Crude Oil Storage
What is Crude Oil Storage?
Crude oil storage is a process of storing crude oil, after it is produced, until such time it is used as a feedstock at refineries for making petroleum products such as diesel, gasoline, heating oil and other fuels. At or near the producing well are a series of tanks that contain the oil as well as salt water, and is referred to as a "tank battery."
What is a "Contango"?
"Contango" has been in thenews lately relating to Crude Oil Storage, and the lack of adequate supplies for crude oil storage. In crude oil storage, contango exists when the futures price (also known as the "forward price") of oil (or other commodity) is higher than the anticipated spot price of oil.
In a contango
scenario, market "hedgers" of that commodity as well as arbitrageurs
and speculators willingly pay more now for oil at some point in the future than the actual expected price of the commodity
at that future point in time. This typically occurs as the market-makers
(arbitrageurs and speculators) prefer to pay a premium to have the oil in the future rather than
incurring the costs of crude oil storage and carrying costs of buying oil today.
The opposite market condition of contango is "backwardation." A market is in backwardation when the future price of oil is below the expected future spot price for oil. This is favorable for those investors who have "long" positions since they want the futures price of oil to rise.
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hundreds and hundreds and hundreds of billions of dollars every year for
oil, much of it from the Middle East, is just about the single stupidest
thing that modern society could possibly do. It’s very difficult to think of anything
more idiotic than that.” ~ R. James Woolsey, Jr., former Director of the CIA
According to R. James Woolsey, for Director of the Central Intelligence Agency, “The basic insight is to realize that global warming, the geopolitics of oil, and warfare in the Persian Gulf are not separate problems — they are aspects of a single problem, the West’s dependence on oil.”
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