First, a little background: most crude oil is loaded onto tanker ships and is brought to refineries around the world. The biggest of these ships are called Very Large Crude Carriers or VLCCs. Each VLCC can hold roughly 2 million barrels of oil. If you do the math even at $30/ barrel, you can see why the ship owner (or more likely, their insurance company) was willing to pay such a large ransom for the release of one of these ships after it was captured by Somali pirates last month. Although the number of tanker ships varies as new ones are built and old ones are scrapped or repurposed, the total capacity of the global oil tanker fleet is roughly equal to 500 of these VLCCs although it is comprised of ships of varying sizes.

Bloomberg is now reporting that oil traders have chartered 25 of these VLCCs and are looking for another 10 to use as floating storage tanks. That is to say that oil traders are buying oil at today's prices and taking it out of the market for now. Instead of reselling it as they normally would, they are holding onto the oil with plans of selling it when prices rise later in the year. According to Bloomberg, the leases are for six to nine months. That suggests that these oil traders expect oil prices in late summer and fall of 2009 to be much higher than they are today. Higher oil prices, of course, will mean higher gasoline prices.

The cost of storing the oil Bloomberg says is about 90 cents per barrel per month, citing Galbraiths LTD, a major ship broker. OK, so nine months, at current charter rates is only about $8.10 per barrel. Then, there's the opportunity cost of all that money. In other words, the oil traders are locking up all that money in inventory with no return at all for nine months. Very, very roughly, it looks as though it would take oil to go to $60/ barrel for this move to pay off. If you add in a risk premium, then it's likely they are expecting prices to hit at least $70/ barrel by this autumn.

On the other hand, this strategy means that approximately 70 million barrels of oil will be sitting and waiting to be released into the market on top of the normal daily oil production. The sale of all this stored oil could actually help to lower oil prices or at least stop them from rising further, especially if it is all released near the same point in time. Imagine being the last holder of this stored excess oil and seeing all the other traders selling off their oil and lowering the price on you. Of course, you'd sell it as quickly as possible, or lengthen the VLCC lease and pay for storage for a few more months.

So we look for oil to be in the $70/ barrel range this fall where it may stall for the rest of the year. In early 2010 expect prices to climb further if the US economy is showing strong signs of recovery and GDP is on the rise again.

Author: Brad Sylvester