Bottom’s Up: Oil Prices Show Signs of Stability, Rebound
I wrote last week how Morgan Stanley had an epiphany of sorts, in buying 2 million barrels of oil at a (seemingly) bargain basement price, and then storing its stash of crude on an oil supertanker off the Gulf of Mexico.
The idea is to buy in bulk while prices are low and then sell when prices rise again, presumably later in 2009.
The storage cost to Morgan Stanley in doing so? $70,000 per day.
It’s not like Morgan Stanley is alone. Other big investment banks have also tapped into the storage gambit – altogether 22 supertankers are in use as floating oil facilities around the globe, instead of delivering it to customers at various ports of call, according to U.K.-based E.A. Gibson Shipbrokers Ltd.
Oil specialists call it the “contango” factor, where oil stored now can be resold later at higher prices.
Will Morgan’s bet pay off? Have oil prices hit bottom? Will contango leave investment banks, already battered enough, dancing in the dark?
Let’s look at the facts. First, most energy experts think that while prices won’t fall as much as they had in late 2008, few are anticipating a significant price spike for the rest of 2009. Obviously, a global recession will reduce demand for oil and there are few signs that the economic slowdown is abating.
If you’re looking for a silver line, though, we might have found one in Monday’s housing sales numbers, which unexpectedly rose off of record lows. Also, a key index of economic indicators (the Conference Board’s economic health index) also came out today and – surprise – showed the first gain in six months. Also, the Reuters/Jefferies CRB index of commodities has spiked upward by 5.5% - another recent high – as investors begin to make what looks like a move back into commodities.
As a result, the price of oil rose to almost $49 a barrel in early Monday trading, the highest level since January 7, and a healthy sign that demand could rise if we begin to see any decent economic news.
As always, OPEC is having its impact on the oil/bottom discussion. Amidst estimates of falling demand for ’09, major oil-producing states will cut oil output by five percent, and they started the wheels moving on that front this month. Once those cuts make their way through the energy industry’s system, markets should constrict somewhat and oil prices should resume their upward climb. Remember, OPEC accounts for 40% of the world’s oil supply, so any limits on supply, coupled with even a modicum of good news from the economy, should trigger an upward tick in prices.
Call me a skeptic, or at least an oil industry observer who needs more evidence of that “perfect storm” of events that will bring oil prices back up again, but it’s becoming apparent that at least the ingredients for a bounce back are beginning to fall into place.
At least that’s what Morgan Stanley and the rest of the contango crowd are betting on: OPEC production cuts, a sign  - any sign – of economic growth, and rising consumer demand.
If those ingredients take shape, then indeed a bottom in the price of oil is in sight, if not sooner than we think.
One thing’s for sure, we’ll know a lot more this spring, when the OPEC cuts and the U.S. housing picture crystallize. Until then, don’t bet on a bottom – but don’t bet on a big rebound either.

Posted 01-26-2009 2:15 PM by Bret Boteler


Are we poised for an oil price rebound? : Bret L. Boteler wrote Are we poised for an oil price rebound? : Bret L. Boteler
on 02-02-2009 12:37 PM

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