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Tuesday, September 25, 2018

Alice in the Oil Market – artificial pricing or a new reality?

Petroleum Intelligence Weekly says that, like Alice in Wonderland, oil markets find themselves this year in a world both familiar and surreal. In recent weeks, a classic bear market has again taken shape. The weather has been warm, storage tanks have filled, downstream capacity has recovered from the hurricanes, crude oil is abundant and spot prices have fallen. But even so, prices are lofty, trading above the peaks of 2004. Last week, despite bearish sentiment, Nymex light, sweet crude futures were still above USD 58 per barrel even in a contango situation - a sure sign of surplus. 

The spot market has been alternately bullish or bearish, but the far forward prices have moved relentlessly higher. From 1991 to 2002, the price two or more years out averaged around the USD 20/bbl level fairly consistently, but by 2003 it was over USD 26/bbl and a year ago it was USD 42/bbl. Now it is over USD 59/bbl. 

Petroleum Intelligence Weekly says that, just like Alice, we are left to ponder whether this market is artificial or the new reality. Explanations abound - from the arrival of "peak oil," to lack of spare capacity, to uncertainty premiums, to pure speculation and more. What is clear is that there has been much more buying than selling in the outer months of the futures curve, for whatever reason, and that seems enough to thwart even a determined bear.

The situation in the oil market is naturally also reflected in the tanker market. Despite apparently low demand in the oil market, the VLCC freight market is extremely tight, despite the delivery of some 25 VLCCs so far this year and no sales for decommissioning of VLCCs involved in trading. It was reported that VELA has taken 6 VLCCs in the spot market. Could this be an indication that at least part of the large VELA VLCC fleet (19 + 123 on TC) is being used for storage?

Contact: Erik Ranheim