For years there has been a large supply of crude floating on big oil tankers. A significant portion of this is not under contract and does not have a specific delivery date. Typically these vessels head for Asia or the Americas. They do it at slow speed. They wait for contact from the owners that the crude has been sold and a delivery date has been set. When that happens the ship picks up speed and heads to the intended port.

It is my understanding from talking to some shippers that this is happening in a very big way as I write. It makes perfect sense. If you were China Inc. and worried this morning about the predictability of supply, the first thing you would do would be to secure as much of the floating crude that was out there. We saw this same pattern in the early days of Egypt. Back then the rush was to bulk up on supplies of wheat. Today it is crude.

Two consequences from this. First a minor one. The cost of chartering an oil tanker has falling from a high of $200,000 per day to as low at $20,000 of late. We are going straight up on this number. Transportation is part of the cost we pay to import the 10mm barrels of oil a day we consume. This increased cost will flow very quickly into the cost of gas.

More importantly is that the cost of spot crude (not futures) is going to skyrocket. It already has. Look at the price being paid for spot crude at the Gulf of Mexico. It opened this morning at $112. There is a $20 premium for physical crude versus WTI Should the current uncertainties on supply continue (or worsen) $4 gas in the next few months is a foregone conclusion.

So the Somali pirates killed the four Americans on the sailing ship. This appears to have been prompted as a result of some effort by US forces to liberate the ship before it made land. As of now the report is that all of the pirates were captured or killed.

This is a terrible result. I wrote about this on February 11th. I concluded that report with the following:

The apparent failure of US Special Ops to save the Americans confirms my prior observation. The only solution is boots on the ground. Keep in mind that the pirates are sitting on (at least) 2 million barrels of crude. Enough to despoil a good chunk of the African coastline for a very long time.