• 2 minutes Oil Price Could Fall To $30 If Global Deal Not Extended
  • 5 minutes Middle East on brink: Oil tankers attacked off Oman
  • 8 minutes CNN:America's oil boom will break more records this year. OPEC is stuck in retreat
  • 1 min Iran downs US drone. No military response . . Just Completely Destroy their Economy. Can Senator Kerry be tried for aiding enemy ?
  • 18 mins California and Oil
  • 3 hours The Inconvenient Truth Of Electric Cars
  • 7 hours The Plastics Problem
  • 3 hours Win Against Tyranny: Turkey's Opposition Strikes Blow To Erdogan With Istanbul Mayoral Win
  • 3 hours Ireland To Ban New Petrol And Diesel Vehicles From 2030
  • 12 hours Solar Panels at 26 cents per watt
  • 9 hours Hydrogen FTW... Some Day
  • 2 hours Green vs. Coal: Bavaria Seeks Fast-Track German Coal Exit in Snub to Merkel Plan
  • 18 hours NATO Article 5: Attack on one member is attack on all. Members all must come to defense . . . NOT facilitate financial transactions to circumvent and foil US Sanctions. Somebody please tell Angela.
  • 17 hours Summit in Pyongyang: China's Xi Says World Hopes North Korea-U.S. Talks Can Succeed
  • 14 hours What's more Important Iran Nuke Deal or Strong China Trade Deal. Hypothetically, If China offered Trump North Korean and Iran deals in exchange for concessions on trade deal should he take it ?
  • 3 hours Here We Go: New York Lawmakers Pass Aggressive Law To Fight Climate Change
  • 18 hours Huge UK Gas Discovery

Breaking News:

Oil Pipelines Sabotaged In Syria

Alt Text

Canada’s Oil Patch Faces Investor Exodus

Capital investment across Canada’s oil…

Alt Text

Trump: We Won’t Protect Foreign Oil Tankers For Free

Reacting to rising tensions in…

Alt Text

U.S. Gulf Coast Oil Imports Hit 33-Year Low

The U.S. Gulf Coast saw…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

More Info

Trending Discussions

Dropping Prices and Supply Glut Sends Oil Into Floating Storage At Sea

There is so much surplus oil sloshing around right now, some of it is being stored on tankers at sea.

It's well known that there is a glut of oil in the United States because of a lack of infrastructure and the ban on exports. A surge in production, coupled with tepid demand, has caused prices to decline by about 13 percent since June: West Texas Intermediate (WTI) is trading at a price discount.

And those declining prices have led some commodity traders to decide that excess oil is better left at sea. There are now 25 to 50 million barrels of oil in floating storage, equivalent to more than two days’ worth of demand for the entire United States.

Related: With LNG Export Battle Won, Are Oil Exports Next?

The trend is not necessarily due to the lack of physical capacity to store oil, but largely because of the dynamics of modern day oil trading.

Spot prices for Brent crude, the international oil benchmark, have fallen below futures prices for the first significant period of time since 2011. By purchasing oil on the spot market, commodity traders can sell a futures contract on that shipment, and hold onto the oil at sea until the deal matures. Having paid a lower price – for example, around $98 per barrel as of mid-September – and selling a futures contract for delivery in October 2015 at $100 per barrel, the trader can pocket the difference when the deal is completed. The whole trend was nicely laid out in a recent Wall Street Journal story.

The margin may not seem like much, but according to the WSJ, it only takes a difference between the spot market and future market of about 70 cents in order to make a profit. The opportunity has not only attracted traders of physical barrels of oil, but also financial investors, who have jumped into the fray.

There are risks to this investment strategy. Storage costs and interest rates could rise, as the WSJ noted. Also, if spot prices decrease further in the months ahead, opening up a wider gulf with the futures price, traders will have missed out.

Another factor is the strength of the U.S. dollar, the currency in which oil is conventionally priced. A stronger-than-expected dollar will send oil prices lower. Moreover, as oil prices are notoriously volatile, it is unclear how long the price spread will last.

Why is there such a difference in price to begin with? For Brent, higher futures prices indicate that traders think that oil prices have slid far enough. Having potentially bottomed out, the markets apparently think that Brent will rise once again. For example, if OPEC cuts back on production, or the global economy picks up its pace of growth, prices would increase. This leads to futures prices settling at higher prices than what oil is sold for today.

Related: Western Sanctions Halt Exxon’s Drilling In Russian Arctic

But such a scenario is far from a certainty, given today’s global economic environment.

WTI is a different story. WTI was selling for $92.50 during intraday trading on Sept. 19. But WTI futures for delivery on Dec.19 – three months from now – is going for $86.75 per barrel. This is the reverse of the situation for Brent, and it suggests that the markets think that oil production in the United States will continue on its upward trajectory. Meanwhile, with flat demand and a dearth of infrastructure, oil will continue to pile up and bring down prices.

This phenomenon may seem odd, but it has happened before. In April 2009, more than 70 million barrels of oil were in storage awaiting future delivery. Of course, that was during the depths of the global economic recession, and spot prices at the time were trading for around $50 per barrel. The gap between the spot and futures prices was a wide one because the markets were relatively confident that the world would eventually dig out from the economic malaise.

But the return of significant storage for futures delivery suggests that the world is once again experiencing a period of oversupply.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage

Trending Discussions


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News