Oil tankers like this one will cost less to lease in 2010. (image: gibraltarnewsonline.com)

As reported on Wednesday by Emirates Business 24/7, a prominent shipping analyst at Business Monitor International (BMI) says that oil tanker lease rates are expected to drop over the coming year. Rising oil prices are the cause, as reduced shipments mean less business for oil tankers, in essence creating a surplus of tankers floating in the sea. Most experts predict that worldwide demand for oil should increase next year; however, the demand will be too weak to make any dent in the shipping industry.

Of course, while there isn’t much of a reason to ship oil, there is a big need to hold oil. Refineries around the globe continue to produce refined products despite weak demand. Rather than flood the market with this oil, which would pressure prices to go down, many companies are leasing oil tankers to hold oil in “floating storage” with the expectation that they will be able to sell it in the future at a higher price. If leasing oil tankers continues to be relatively inexpensive for major oil companies and financial institutions, then the incentive will remain to keep oil off the market. This practice could be supporting higher oil prices today, but may also moderate any future price increases as this supply enters the market.

Daniel Yergin joins other commentators who have said oil prices are not being driven by supply and demand. (image: cache.daylife.com)

“Oil prices today do not reflect the world’s supply and demand fundamentals.” That, in a nutshell, is energy expert Daniel Yergin’s assessment of why today’s $80 a barrel oil prices are double that of last year’s. On Monday Reuters reported that Yergin—who was awarded the Pulitzer Prize in 1992 for his book on the history of the global oil industry entitled The Prize: An Epic Quest for Oil, Money, and Power—attributes current oil prices to the weakness of the dollar and an overriding faith in economic recovery.

Yergin, who also possesses a PhD in International Relations from Cambridge and is the chairman of IHS Cambridge Energy Research Associates, Inc., agrees with many other renowned energy experts concerning the price of oil. On November 13 HeatingOil.com reported that energy expert Jason Schenker attributes the abnormally high cost of oil to optimistic investors who trade as though the economy is rapidly recovering and oil demand is high.

Commodities trader and analyst Stephen Schork, who is known for his unorthodox opinions on oil production and consumption, also agrees that oil prices are out of sync with supply and demand. However, Schork adds an interesting psychological element to interpreting the price of oil. According to HeatingOil.com, Schork attributes the price of oil to unfounded American beliefs that other countries, especially China, have begun consuming oil at unprecedented rates. The way Schork puts it, “the idea of a billion Chinese trading their Schwinns for Cadillac Escalades—I think that is what is driving the market.”

Also agreeing that oil prices are inconsistent with the laws of supply and demand is economics professor Nouriel Roubini. Professor Roubini has warned that such high prices are dangerous to economies that are only now beginning to shake the effects of last year’s economic crisis. Roubini, who predicted the crumbling housing market and subsequent credit crisis in 2006, has argued that what recovery has been achieved is in danger and “if oil goes to $100 today, it will have the same effect on the global economy as what $147 oil had last year.”

The current state of affairs surrounding oil prices has not shaken Dr. Yergin’s faith in supply and demand, though. Asserting that “the only two real characters that count are supply and demand,” Yergin is confident that the market will eventually correct itself, and that supply and demand “will win at the end of the day.”

And although Yergin’s analysis of crude oil prices is not entirely positive, he may have good news for consumers of diesel fuel and heating oil. According to Yergin, supplies of diesel and heating oil are remarkably abundant—when the market does correct itself, customers will receive significantly lower prices.

IEA director Nobua Tanaka. (image: iea.org)

International Energy Agency executive director Nobuo Tanaka has a lot on his mind, as detailed in a Reuters article published on Tuesday.

At the top of his agenda is the state of the world’s economy. Though expectations of economic recovery and revived oil demand are high, Tanaka said that stocks of distillate fuel—which includes diesel and heating oil—remain high throughout the member countries of the Organization for Economic Cooperation and Development, which is comprised of the globe’s 30 biggest economies. A lack of demand for diesel fuel, Tanaka said, serves as an indicator for industrial production.

Ship brokers ICAP estimate that over 90 million barrels of oil products are currently stored at sea. Another 6.5 million barrels could be added to this total by the end of the year. This, more than anything else, indicates the huge amount of supply currently backlogged.

The large stockpiles of fuel could also make it difficult for OPEC to determine whether to raise or lower oil production at its next meeting scheduled for December. Tanaka said:

“OECD inventories are very high, and OPEC’s concern is the global economic recovery, so if the economies recover in a robust manner, they will have to produce more. If not, just simply adding to the stock levels does not make any sense.”

However, despite weak demand and large supply, the price of crude oil has hovered around the $80 per barrel mark, significantly higher than prices were this time last year. One reason for this, he said, was the weakening of the dollar, the currency used to price oil.

The loss of value in the dollar has become so pronounced that some have called for it to be replaced with a basket of currencies when pricing oil, as discussed in October here on HeatingOil.com. However, Tanaka maintained that “the most reliable and liquid currency is still the greenback. Moving away from the dollar may not necessarily be the final solution.”

Tanaka also said that existing oil fields could soon reach their peak. However, offshore and underground oil reservoirs remain largely untapped (a point seconded by oil analyst Stephen Schork); they could play a more prominent role in supplying the world’s with oil if investors felt they could make a profit by exploring these opportunities.

Tanaka’s remarks come on the heel of the IEA’s latest World Energy Outlook, which was released last week. In this report, the IEA predicted that oil consumption would rise to 105 million barrels per day in 2030, up from 85 million today. Along with this would come a gigantic increase in demand for electricity. Combined, this could add to climate change while disrupting the world’s security.

Tanaka also refuted accusations published last week in the Guardian from a whistleblower who says that the IEA is underplaying the potential of an oil shortage: “That article says we are too complacent. That’s not true. In fact, we have been quite alarmist about the necessity of putting huge investments into potential, new fields.”

Kuwaiti oil field. The Kingdom’s economy is wholly dependent on oil, which gives them a keen interest in the functioning of oil markets. (image: bbc.co.uk)

As reported by the Middle East North Africa Financial Network on Wednesday, Kuwait’s Oil Undersecretary for Economic Affairs believes that speculation has played a “great role” in driving oil prices higher in recent months. Nawal Al-Fzei said that speculators were the reason that oil prices crossed above the $80 per barrel mark recently.

Right now, according to Al-Fzei, oil prices are balanced above $75 per barrel, being held there by the interplay of forces:

Pushing prices higher—

• Metrics showing improving economies in industrial nations, including the U.S., which should lead to higher consumption (though see below for contrary evidence)

• Continued growth in Chinese and Indian consumption

• Anticipation of a cold winter in the northern hemisphere

Pushing prices lower—

• Offsetting evidence that the industrial world has not yet turned the corner on recession (sustained lower oil consumption; high unemployment; predictions that the U.S. economy may decline from the third to the fourth quarter)

• Geopolitical unrest in the Middle East, especially in Nigeria and relating to Iran’s nuclear program

• Increased oil reserves in major consumer states, such as the U.S.; while not at the early ’09 level of 65 days of oil in inventory, the current inventory of around 60 days is still a week or more over the typical stockpile level of 52-53 days inventory

OPEC is set to meet in Angola in December, at which time they will—based on their reading of political and economic conditions—decide between maintaining a production cap (since demand is still weak, even with some signs of a recovery) and increasing production (to stop oil prices from continuing to rise).