Oil as Water
Pfäffikon SZ, Switzerland – Saudi Arabian airstrikes was cause for unrest on the financial markets yesterday. Due to the airstrikes the fear is growing that there will be a further spread of unrest in the Middle East, which could impede the supply of oil. The strategic location of Yemen certainly plays an important role in all this. Moreover, things have not been running smoothly between the American President Obama and the Muttawakkilite Kingdom. Obama, for some time, has been referring to Yemen as a thieves den. I need not tell you what happened to the oil price – it shot upwards. But how sustainable is this surge in the black gold?
Currency war
The global markets for some time have been subjected to an unmistakable currency war that is being waged. Stock markets have been more reactive to currency shifts and the carefully selected words of central bankers than to real economic development. But there is another important factor which undoubtedly plays a role, which is oil. The oil price and its structural decline will not have escaped you. The recent fall in prices has prompted oil traders to stash the black stuff and wait for better times. The logical consequence is that oil tanks have not been this full in 80 years.
Desperate
These developments created more space in the oil market. When it comes to tank storage the first thing to take into account is working capacity. Additionally there is room for extra storage. But the phenomenon “contango” also plays a role in oil storage. Contango is the difference in oil price which comes into existence by for example storage costs. Smart oil hubs try to squeeze together the real “contango”. The working capacity typically ranges from 3% to 5% of the storage capacity. By reducing this capacity to 1%, pure profits for the oil hub are generated. Every cubic centimetre of storage is desperately put to use to store oil. It should be noted that not every oil hub operates in this fashion, but it does illustrate the tense situation.
Oil in abundance
The Middle East has more often than once indicated it will not tighten the oil valve. In the past I have pointed out how and why. Despite the unrest in Yemen it’s not entirely unthinkable that we are yet to see the bottoming of the oil price. After all when the storage capacity is put to use completely little remains but dumping oil on the market. For this reason it is not a crazy thought to start doing your homework on decent oil investments in the case such a situation should present itself.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
