Oil Prices Poised for a Big Rise by Year End


"We look for oil to be in the $70/barrel range this fall. . ."

We've seen the price of crude oil and gasoline fall dramatically in the last year, but some very big bets are being made that the prices are going to go back up substantially this year. While these plans could backfire, they are being made by those who are in the best position to forecast rates going forward.

Bloomberg is now reporting that oil traders have chartered 25 VLCCs (Very Large Crude Carriers), which can hold roughly 2 million barrels of oil; and they're looking for another 10 to use as floating storage tanks. Oil traders are buying oil at today's prices and taking it out of the market for now. Instead of reselling it as they normally would, they are holding onto the oil with plans of selling it when prices rise later in the year. According to Bloomberg, the leases are for six to nine months. That suggests that these oil traders expect oil prices in late summer and fall of 2009 to be much higher than they are today. Higher oil prices, of course, will mean higher gasoline prices.

The cost of storing the oil Bloomberg says is about 90 cents per barrel per month, citing Galbraiths LTD, a major ship broker. OK, so nine months, at current charter rates is only about $8.10 per barrel. Then, there's the opportunity cost of all that money. In other words, the oil traders are locking up all that money in inventory with no return at all for nine months. Roughly, it looks as though it would take oil to go to $60/barrel for this move to pay off. If you add in a risk premium, then it's likely they are expecting prices to hit at least $70/ barrel by this autumn.

The sale of all this stored oil could actually help to lower oil prices or at least stop them from rising further, especially if it is all released near the same point in time. We look for oil to be in the $70/barrel range this fall where it may stall for the rest of the year. In early 2010 expect prices to climb further if the U.S. economy is showing strong signs of recovery and GDP is on the rise again.

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