355. BANKS HOARD OIL IN STORAGE TANKS
$130 oil is really working wonders for peak oil websites like this one. I'm getting a nice surge of new visitors lately, so let's do a quick public service message on a little known fact that deserves broader airplay.
An interesting phenomenon has happened in the last couple of days. The oil futures market has gone into a state known as "contango". I'm not going to go into any detail on the specifics -- if you're curious just do some googling. As a layman, all you really need to know is that, thanks to some complicated financial mumbo-jumbo, banks will now begin to hoard oil in storage tanks, driving up the price. And then they will sell that oil back to the public for obscene windfall profits.
Morgan Stanley, Goldman Sachs and Deutsche Bank got into hoarding early in 2004:
A LARGE warehouse in Amsterdam may seem an unusual place to attract the City’s top traders and hedge funds. But, in the past few months, Morgan Stanley has been accumulating warehouse space in the Netherlands to store its hottest new property — oil.Goldman Sachs, hedge funds:
Meanwhile, banks such as Morgan Stanley are also beginning to move into the physical market to buy oil — or even entire oilfields.
Goldman Sachs recently bought 10m barrels of oil.
Morgan Stanley and Deutsche bank recently bought the rights to 36m barrels of oil between 2007 and 2010 direct from a North Sea oilfield.Source
With BP PLC accused of artificially inflating the price of propane by withholding some of its inventory from the market, government officials and energy traders are grappling with a question: When does smart trading cross the line into market manipulation?Here's the FYI on oil hoarding by banks during the last contango:
The shrewdest competitors in the energy-trading world these days deal heavily in physical shipments of fuel, not just contracts for the future delivery of such commodities. Owning actual oil, natural gas, propane and even electricity has two big advantages. It provides detailed knowledge of regional supply and demand and the pricing power that comes from holding large quantities of commodities.
An explosion in the number of participants in the energy-trading world has led to an increase in so-called physical trading.
Dominant commodity traders such as Morgan Stanley and Goldman Sachs Group Inc. long have had strategies to own or lease fuel-storage terminals, oil tankers and power plants to give them more flexibility to hold onto inventory or sell it at opportune moments.
More recently, those Wall Street firms have taken physical trading to new levels with bids to buy, not lease, distribution facilities such as pipelines and production facilities including refineries. Hedge funds also have gotten into the game of dealing in physical energy and even metals assets.
Goldman Sachs last year bought a refinery with private-equity firm Kelso & Co. Morgan Stanley this month agreed to buy petroleum-products distributor TransMontaigne Inc. and is negotiating to buy the Heidmar Group of shipping and marine-logistics companies. (Source: Tracking the Numbers / Street Sleuth -- Case Raises a Tough Query: When Do Traders Cross Line?, Ann Davis, Wall Street Journal, Jun 30 2006)
Storing oil became big business. Tank owners and companies that leased storage, including Wall Street giants such as Morgan Stanley, turned sizeable profits simply by sitting on tanks of oil. They would buy oil for immediate delivery and stick it in their storage tanks, then sell contracts for future delivery at a higher price. When delivery dates neared, they closed out existing contracts and sold new ones for future delivery of the same oil. The oil never budged. The maneuver was known as the oil-storage trade.Here's another detailed article discussing Morgan Stanley's tank farms and other aspects of the ongoing Enron-ification of the entire energy system:
Bruce MacPhail, who manages Enbridge's U.S. oil-terminal leasing, estimates financial firms now lease 25% to 35% of the company's storage.(Source: Where Has All The Oil Gone?; After sitting on crude, speculators unload it; The world's eyes fall on Cushing, Oklahoma, Ann Davis, Wall Street Journal, Oct. 6, 2007)
What's a white-shoe investment bank doing selling oil? The answer unfolds in Purchase, N.Y., where an army of its commodities traders sit before flickering screens on a vast, domed trading floor staffed 24 hours a day. At the former site of Texaco's headquarters, Morgan Stanley veterans Neal Shear and John Shapiro run one of the most profitable energy-trading operations in the world.
But they don't just trade futures, a common way of betting electronically on commodities that involves buying and selling contracts for future delivery. Morgan Stanley also handles real barrels of oil and generates actual megawatts of power.
The reason is twofold. Having access to barges and storage tanks and pipelines gives the bank additional options, to move or store commodities, that most energy traders don't pursue. And by having its finger on the pulse of the business, it hopes to get a more subtle feel for the market, a crucial asset to a trader.
One member of [Morgan Stanley's] team, Olav Refvik, has amassed leases on storage terminals around the globe.
In dealing with crude oil, the Morgan Stanley team at times buys the rights to oil companies' production in the Gulf of Mexico, then turns around and sells it while it is still underground.
That was the beginning of a quiet strategy that later helped Morgan Stanley muscle into another huge petroleum market: home heating oil.
The trader who largely carved out that dominance is Mr. Refvik. In the 1990s, he made a bold real-estate play along a grimy refinery row in coastal New Jersey near New York Harbor. The New York Mercantile Exchange, the country's main hub for trading oil futures, designates about two dozen sites there and in New York as places where exchange-traded oil can be delivered. Through leases, Mr. Refvik locked up a large chunk of the official storage space. He laid claim to tank farms -- clusters of giant metal storage drums. His team also leases a big storage terminal in New Haven, Conn.
Messrs. Shear and Shapiro worried, at first, that the expensive leases could be albatrosses. But the move has worked so well that traders elsewhere dubbed Mr. Refvik "King of New York Harbor," a nickname that also reflects his occasional tour of the waters with his yacht, Song of Norway. Meanwhile, Morgan Stanley also acquired large amounts of oil-storage capacity in other countries.Source