The price of oil

The futures market for oil is currently in contango. In other words, the price of oil for delivery in several months’ time is higher than the cost of oil for delivery now. There is currently such a wide gap that traders with deep enough pockets can lease a tanker, fill it with oil bought on the spot market, sell a contract to deliver it later in the year, and realise a pretty significant and moderately risk-free return (assuming that their tanker doesn’t get boarded by pirates).

This is bit unusual.

It appears that we are temporarily awash in oil and have run out of storage room, so it is somewhat harder than usual to buy oil in the spot market without having an immediate use for it.

However, this does not mean the price trend of oil has turned upwards again—at least not yet. Even if we accept that peak oil will soon be upon us, the price of oil over the next several months will have as much to do with how much further demand has to fall as with anything else.

On a slightly longer time-scale, the picture is more pessimistic. The recent collapses both in oil prices and in the availability of credit mean that much needed investment in oil infrastructure is unlikely to be forthcoming in anything like the required magnitude and timescale, thus ensuring that prices are likely to start rising again in the not too distant future—the only question is when.