The Cost of OPEC's Plan

A glut of oil is driving a contango in futures market and is putting a premium on places to put it.

While the market is getting some support from talk from Saudi Arabia that prices will rebound to $80 a barrel next year the reality is telling us a different story.  The Energy Information Administration reported a superfluity of petroleum supply with a stunning Christmas Eve report. Not only did they report that crude oil inventories increased by 7.3 million barrels they followed that up with a big 4.1 million barrel build in gasoline supply and a 2.3 million barrel build in distillate.  As the front end of the futures price fall versus the further out contracts it is making it attractive for market players to store oil and contract to sell it a year or 2 down the road, otherwise known as contango. This is putting a premium on storage as the market is acknowledging that in the short term we don’t need more oil, so put it away for a rainy day. At a time when oil and products are normally taken off the books for year-end tax reasons, US supply keeps rising. Commercial crude oil inventories situation is overwhelming with supply well above average. Oil supply will continue to rise as US productions stays strong and OPEC continues to flood the global market. With global production exceeding demand the question soon will become where do we put this oil? Reuters is reporting that “Global oil traders are likely to store crude in tankers next year, as a widening contango makes large-scale storage at sea profitable for the first time since the financial crisis more than five years ago.” Rising storage should keep prices low as supply in storage will undermine price. Overtime that will impact production as low prices will discourage more production and at the end of the day that is probably OPEC’s plan. Yet it is not coming without a cost for the cartel. The Energy Information Administration reports that OPEC revenue will hit the lowest level since 2010. The EIA says that OPEC, excluding Iran, will earn about $700 billion in revenue from net oil exports in 2014, a 14% decrease from 2013 earnings and the lowest earnings for the group since 2010.  The EIA says that the reason OPEC earnings declined in 2014 were for two reasons: decreases in the amount of OPEC oil exports and lower oil prices, with the 2014 average for Brent crude oil projected to be 8% below the average 2013 price. The EIA also reported that the national average of retail regular gasoline price decreased for the twelfth week in a row to $2.403 per gallon on December 22, $0.151 per gallon less than last week and $0.868 under a year ago. The national average retail diesel fuel price decreased for the sixth week in a row to $3.281 per gallon, $0.138 per gallon below last week and $0.592 under a year ago. Natural gas got smashed as warm weather and big production sent prices to the lowest level this year.  Price Links Video series gives insight across the financial spectrum.

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