A U.S. government report of higher oil inventories at Cushing, Oklahoma, a major storage hub, drove down the price of oil Wednesday. (Brandi Simons for The New York Times)

Where is oil going next?

By Clifford Krauss

Published: January 15, 2009

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HOUSTON: From the Indian Ocean to the South Atlantic to the Gulf of Mexico, giant supertankers brimming with oil are resting at anchor or slowly tracing racetrack patterns through the sea, heading nowhere.

The ships are marking time, serving as floating oil-storage tanks. The companies and countries leasing them for that purpose have made a simple calculation: the price of oil has fallen so far that it is due for a rise.

Some producing countries are trying to force that rise by using the tankers to withhold oil from the market, while traders are trying to profit by buying cheap oil now to store and sell at a higher price later. Oil storage has become so popular that onshore tank capacity is becoming scarce.

Only six months ago, companies up and down the energy pipeline were rushing oil to market, struggling to keep up with galloping demand and soaring prices. Now, with the global economy slumping and people driving less, demand for oil has plunged — and the same companies are acting in ways that would have been unimaginable until recently.

Oil producers are shutting down rigs, refiners are producing less gasoline, and investment planning throughout the industry is in turmoil.

The problem for the companies is not just that prices are lower, but that they have become volatile — historically, a sign of an unstable market whose direction is uncertain. Between Christmas and a week ago oil prices soared 40 percent, only to reverse course almost as sharply in recent days. Just last week, the price of a barrel of crude oil dropped by nearly 12 percent in one day alone.

"The oil markets are suffering acute whiplash," said Daniel Yergin, an energy consultant and author of "The Prize," a history of world oil markets. "Price volatility is adding to the sense of shock and confusion and uncertainty."

The wild price swings are a continuation of last year's trends, when the price of a barrel of oil swelled to nearly $150 in July from just below $100 in January before collapsing to less than $35 last month. Daily oil prices rose or dropped by 5 percent or more 39 times, versus just four times over the previous two years. The only recent year that was comparably volatile was 1990, the year Iraq invaded Kuwait.

The continuing volatility is sending waves of anxiety up and down the complex production and investment chains of the oil world.

A year ago, oil producers and refiners could not move their products fast enough to meet growing world demand and chase rising prices. Now, with demand and prices slumping, they are sitting on 327 million barrels at tank farms around the country, particularly at Cushing, Oklahoma, a major storage hub and a crossroads for pipelines. That is more than 40 million barrels more in storage than this time last year, and more than 30 million barrels higher than the five-year average.

The mounting buildup has come during the last 100 days or so, as consumption of oil fell behind imports and domestic production.

With storage tanks filling up onshore, private and national oil companies, refiners and trading companies are storing another 80 million barrels aboard 35 supertankers and a handful of smaller tankers, the most in 20 years, according to Frontline Ltd., the world's largest owner of supertankers.

The different players have different reasons for storing oil, whether onshore or offshore.

National oil companies are hoping to reverse the price slide by holding oil off the market. Iran alone is reportedly using as many as 15 tankers to store crude oil in hopes that higher prices will prop up its economy, which is dependent on oil exports.

Private trading companies like Vitol and Phibro are storing oil in expectation of higher prices. They are taking their cues from markets where traders buy and sell contracts for future delivery of oil, which are signaling higher prices down the road.

Adam Sieminski, chief energy economist at Deutsche Bank, noted that a trading company could buy oil at the spot price of nearly $40 a barrel, store it and sell a contract to deliver it in a year for about $60. "You pay between $6 and $10 a barrel to store it, and you can make $10 a barrel," he said. "That's why Cushing is filling up rapidly and people are leasing tankers."

One small example of how the price uncertainty has affected behavior is the Devon Energy Corporation, an Oklahoma City company that in recent years has excited the energy world with announcements about expensive new investments in Canadian oil sands and deepwater oil exploration projects.