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Oil Pricing

August 31, 2007

although the pricing of oil is basically supply and demand driven,
there are a few extended factors which should be considered.

in addition to refinery inventories,

OPEC (Organization of the Petroleum Exporting Countries)
attempts to control global oil supply, and

governmental controlled surplus inventory pools, such as:
U.S. Strategic Petroleum Reserve (SPR),

there also exists speculative market effects
in the form of "contango"

contango is a term derived from origins at the London Stock Exchange
which described a fee paid to the holder of a commodity;
the "contango fee" compensating for the cost of holding the commodity
for a delayed future delivery

if the future price of a commodity
is higher then the current spot price for the commodity;
then there exists financial incentive to hold onto such commodity
to obtain the higher future price

the costs involved in storing the commodity
subtracts from the potential contango profits

in practice, if the day rates for oil tankers
is less then the differential in future commodity price,
then it becomes financially advantageous to
keep oil tankers at sea as the value of such cargo increases.

there exists a somewhat flexible "bank" of oil inventory stored at sea

if the futures price of oil turns lower then current spot prices
oil tankers can magically start arriving at destination ports quicker

future contract pricing therefore functions
in a manner similar to the effect of interest rates
upon the supply of financial liquidity


Oil Tanker Day Rates

oil futures contango therefore also effects
profitability of oil tanker companies;
as such supply/demand characteristics effects the day rate pricing
which such transportation companies are able to obtain


Oil Refineries

oh, by the way,
be careful about forming opinions about oil pricing expectations
based upon news reports that no new oil refineries
have been built for quite a few years now;

what might not be mentioned in such news reports
is that there has been increased capacity
added onto existing refineries


some links:

World Crude Oil Reserves

U.S. Refineries Operable Capacity (January 1, 2007)


this webpage was last updated on: August 31, 2007

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