After rising by $10 a barrel since mid-April, oil prices continued to increase early last week, and at one point touched a six-month high of $60. Just as the equity markets remain largely detached from economic news and focus on hopes for recovery, the oil markets remain largely detached from the news of supply and demand. When the equity markets turned softer on Thursday, oil followed them down to close out the week at $56.34.
Most of the week’s news suggested too much production and slackening demand. OPEC crude output increased by 270,000 b/d in April after falling for seven months. OPEC is now 950,000 b/d over target. China’s industrial production grew by only 7.3 percent in April, well off the double digit increases seen in recent years. Beijing’s exports for April were down by 22.6 percent year over year. Numerous US economic indicators released last week, including retail sales, employment and housing, all suggest that the demand for oil will be weaker in the weeks ahead.
The weekly US stocks report showed a 4.7 million barrel decline in crude inventories, the first since February, with imports dropping to the lowest level since 2004, excluding disruptions caused by hurricanes.
The amount of oil and products stored at sea is now reported to be approaching 150 million barrels. As the older single-hulled tankers are no longer welcome in some ports, owners are happy to lease them out for storage as an alternative to scrapping them immediately. China is reported to be storing some of its increasing strategic reserve aboard leased tankers.
The economics of storing petroleum are based on contango in the oil futures markets which allow well-financed companies and speculators to make money by storing oil for future delivery at higher prices. Should the outlook for oil prices reverse and longer term contracts drop below near-term contracts, a very large amount of oil is likely to be dumped on the market, forcing down prices precipitously.