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What Drives Tank Storage Demand? Market Structure

Gepubliceerd Jacob on 9 oktober 2017 14:30:02

The market structure stimulates traders to buy now and sell late. In this article we would like to highlight the themes contango and backwardation and what market structure means for tank storage operators.

Introduction contango and backwardation
An oil price for immediate delivery is called spot price or cash price while an oil price for delivery at a specified date in the future is called a forward price. When we plot these various prices and order them from short to long term delivery, a forward curve is created.

When a futures price (second month) is below a futures spot price (first or front month), the market structure is in backwardation. In this case, the forward curve is downward sloping. When the futures spot price is below the futures price, the market structure is known as contango. In this case, the forward curve is upward sloping.

Learn what drives tank storage demand. Join the FREE Webinar: PJK Tank Terminal Commercial Performance Model upcoming October 30th 2017.

A contango usually occurs when supply is higher relative to demand (supply glut) while in a backwardation demand is higher relative to supply (shortage). As time evolves, an oil forward curve can switch from backwardation into contango as in the case of the NYMEX RBOB futures forward curve (see: figure 2). When a cyclical pattern is visible, this is called seasonality. With respect to NYMEX RBOB futures, US gasoline prices tend to rise towards summer driving season during the period June and September. In the period before peak demand, oil traders tend to buy and store products to have product available in times of high consumption.

Learn what drives tank storage demand. Join the FREE Webinar: PJK Tank Terminal Commercial Performance Model upcoming October 30th 2017.

Importance of market structure to tank storage companies
In a period of contango, oil traders are encouraged to buy oil products today and sell in the future when the spread between two months covers storage, shipping and finance costs. When this opportunity presents itself, product is being sold, shipped and stored, resulting in more business for tank storage companies. This play is known as a ‘contango storage play’ but is limited by the maximum tank storage capacity available.

In some rare occasions, when the time spread is large enough even tanker vessels are chartered by trading companies to store oil products. This is known as floating storage. In this rare environment demand for tank storage is high and pushes storage rates for spot availability. Backwardation discourages storing oil products as a trader can sell oil today at a better price than in the future.

Is market structure the only business opportunity indicator for tank storage companies?
There are other indicators that should be taken into account such as price volatility, arbitrage and more. These topics and PJK’s market model will be covered in upcoming weeks.

Learn what drives tank storage demand. Join the FREE Webinar: PJK Tank Terminal Commercial Performance Model upcoming October 30th 2017.

Source: Morgan, D., Oil 101, 2009

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Oil Prices Continue to Fall in Flooded Market

Gepubliceerd Jacob on 29 juli 2016 10:31:57

By Sarah McFarlane and Jenny W. Hsu
Oil prices extended their recent slide on Friday, as a deluge of oil and refined products in the market weighed heavily, keeping prices near three-month lows.

Brent crude, the global oil benchmark, fell 1.2% to $42.71 a barrel on London’s ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading down 1% at $40.74 a barrel.

A combination of an expanding global gasoline glut, early signs of increasing production in the U.S., and rising output from the Organization of the Petroleum Exporting Countries have dragged down oil prices by around 20% since they broke above $50 in June.

“The unexpectedly weak performance raises the important question of whether this is a short-lived blip or has the fragile recovery in oil prices been derailed,” said brokerage PVM in a note.

The market was caught off-guard by an unexpected rise in weekly U.S. gasoline stocks which showed inventories rose 452,000 barrels to hit 241.5 million barrels in the week ended July 22. The increase comes at a time when stocks are usually being drawn.

“Global (gasoline) stocks should usually peak just before the start of the driving season,” said Patrick Kulsen, analyst at Dutch consultancy PJK International. “The expectation was that there would be more consumption in the U.S. and apparently those expectations were exaggerated.”

Support from temporary factors including Canadian wildfires, oil workers on strike in Kuwait and militant attacks in Nigeria that helped oil prices recover since February have now dissipated and the focus has reverted to the overhang of supply.

Investors will also be watching the weekly U.S. drilling report released later today for cues. Data from industry group Baker Hughes Inc. have shown an increase in oil drilling activities in the U.S. for four consecutive weeks to 371 as of July 22.

“In addition to having more rigs drilling, the average productivity of rigs continues to increase,” said the U.S. Energy Information Administration. In the three major oil producing regions of Bakken, Eagle Ford, and Permian, daily productivity picked up by 155 barrels, 226 barrels and 111 barrels, respectively, per well, over the 2015 average.

In June, OPEC crude production increased by 264,000 barrels a day to average 32.86 million barrels, according to the cartel’s monthly report.

The increased barrels come at a time when the refined market is becoming bloated as output outstrips demand. The fear is that the glut of fuels will erode appetite for crude in the coming months and suppress prices to below the $40 mark.

Nymex reformulated gasoline blendstock–the benchmark gasoline contract–fell 1.5% to $1.28 a gallon. ICE gas oil changed hands at $367.00 a metric ton, down $6.75 from the previous settlement.

Write to Sarah McFarlane at sarah.mcfarlane@wsj.com and Jenny W. Hsu at jenny.hsu@wsj.com

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Review week 15/05 Oil prices’ downward movement slows

Gepubliceerd Jacob on 26 januari 2015 11:40:35

Last week, both crude and product prices moved in a more or less sideways range. Financial markets (Stocks, commodities, currencies) were all focused on the outcome of ECB’s policy meeting in Frankfurt.

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Review week 15/04 Crude oil prices ended a 7-week losing streak

Gepubliceerd Jacob on 19 januari 2015 13:25:30

Last week, oil prices showed a volatile reaction. Brent crude opened the week around $50/bbl but its weekly low lay at $45.19/bbl. Eventually, Brent crude March settled at $50.17/bbl, ending a seventh straight week losing streak.

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Review week 15/03 Oil prices lost for a seventh straight week

Gepubliceerd Jacob on 12 januari 2015 13:28:08

Both crude – and product prices lost for a seventh straight week. The sharpest price declines were made early in the week and on Friday. Wednesday and Thursday oil markets were relatively stable. Gasoil prices shed around $45pmton on a weekly base while Brent crude lost around $6/bbl on a weekly base.

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Review week 51 Oil prices fell but losses remained limited

Gepubliceerd Jacob on 22 december 2014 13:28:58

Both crude – and product prices lost again on a weekly basis but losses remained limited. Early in the week, important Gulf OPEC producers said that prices were formed on markets and the group would not increase production.

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Review week 50 Oil prices slumped another week

Gepubliceerd Jacob on 15 december 2014 13:30:47

Both crude – and product prices extended losses on the outlook of a surplus in 2015 in an already ample supplied market.

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Review week 49 Oil prices extended losses

Gepubliceerd Jacob on 9 december 2014 13:32:04

Both crude – and product prices extended losses last week. Research showing the new low-price environment possibly affected US shale production with a decline in permits issued for new shale wells in October, supported oil prices early in the week.

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Review week 47 Oil prices ‘all over the barrel’ plunged

Gepubliceerd Jacob on 2 december 2014 13:34:02

Oil markets were under the spell of the November 27 OPEC-meeting last week. Early in the week, market players were convinced that OPEC would cut production in order to stabilize prices. This resulted initially in a more sideways movement of prices.

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Review week 46 Oil prices pared losses last week

Gepubliceerd Jacob on 24 november 2014 13:36:29

Oil prices were relatively volatile but eventually settled close to last week’s open prices. Early in the week, oil prices dropped on macro-data from key consuming countries and regions such Japan, China and Eurozone indicated that indicated weaker oil demand

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