Friday, August 06, 2010

Building Oil Glut in Middle East Has Interesting Overtones

While the usual suspects continue to predict higher oil prices, most intelligent observers are careful to watch trends. One of the most important trends for energy analysts to watch is the growing glut of crude in middle eastern floating storage, and what effect this glut of crude will have on future oil markets.
The Gulf region, which supplies 40 per cent of the world’s oil, is glutted with crude that producers cannot immediately sell, even as US and European oil has risen above US$82 a barrel.

The amount of oil in long-term floating storage in the Gulf and Red Sea is estimated at 30 million barrels, or enough to supply all of North, South and Central America for a day.

The trouble is that most Middle East crude is not sold in the Americas. Instead, it is shipped to the growing economies of Asia and, to a lesser extent, markets in Europe.

While Europe is not oversupplied with crude because of a seasonal drop in North Sea oil output from maintenance and repairs at production plants, Asia has as much as it can use.

Increasing Russian supply to Asia is also a factor in slower Middle East sales there.

...While refinery maintenance in Far East markets has contributed to the oversupply in recent months, oil shipments to Asian markets through Russia’s East Siberia Pacific Ocean (ESPO) oil pipeline are causing a longer-lasting headache for Gulf producers.

The ESPO blend of crude shipped through the pipeline from recently developed oilfields in eastern Siberia is now “a popular alternative” to Middle East crude, JBC reported.

The head-on competition between Russian crudes, which also flow to Europe, and those from the Middle East is likely to continue for at least some months.

At the moment, the prices of futures contracts for crude bought from Middle East and European suppliers for November delivery are almost the same, so there is little opportunity for traders to make a profit from the difference.

The longer Middle East crude remains in storage, the more downward pressure it will put on international oil prices as it is released to the market.

The US government yesterday reported stockpiles of petrol in the US had increased by 729,000 barrels in the preceding week, suggesting weak demand from US motorists in the crucial summer driving season.

And high unemployment in Europe and early signs that the powerhouse economies of Asia and India may be faltering raise worries about global economic recovery. _TheNational
The story lends more support to reports that Russia is increasing its oil production for the long haul. It also raises questions about what is driving recent runups in oil prices above $80 in US and European markets.

Investment bankers and hedge fund operators will always make predictions which benefit themselves. But unless you want to become a perpetual victim of the grifting instinct of traders and bankers, you will wish to look more deeply into underlying trends.

The gluts discussed above suggest short to intermediate term trends in demand and supply which should limit how far and how quickly oil prices will rise. Markets are always subject to considerable turbulence due to speculation and fallout from the instability of national economies, so always take the economic stupidity of governments and central banks into account when gazing into your crystal balls.



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