High Oil Prices Tied to Extended Storage, RFG Contracts
February 24, 2006
• by Staff
WASHINGTON, D.C. --- Though U.S. inventories of crude oil, gasoline and distillate fuel (used for diesel fuel) are greater than usual, oil prices remain high. Industry analysts attribute the trend to a number of factors, including a market condition known as “contango.”
A market is in contango when prices for commodities delivered in future months are increasingly higher than those delivered in the near term, according to the Energy Department’s Energy Information Administration (EIA).
Contango provides economic incentive for inventory holders to store more oil because they can recoup the extra cost of maintaining inventories by buying now and selling later for a higher price. Today, contango is having the greatest impact on gasoline. Some of the contango in gasoline futures is tied to contracts for reformulated gasoline (RFG), the EIA pointed out.
“With the phasing out of MTBE [methy tertiary-butyl ether] in nearly all RFG likely to occur before November, there may be some market confusion, or near-term disincentive, to holding RFG supplies blended with MTBE that may be depressing the March 2006 delivery price for RFG,” the EIA reported. “Limited volumes in the November 2006 delivery contract may be making that price more volatile than it would otherwise be.”
Another factor contributing to high oil prices is the lack of spare capacity throughout the supply chain. And, of course, political volatility in Iran, Nigeria, Iraq and Venezuela are also contributing factors.
Originally posted on Fleet Financials