[kpeavey]

This has been going on for a while, just now learned the word for it.

Oil Contango and its Effects on Oil Prices

[pup55]

A quick check of the history says that this was an unusual condition until about December of 2004. Since then, with the exception of roughly one year period between June of 2007 and June of 2008, the contango has been the prevailing condition.

The exception periods are those right before or after a hurricane when people are scrambling for short-term supply.... such as in the fall of 2005.

We have been tracking this stuff for awhile and right now, have the theory that with available on-the-water tanker storage cheap and available, people are working the system quite a bit, to make a bit of extra money by unloading when the prices are high, and sitting on their supply when they think they can do better next week.....

Of course if you are a consumer of crude oil, like some of these big chemical companies, this drives you nuts because you do not know what prices you can expect for your feedstock, because all of this makes the price really variable. Example: In the last month, the price has gone from the low 70's to the low 80's, a 15% fluctuation, with no apparent logic or reasoning behind it.

This will continue until something changes in the underlying psychology of the traders and/or middle people that are in this business. Good luck with that. By now, they're used to it.

[gnm]

Pup, you mentioned industrial feedstock prices. I was out yesterday shopping for some open cell foam - Normally relatively cheap material - or so I thought. I had bought some about 8 years ago and paid $45.00 for a 4x8x3" thick sheet. I went to the same place and was shocked to be told that the same sheet is now $290.00. The owner apologized and said something about petroleum feedstock prices at their supplier. Talk about inflation! Thinking this was an anomaly, I went to another place, a cloth supply store and the price there was $56/yard for 2' wide material or something like $250 for the same amount as well. Geez I was just going to make some Dog beds. I think I'll go dumpster diving...

-G

[pup55]

Well, let's see, 8 years, 2002, oil has gone from 20 to 80 so that's about right.

There's a whole array of people that produce the intermediate products, I am thinking stuff like styrene and ethylene.... that then are turned into the petrochemical products downstream, and the less labor dependent they are, the closer they will track the price of oil, since a lot of these are continuous processes that do not actually require much human input. Anything that takes some human component, tires for example, did not have such a big increase because a lot of it is done in China.

These guys have a little leeway on pricing their products, not much, because in most of these businesses there are a few big aggressive competitors, and there is overcapacity in all of these industries because of what happened in automotive for all of those years......Many of them are just as badly off as the oil refiners are right now..

A lot of this stuff was expanded in the 90's based on the assumption, put out by the EIA a government agency, that the worst case scenario would be that oil will get to $35 a barrel.....and we would all drive Ford Explorers.

So in a world like we have seen the last 18 months, where oil has gone fro 147 to 33 and now back up to 80, the assumptions that people built into their business and product pricing model went totally out the window. They also have the problem of getting money to refinance their plants when their bonds come due....about now....

So the whole thing is a mess, particularly for these gigantic operations that need a lot of capital and some steady pricing and a lot of other things in order to run a business.....

I suppose you could eventually see an evolution back to smaller and more flexible companies in this market, such as what happened in the steel industry when Nucor grew up in the 80's.....but that means that you can expect to pay more to the survivors who can manage to make a business out of this disaster.