Contango May Be To Blame For Oil Price Drop

Friday, December 19th 2008, 10:16 pm
By: News On 6

By Jennifer Loren, The News On 6

UNDATED -- The price of oil suffered its biggest weekly drop in nearly two decades.  The price is down to $33 a barrel, $110 lower than its peak this summer.  While the price plunges, many are pointing the finger at Oklahoma.  Why are world markets blaming us?

Oil traders at the New York Mercantile Exchange say crude oil is being stockpiled in storage facilities in Cushing and that's causing the price of oil to tumble.  Why are crude inventories increasing so rapidly in Cushing and how is that affecting the global oil market?

We have 27.5 million barrels of oil in our own backyard and those numbers are climbing.  Cushing, Oklahoma, is home to the largest fuel storage terminal in the world.  Storage facilities are reportedly at near record highs and could reach capacity within two weeks.

To oil traders in New York that means there's too much oil and not enough demand for it.  That's one reason why, the price per barrel of oil continues to drop.  There are actually scores of reasons for the drop in demand.  Number one is the worldwide recession.

The United States, China and India are the three largest consumers of energy.  When our economies are in trouble so is the global oil market.  But, many analysts are speculating there is another reason for the drop in demand.  It's called contango and that's where Cushing comes into the picture.

When the oil market is in contango, companies are storing crude and holding it on purpose.  They know that by buying it now for a low price and storing it in Cushing, they can make more money in the future by selling it for a guaranteed higher price.

So buy it low, store it in Cushing, and sell it high at a later date.

Contango actually encourages companies to stockpile oil which, right now, analysts say is causing oil futures to plummet.

Oil stockpiles in Cushing climbed 21% last week.  But, when the oil market is down, Oklahoma's overall economy is negatively affected.