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2009-05-16 — bloomberg.com

“We don’t think it’s a wise economic decision” to produce oil from secure underground fields then pay to store it in floating tankers, Iraqi Oil Minister Hussain al-Shahristani said yesterday in an interview at the Dead Sea in Jordan at the World Economic Forum. “Future generations can benefit from it better than we can, if we don’t need it.”

Mish posted this article but drew the precise opposite of the conclusion we would draw. He implies that this dynamic just means that oil is overpriced, and there is nothing that can be done about overproduction, so naturally the price is destined to fall.

However, if one actually looks at the sentiment expressed above, that oil is more valuable in the ground, as well as China's remarks (posted by Mish) to the effect that they are only storing oil on floating ships because they are still building more terrestrial storage, you can glean a different conclusion: that oil is switching from being a purely consumed/produced asset to a store of value in lieu of the dollar.

In specific, because the dollar's prospects are horrible, while in comparison, crude is likely to prove critically valuable for some years to come, countries are switching from a regime of merely consuming/producing crude to also storing it as a financial asset.

This implies that OPEC cuts may "work" better than one would expect based on the last 50 years' market regime, and prices from here might not be destined to fall significantly. In fact, the exact opposite could happen, in classic "flight to real assets" fashion.

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