the same market. So in theory, when many extra tankers of oil hit the market at the same time, there will be a substantial drop in price. (whether the price remains low for long is a different story) However that leaves many refineries that can't handle the heavier crude and still have to pay the higher price for light crude. And as light crude is more likely to be used for motor vehicle fuel, "bursting the bubble" won't for certainly lower gas prices by a large amount.

It may help the US more than some other nations, providing the Iranian oil is brokered by a 3rd party.

So do you foresee $3/gallon gas out of that?