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Saturday, May 16, 2009 1:35 PM


Iraq objects to Floating Tankers, May Cut Oil Output


Floating takers are now the scourge of Iraq. I spoke of floating tankers on Friday in Wholesale Prices Post Largest 12-Month Decline Since 1950.

Here is the pertinent snip:

Crude Oil Daily Futures

Floating Storage

Because of the contango shown on the left, it may be cheaper to buy crude now, assuming one has storage, and storage costs are low enough.

Of course, whether it is wise to stock up now depends entirely on where prices head from here.

Regarding contango, a friend just pinged me with this comment:

"Nordic American estimates that up to 80 VLCC's (Very Large Crude Carrier) are currently used as 'floating storage'. I have heard from a shipping company in Hong Kong that they think it is even more, as China has apparently hired many of the old single hull ships to use as floating storage until it can build enough storage facilities on land. There's a lot of oil 'floating about', literally."

All things considered, oil prices are due for a pullback and gasoline prices at the pump are likely to follow. Moreover, with the possible exception of food, consumer prices in general will remain under pressure, if not indeed negative on a year over year comparison basis for quite some time as well as falling producer prices pass up the chain.

Please see first link for more discussion of contango and oil prices.

Iraq Calls Floating Storage Unwise

Inquiring minds are now reading Iraq Says Storing Oil in Tankers ‘Unwise;’ OPEC May Cut Output.
Iraq, holder of the world’s third- largest oil reserves, said storing crude in floating tankers was “unwise” and OPEC nations may need to make further production cuts, assuming demand continues to drop this year.

“We don’t think it’s a wise economic decision” to produce oil from secure underground fields then pay to store it in floating tankers, Iraqi Oil Minister Hussain al-Shahristani said yesterday in an interview at the Dead Sea in Jordan at the World Economic Forum. “Future generations can benefit from it better than we can, if we don’t need it.”

Speculation that oil demand may fall further than expected because of the recession were “bad news,” he said. “OPEC will have to reconsider its production levels again,” assuming consumption does continue to decline, he said.

Fuel demand typically grows in the northern hemisphere’s summer months when motorists take to the roads for their annual vacation. About 25 million barrels of gasoil and jet fuel are held in floating storage in Europe, OPEC said in the report.
OPEC Members Will Cheat

Iraq can object all it wants but there is little Iraq or OPEC can do to stop the practice. Such griping is an admission that OPEC is having a tough time manipulating oil prices where they want them. And after this runup in prices since December there will be every incentive for members to cheat on production quotas.

Given that Bernanke's green shoots are withering on the vine I expect we have or will soon see a relative peak in oil soon regardless of what OPEC does, barring some unexpected geopolitical event in the Mideast.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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