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An Oil Surprise

by Elaine Schwartz    •    Feb 24, 2011    •    229 Views    •    TIME TO READ: 1 minute

As the turmoil in the Middle East unfolds, if you want to sound knowledgeable about oil, you could just say $147, contango and floating storage.

As you can see on this graph, it was mid-July, 2008, when the price of oil peaked at slightly more than $147 a barrel. A plunging line that went below $40 during 2009 followed the 2008 peak. Most people were surprised by the plunge and also by the peak. 

Meanwhile, only last July, the supertankers that were carrying “floating storage,” started to download their cargo because oil prices appeared to be declining. The reason they had initially loaded the oil could have been “contango.” Very simply defined, contango just means that traders expect a higher price in the future.

Now, floating storage could come in handy. As the oil that is stored oil tankers around the world, floating storage could be used to compensate for any Libyan oil shortfalls. In addition, extra Saudi Arabian production could equal 4 times a day what the world gets from Libya. So, if we need it, the oil is right there.

Conclusion? The future price of oil will be a surprise.

The Economic Lesson

When you hear a price for oil, it probably refers to Brent or West Texas Intermediate. The origin of Brent is the North Sea while West Texas is the U.S. This explanation explains oil prices further and names other types including Nigerian Bonny Light and Algerian Saharan Blend.

The $147 was for Brent.

 

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