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I’ve been meaning to write about the impact of Somalipirates hijacking oil supertankers. From what I’ve seen, the damage to the oiltrade is fairly significant.
One piece of news this week: five pirates – hanging on totheir share of the $3 million ransom - died when their boat capsized in the Gulf of Aden last week. The five were part of yet anotherSomali pirate raid on an oil tanker – 100 or more in 2008. It’s interesting howoil companies and supertanker companies pay these ransoms. In the case of theSirius Star – the hijacked tanker in question – the ransom was dropped byhelicopter on to the ships’ deck.
One UKthink tank says that the oil industry lost $30 million in ransoms just in the Gulf of Aden alone. The area is off the coast ofpoverty-stricken Somalia,and is one of the world’s largest shipping lanes, linking the Mediterranean Seaand the Red Sea to the Indian Ocean.
As I said, great stuff, but it’s another supertanker issueI’m writing about today. Morgan Stanley has followed the lead of otherinvestment banks (like Citigroup) in stocking up on cheap oil and storing it onoffshore supertankers, until the price of oil goes back up.
Specifically, JP Morgan purchased two million barrels of oiland loaded it onto the tanker Argenta, off the Gulf of Mexico.
The goal is an obvious one. Morgan anticipates higher oilprices later in 2009 and is jockeying for a big profit by buying oil at around$34 a barrel (where it’s trading this week). Morgan Stanley, Citigroup and Royal Dutch Shell, which have all deployedthe oil-hoarding gambit, have all lost billions in the global recession.Consequently, they’re taking advantage of what oil traders call the “contangoeffect”, where oil pricing structures are impacted by excess supply and lowdemand, but may not rise even after OPEC moves to cut inventory glutsthroughout 2009. In other words, the oil gambit is another potential profitcenter for investment banks that could really use one.
So far, oil analysts estimate that about 80 million barrelsof oil are being stored offshore in early ’09. Now, that’s not a heck of a lot– about one day’s worth of oil for the globe’s energy needs.
But it is an interesting trend. The mathematics alone isespecially interesting. The laws of supply and demand are pretty clear – buylow when demand is low and sell high when demand is high. It’s not like thecost of carrying the oil is a burden. According to news sources, Morgan Stanleyhired its tanker at a cost of $68,000 per day, or about $1 per barrel permonth. The outlook for future oil prices is currently fairly bullish, althoughnothing spectacular. Benchmark oil futures are hovering around $3.70 more thismonth than last, so Morgan, Citi et al, have a ways to go.
Another interesting point. Oil-producing countries aregetting hammered. Expecting $75 per barrel oil and getting $30 per barrel oilshas caused consternation, if not panic, in such countries. So they’re more thanhappy to sell millions of barrels at current market prices, just to generatesome much-needed income, and speculators are only too happy to buy at a goodprice and wait for the futures market to bid higher, then sell and deliver theoil.
The risk is that once storage capacity is realized, thenprices might go down, as the contango model basically predicts. But as oilanalysts point out, quite accurately, that the stored oil is not for sale onthe open market, and hence cannot “flood” the oil market, at least in the shortterm.
So Morgan Stanley, with its “floating supertanker storage”strategy, would appear to be ahead of the curve on this one. Just how far aheadof the curve remains to be seen.
But you certainly have to give them points for originality.
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