Hurricane Harvey has severely damaged the Texas Oil Cost, shutting down refineries which will probably disrupt gasoline supplies, resulting in price hikes. Despite this, the long term forecast is still that we are in an oil glut, and barring major hostilities in the Middle East, prices are going to remain soft. The word to learn today is “contango”:
Contango occurs when the current futures price of an asset (as quoted in the futures market) is higher than the current spot price of the underlying asset. (meaning today’s prices are much less due to excess supply)
“Floating storage off Singapore reached an all-time high in February,” Smith told CNBC’s “The Rundown.”
“We started to see Singapore floating storage dropping off last month from that record high of 60-million barrels, but we saw it rebound last week.”
Ahead of the OPEC production cut, producers ramped up production and exports to maximize revenues, with OPEC sending over three- fifths of its production to markets in the Asian region.
February arrivals hit 16.1 million barrels per day. That’s 1.1 million barrels more than last year’s average and nearly 300,000 barrels higher than the previous record set in February 2016, according to ClipperData.
The region’s refineries cannot process that much crude, so the influx lifted Singapore floating storage to 64-million barrels in early February, the highest level on available records. It has fluctuated since then, but remains well above recent averages.
“As long as we see 60-million barrels floating offshore in Singapore, it is just indicating that the market is still oversupplied and is not absorbing all this oil,” Smith said.
Of course, any excuse, valid or not, to raise prices and start gouging drivers will be taken. The cost getting the oil to the refineries has not changed, there are just suddenly fewer refineries to make fuel, and pipelines to transport what fuel is in the area are shut down. This situation could see fuel prices rise up to $1 gallon.