UK tabloid tales fire fears of contango conniving

However, the most recent spate of tabloid interest has focused on the rising price of crude and its consequent effect on prices at the pump. Which, in turn, is having an impact on the average family (or reader) already bowed down beneath a tax burden brought about by the massive government bailout of a spectacularly ungrateful banking sector.
    
In so doing, the tabloids have sought to resurrect a few familiar ghosts and reignite the modern oil debate -- the role of the speculator.

For those working in and around the oil industry, faced with the challenges and decisions that prevailing market structures bring, it's easy to forget that to the outside observer, the contango structure can seem a little perverse. 
    
The idea of storing up both crude oil and products until such time as preferential economics encourage its release can be made to sound particularly cold-blooded, in a way that satisfying a backwardated market, with its wholly logical instinct to sell now to meet strong prices, does not.
    
At the heart of the ire has been the storage. Floating storage specifically, perhaps the defining feature of global oil markets through 2009, particularly for Europe's middle distillates.

The last two years have seen a stark divide, middle distillate markets broadly fired first by backwardation, where there's strong demand for the "now" barrel with people willing to pay up for it, and the flip side seen as recession set in, where markets become mired in contango, where demand is deferred and prices reflect that fact. That has been the situation for much of 2009.
    
To the oil industry, contango means the same thing as the first flurry of falling leaves to the average squirrel: it's time to store.
    
Previous media interest in the loitering mini-armada had been the preserve of local papers expressing parochial fears ranging from the risk of spillage, the smell of oil and gas and, particularly English, the blot on the seascape that the sight of so many tankers entailed.
    
It started in mid-November with the venerable Daily Telegraph, a British institution that first committed ink to paper in 1855. In a motoring article, the Telegraph neatly contrasted the rising price of gasoline, up 26% since the start of the year, with the presence of the tankers offshore, under the headline; "Speculators accused of forcing up petrol prices." 
    
In support of the headline, one nameless expert was called upon to bear witness. "People see crude and refined oil as a good bet, especially at a time when interest rates are low," the expert explained in, one imagines, a shrill, reedy voice that would brook little empathy from the common man.
    
Two days later the Daily Mail followed up with the altogether blunter and more accusatory headline; "Sharks off the British coast: Oil tankers refuse to unload until prices rise... keeping YOUR fuel costs soaring."
    
Taking the bit between their teeth, the Mail went on to lash out at traders, speculators and oil tanker owners for playing their part in what they regarded as a conspiracy to fleece the British motorist.
    
"Speculators are free to drive up the price thanks to the age-old capitalist model of supply and demand," the paper thundered, again quoting the potential 26% increase in the road fuel prices as all the proof needed.
    
"If the price is not high enough, the tankers simply cruise around the high seas...until it goes up sufficiently high to sell on in the UK or elsewhere," the article states.
    
For Europe and particularly for the UK, where re-emergence from recession is taking longer than other nations, it's not difficult to see why the presence of floating storage seems at odds with the creeping prices at service stations, a fact seized upon by a spokesman for one of the UK's driving organizations and quoted by the Telegraph.
    
"It seems like madness to drivers that pump prices are rising to new highs this year, when there seems to be a glut of fuel and oil." 
    
Three separate rises in government duty on road fuels imposed over the last 12 months have played some part in adding to the price too, but the sight of Brent crude contracts harrying the $80/b level acted as a catalyst to accelerate media attention.
    
TV broadcaster Sky News, part of Rupert Murdoch's media empire, attempted to redress the balance in the rather more restrained article: "Moored tankers 'not behind petrol price hike'." 
    
Quoting from a shipping source, the article mounted a rudimentary explanation of the economics of contango that facilitate the holding of product in tank, both at land and at sea.
    
Steve Christy, of Gibson Shipbrokers, said in the article; "Global oil prices are more determined by stronger economic growth and also the weaker dollar. The rising oil price for next year is a sign of international confidence in a rising global economy."
    
And nowhere is that confidence rising faster than in the Asian economies, charging out of the downturn at such a pace that it's no wonder crude and heating oil contracts are taking note. 
    
While some speculators will anticipate that rise, it remains the fundamentals of supply and demand that determine the extent to which price will rise.
    
That's little in the way of comfort for Europe's end users, whether they be airlines, motorists or hauliers, all caught by the influence of stronger crude values before they have felt the benefits of economic recovery.
    
The very British response to this call to arms has, admittedly, been muted. No Dunkirk-esque armada of little ships have assailed the great sharks lurking off the coast and discordant murmurs of fuel protests and go slow campaigns remain at the background noise level. 
    
Bulletin boards and comments posted in response to the articles broadly amount to a grand national shrug of the shoulders and a resigned, 'what else is new?'. 
    
Perhaps that's why the great bandwagon of media outrage seemed to derail no sooner than it began. The oil tankers, much as they have for most of the year in one form or another, remain silently moored around the North Sea; in Lyme Bay and off the coast of Southwold, in the approaches to Rotterdam and outside Le Havre. 
    
Meanwhile, the news from Dubai affords the papers the opportunity to get back to doing something they've grown to enjoy -- debating whether we're in the midst of a V-shaped, W-shaped or tick-shaped recession.