Investment Banks Hoarding Oil Offshore?

By Justin Gardner | Related entries in Business, Energy, Gas, Money, Oil

Following up on my earlier post about oil speculation, there’s news that 50 million barrels of oil are being hoarded on supertankers.

The market calls it “contango.”

I call it irresponsible.

From Marketplace…

“Contango” refers to a market condition in which the future price of a commodity is higher than the cost of buying it today. Right now, investors can lock in oil futures contracts to get paid $46 a barrel in March. They can fill a supertanker right now for just $41 and change. It’s pretty cheap to keep the tanker floating around in the ocean. When it unloads in the spring, the investors make a tidy profit: more than $3 a barrel.

Daniel Yergin is author of the Pulitzer-winning book, “The Prize.” He says there’s a glut of oil right now, caused by the global recession. But futures prices are going higher, because OPEC has promised to cut production. And, says Yergin, oil traders are reading something else in the economic tea leaves.

Daniel Yergin: “There’s a bet here that all of the stimulus, new economic programs, are going to work, and that by the second half of the year, we’re going to move out of recession, back into economic recovery, and that demand will start rising for oil again.”

As I’ve said before, only companies that can actually use the oil should be able to buy contracts. Not that hoarding was a responsible practice in the first place, but it’s particularly offensive now that we’ve seen what it can do to the market.

But hey, tell me why I’m wrong.


This entry was posted on Monday, January 12th, 2009 and is filed under Business, Energy, Gas, Money, Oil. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

16 Responses to “Investment Banks Hoarding Oil Offshore?”

  1. Henry North London Says:

    Diamonds are stockpiled by De beers to keep the price up

    The price of a diamond is remarkably cheap because if you released all the stock De beers owns they would be cheaper than semiprecious stones

    So they are doing it with oil, Sounds sensible if you ask me After all if there was a shortage they would have to bring their tankers in or risk losing out.

    Then again playing the financial markets is a big game and all people cheat in games Just that not many people know

  2. J. Harden Says:

    “Contango” refers to a market condition in which the future price of a commodity is higher than the cost of buying it today.

    This is an incorrect definition. Contango refers to a market situation in which the futures *contract* price is higher than expected future spot market price on the same settlement date. Example: The excepted spot market price for 7-1-09 pork bellies is less than the 7-9-09 futures contract at of 1-9-09, then pork bellies are contangoed.

    I’m not even going to try to explain why or how you are totally ignorant on the topic of future commodity trading — it would be like talking to Joe the Plumber about the Middle East — first you need to learn something. Sorry.

    How every you are probably perfectly qualified to sit on Obama’s Council of Economic Advisors — you’re pretty damn good at posting things on the internet.

  3. J. Harden Says:

    The excepted spot market price for 7-1-09 pork bellies is less than the 7-9-09 futures contract at of 1-9-09, then pork bellies are contangoed.

    That should be: The expected spot market price for 7-1-09 pork bellies is less than the 7-01-09 futures contract as of 1-9-09, the the pork belly futures are “contangoed”.

  4. Mike A. Says:

    All those ships sitting offshore…..looks like a good free market opportunity for pirates ;)

  5. kranky kritter Says:

    JH,

    So if the “expected” price isn’t the actual price, then all bets are off, right? No one actually knows what the price will really be that day, right?

    Is it true that all we have are somewhat educated guesses framed by contracts which account for only one portion of the price?

    Of course you can buy a contract to lock in a future price. But that just means someone else is willing to pay that $46 2 months or so from now as a hedge against GREATER increases.

    Justin, one big thing you are missing is that someone already bought the oil in that tanker. They own it. In a very real sense, they are “using” it by taking possession of it. It’s simply the case that they have found a future buyer. So what? That’s what investing is. By locking in the $46 price, they are foregoing additional profits that could be made should the price be even higher.

    I agree with JH that you seem woefully ignorant. It’s almost as though yop want very badly to NOT understand all of the mechanisms involved in having a market in the first place. Becuase if you did, then you;d be forced off of your pet proposition that only oil “users” ought to be “allowed” to buy oil and oil contracts.

    Here’s the thing, people need to be able to plan and ship and supply fuel for present, near future, and farther future needs. Without the futures market, no one could do that. It’s like insurance. Speculators risk their capital to provide stability to more risk-averse entities. If “non-users” were not allowed to risk their capital to sell predictable stability to the risk averse, these risk-averse entities could not provide it to their end users. How would you like the price of electricity to be as volatile as gas was last fall?

  6. Thomas More Says:

    One of the more unfortunate developments of the last year (prior to Nov 4th), was the rush by some conservatives to join liberals in their critique of the free markets by calling for more government regulation and intervention into oil markets.

    Remember when oil prices were at all-time highs and even conservatives were calling for prohibitions on oil futures, capping prices, and all sorts of other loony ideas we would normally expect to hear only from the Left?

    Well, today Justin Gardner over at Donklephant brings the issue up again by commenting on a story by Marketplace about the practice of hoarding oil supplies offshore, by delaying the unloading of crude from tankers. The process is referred to as ‘contango’, a term I’ve never heard before even though I’ve studied this issue before.

    The idea is that oil suppliers can delay delivery in hopes that prices go up. Alternatively, some conspiracy theorists have alleged that by conspiring with other suppliers, the delays themselves can sometimes cause shortages, resulting in an increase in supply. The reasoning is that sometimes the future price of oil (that available in the futures market) is higher than the current price. That’s not much evidence for a theory, but at least it’s an example of a hypothetical reason.

    I don’t believe this to be a strategy on the part of the oil suppliers for several reasons. First, they make their money by getting oil out of the ground and delivering it to buyers. Delaying that process delays their being paid. Nobody, including big oil, wants to delay payment.

    Secondly, delaying delivery causes a chain reaction along the supply line. The tanker that is floating around the ocean, delaying delivery in hopes of higher prices, is as a result not on its way back to get another load. This delays receipt of those revenues as well. Not something small business would do, let alone big oil that runs on a model of high efficiency.

    The third reason I don’t believe this is a strategy is that prices can drop as easily as they rise, as the last year has demonstrated for us. Simply because futures prices for March are $3 a barrel higher, it doesnt mean that a) March futures prices won’t drop and b) that February delivery prices won’t be lower. Suppliers, like most businessmen, don’t like to gamble, they like to lock in prices.

    This suggests a fourth reason the theory is unlikely; the use of futures contract to lock in pricing. Any big consumer of commodities such as oil uses the futures market to lock in profits (or costs). I find it highly unlikely that the major suppliers of oil are delivering oil today at unknown prices. I’m almost certain that, like Southwest Airlines (to use a well-known practitioner), they have already locked in prices for January delivery of crude months ago. The notion that they can delay delivery and get a different price when they are already under contract from a domestic buyer at a fixed price just doesn’t make sense.

    Finally, the fifth reason I can offer to counter the ‘contango’ theory is that delaying delivery increases costs substantially. A tanker is no small operation. The fixed costs of operating a tanker plus the salary and other costs associated with operation cannot be insignificant. It runs counter to everything I know about business to suggest the tanker should sit on the open ocean in hopes of getting a higher price.

    If anyone has evidence of this strategy really being utilized, I would be interested to know.

  7. Justin Gardner Says:

    Oh, where to begin…

    First off, that was a quote from NPR. Just because they don’t use the term “futures” doesn’t mean that their definition is wrong.

    And then this from Wikipedia…

    Formally, it is the situation where, and the amount by which, the price of a commodity for future delivery is higher than the spot price, or a far future delivery price higher than a nearer future delivery.

    So J. Harden…either you’re wrong or you’re just saying the exact same thing with different words. It seems to me it’s the latter and you just don’t realize it.

    Also, call me ignorant if it makes you feel better, but I was saying this was happening last summer and everybody told me I was full of it. I argued then that there wasn’t a supply problem and that speculators were hoarding. Well guess what? I was right. It doesn’t take a economist to realize that oil jumping $20 a barrel in a single day is not due to normal market conditions.

    To kranky…how do you not understand that risk-averse entities stabilize the markets because they actually use the supply they buy? How do you not understand that speculators like Enron DID do this with electricity and caused blackouts in California when utilities couldn’t pay up? D you not remember recent history when regulated markets were deregulated, but then completely screwed the consumer and then were reregulated?

    Also, I realize that speculators “own” the oil, but your definition of “using” is particularly specious when it comes to the commodities markets where we’re talking about actual product, not just stock certificates. Their “use” comes in the form of “hoarding” and that was frowned upon for years. These markets need to be reregulated so speculators can’t do this anymore.

    To close, I find it puzzling that people who claim they’re market experts seem to have no appreciation for the idea that speculators are only after profit and therefore are constantly destabilizing it. And to that point, there was a reason these people were kept out of the market in the first place, and given the fact they’re abusing it now and subverting the normal laws of supply and demand, they should be kicked out immediately. Otherwise there’s no way we’ll be able to solve our energy problems if we’re continually subjected to massive price swings.

  8. kranky kritter Says:

    To kranky…how do you not understand that risk-averse entities stabilize the markets because they actually use the supply they buy?

    Stop digging, Justin. They can’t do it by themselves. I can’t insure myself without an insurance companiy, Risk averse entities can’t manage risk unless others are willing to take it on. the stability is created via a relationship BETWEEN the risk-averse and the risk-willing.

  9. Justin Gardner Says:

    Again kranky, you’re missing the point.

    The oil and gas companies were the risk-willing companies until the speculators came into the market. Then you had folks buying up a significant portion of the supply to artificially cause a shortage and inflate prices unnaturally. No responsible oil or gas company would take part in hoarding because the government would find out and nail them for price fixing. So by default they became the risk-averse players in this game.

    And see, the way you describe the insurance industry is the way it should work. WE should be the risk-averse entities in this game, and we are…but oil and gas companies are now caught between us. I actually have a lot more sympathy for them now, even though they made record profits.

    In short, the folks who handle the production and distribution models is how supply and demand should be determined. Not the people who buy hundreds of millions of barrels just to create unnatural price variances.

    Again, I’m not exactly sure why you don’t want to admit that speculators played a huge part in these historic swings. But that’s your cross to bear, not mine.

  10. J. Harden Says:

    Justin – You are correct. I looked into it and the definition of contango is more expansive than I knew. I always heard of it in the context of describing a future spread — which is understandable since I only do spread trading, because I’m risk averse. Buy two contracts, one to buy (usually my long position), one to sell (usually my short), generally in the same commodity, and engage in the evil practice of “speculating” on the spread. Certifiably fu*&ing evil, I know.

    Anyway, for your information, everybodies out to make a profit — including the direct purchasers of commodities. The futures contracts have underlining commodities — and all “speculators” take the contractual risk of delivery obligations if they don’t sell the contract.* Are you accusing the major oil companies of hording petroleum when it was $160 a barrel? Are you dissatified with the current price of gas? The black-outs in California were a result of Enron stopping electricity generation or creating congestion on the grid to manipulate the spot market price. The fundamental cause for the blackouts was the price controls in conjunction with deregulation of California utilities. Do you have gas supply concerns, Justin? Please, show me ANY thing like what you had with ENRON. I figured you were referring to financial manipulation of futures causing high oil prices (which is possible.) I had no idea that you were hanging your hat on SUPPLY HORDING! John Denver did that…poor guy.

    In my opinion, the volatility of the oil market is proportional to the lack of production control and information – the reliance on foreign sources. It includes our ever increasing inability to control the political picture of the Middle East, and is intricately related to asset depreciation and the over all state of the economy. Traders are not immune to irrational market exuberance, but hording ain’t the cause $160/barrel petro.

    there was a reason these people were kept out of the market in the first place, and given the fact they’re abusing it now and subverting the normal laws of supply and demand, they should be kicked out immediately.

    The first *recorded* evidence of commodity future contracts is in 17th century Japan (rice) and Holland (wheat). Yes, the practice must be stopped immediately.

  11. Michael Moore Says:

    OMGz! Speculation?! Quick, we must set up a government exploratory sub-committee on how we can remove uncertainty from the world and finally put an end to speculation! Surely we must consume everything NOW. Instead of allowing people to speculate and store oil, which will eventually assist in softening any possible price rise (supply and demand, remember?).

    PS. Hasn’t the government oil-cartel, OPEC, been cutting back on production to raise prices? Why isn’t that news? In fact, it’s probably the reason why speculators are expecting prices to rise and are storing oil…

  12. kranky kritter Says:

    Again, I’m not exactly sure why you don’t want to admit that speculators played a huge part in these historic swings. But that’s your cross to bear, not mine.

    That’s a straw man. Please show me where I have denied that speculators played a role in these swings. You can’t, because I didn’t. That leaves me pretty much off the cross, despite your contention.

    Instead, why not at least TRY to stick to the subject of my criticism, which is my contention that your pet idea (only users can buy oil) is simplistic? This notion is compelling only because it relies on a near-total lack of broader understanding of how the industry and related markets work. A lack of broad understanding of markets is not by itself astonishing, Justin. It’s understandable. But what IS astonishing is your blithe willingness to hypothesize about solutions despite your lack of understanding. And that, my friend, would be YOUR cross to bear.

    For the record, I cheerfully agree that speculators were involved in recent oil price volatility. Speculators are always involved when there’s a bubble. You should have understood that I knew this when I mentioned how a lengthy period of very cheap capital was part of the problem. But apparently you’re too wedded to your pet idea to even try to understand what I am trying to convey.

    What’s further demonstrates your lack of understanding of the various roles of the myriad players is your easy slash at at the vague slow-moving demon “oil companies.” Fine, they’re evil. Whatever. But sadly for your pet hypothesis, they often act as middle men themselves. There are tons of middle men. That you would imply that the players can be neatly split into direct producer and users displays yous naivete.

    I can’t help but wonder how you think you (or any group composed solely of “oil users”) is going to stop oh let’s say OPEC nations from selling their oil to whoever offers the best price, whether it’s by futures contract or by backing a tanker up to the spigot. Your idea, bluntly, is a non-starter.

    And that has been my point all along in this thread. The spots where I describe the role of speculators are merely incidental points describing dynamics. They’re not defenses of any specific actions of speculators, per se. And they are not denials of the notion that speculators played a role in the oil price bubble. If you were an honest broker interested in a serious discussion of the issues, you’d have understood that. But you can’t stand the idea that your simplistic uninformed pet idea has no chance of coming to fruition, and if it did, it wouldn’t work.

    No group composed solely of folks on the demand side can ever dictate terms to the folks with the supply unless they control ALL the demand. It’s even more difficult when the folks on the demand side are seeking a supply of something that they can’t realistically do without. For homework, do some research in inelasticity.

    All these dynamics are a good argument for increased planning and committment to ways to produce alternative sources of energy. I’m strongly in favor of finding ways to truly conserve energy, and I’m strongly in favor of finding new alternative sources of energy that are cost-effective, reliable, and implementable.

  13. Justin Gardner Says:

    kranky,

    You’re right that you didn’t explicitly say that speculators weren’t involved in this swings, but your entire reason for even commenting is predicated on the notion that speculators act as a stabilizing force for these markets because they take on the risk. So forgive me if I didn’t think your position recognized that they worked to destabilize the market…because you were saying nearly everything to the contrary.

    Now, I could go point by point with response, but that’ll just devolve.

    Instead, let me address the overarching point of you saying I’m being simplistic.

    Well, I’ve never contended that speculation was the only thing at work, but as my post states…I want this practice of hoarding to stop so we can let the marketplace work in more efficient, transparent manner. Because, let’s face it, hoarding product is not efficient market activity. It is merely an investment tactic to drive down supply so prices will go up. That’s it. It’s merely done for profit.

    Also, I acknowledge that OPEC acts as a destabilizing force, but at least they announce what they’re going to do publicly. Not so on the commodities market. There’s a HUGE difference there and that’s one of the reasons why people didn’t want to deregulate these markets.

    Ultimately, speculators only hurt the adoption of alternative energy vehicles because the market will never be stable enough. Sure, the auto companies will always have to hit a moving target, but they’d much rather try to a target that stays between 2.50 and 3.50 a gallon instead of 1.50 and 4.50. Because if you really believe in the magic of the marketplace, you’ll also acknowledge that a for-profit company has to have a receptive market to sell their products to. Personally, I think the market should be subsidized to make up the difference because using less fuel will ultimately be better for all of us, but I know that’s not a popular notion…yet.

  14. nikolai Says:

    Hell, this is no surprise, in fact, it’s just the tip of the iceberg. Look at the price of oil a few months ago; over $4 and approaching $5 a gallon, and now down to a $1.65 a gallon. How much money are these people making anyway? How much did they make when oil was at over $150.00 a barrel? The oil industry is totally out of control and the only way to get the price of oil under control is to boycott or at least buy as little as possible as illustrated by the latest economic downturn which brought oil/gasoline prices down to where they realistically SHOULD BE. Bottom line, money talks, so hit ‘em in the wallet whenever you can.

  15. J. Harden Says:

    I want this practice of hoarding to stop so we can let the marketplace work in more efficient, transparent manner. Because, let’s face it, hoarding product is not efficient market activity. It is merely an investment tactic to drive down supply so prices will go up. That’s it. It’s merely done for profit.

    Kranky — please read that again and ask yourself — what is the point of having a conversation with Justin about this. He is in the proud company of Bill O’Reilley and Dennis Kucinich on this topic and NO amount of reason will dissuade him.

    He should really stick to issues that he knows alot about: gay marriage and political polls.

  16. Justin Gardner Says:

    Josh, why not point out why that’s wrong instead of engaging in a juvenile power play to undermine my credibility?

Leave a Reply


NOTE TO COMMENTERS:


You must ALWAYS fill in the two word CAPTCHA below to submit a comment. And if this is your first time commenting on Donklephant, it will be held in a moderation queue for approval. Please don't resubmit the same comment a couple times. We'll get around to moderating it soon enough.


Also, sometimes even if you've commented before, it may still get placed in a moderation queue and/or sent to the spam folder. If it's just in moderation queue, it'll be published, but it may be deleted if it lands in the spam folder. My apologies if this happens but there are some keywords that push it into the spam folder.


One last note, we will not tolerate comments that disparage people based on age, sex, handicap, race, color, sexual orientation, national origin or ancestry. We reserve the right to delete these comments and ban the people who make them from ever commenting here again.


Thanks for understanding and have a pleasurable commenting experience.


Related Posts: