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Storage plays will help keep oil price low globally

Friday, February 20, 2015

Subject

Current opportunities for oil storage plays.

Significance

Oil markets are now in their third month in contango -- when prices for future delivery exceed spot rates. The collapse in the price of crude under the weight of the US production surplus has made it profitable for traders to buy oil now and sell it forward on the futures market even after accounting for the costs of storage and insurance. However, the speed with which shale production can be taken off- and online makes storage plays uncertain.

Impacts

  • Contango will open opportunities for trading houses to leverage their internal storage capacity.
  • A 3% drop in global oil production will be enough to erase the current opportunities in storage plays.
  • Despite remaining negligible, the return of Libyan exports would add to the surplus, adding to the profitability of storage plays.
  • Rising future prices could attract new investment to shale production, bringing it back online and perpetuating the supply glut.
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