The reason I am not a short-term trader is that you have that extra variable of market sentiment to take into account. Market sentiment can change in a hurry; it can shave the value of a stock by 50% in one trading session. In the longer-term, it is less of a factor and you can rely more on the fundamentals; i.e., there is less luck involved. So, I adopted a philosophy long ago that I would plan long-term, and ignore short-term trends. Those short-term moves can build wealth rapidly, but just as quickly destroy it. A lot of day-traders learned that lesson the hard way a few years ago.
In the oil markets, sentiment has changed dramatically since August, and this week’s inventory report saw another bullish shift. Prior to the report, oil had been drifting lower. But this week’s inventory report changed all of that. As I wrote on Wednesday, “I suspect crude will be off to the races again” and “this inventory report will provide a lot of fuel for the bulls for another week.” And in the past two sessions, oil has been sharply higher. If you were in the position to make an immediate trade following the release of Wednesday’s report, buying oil was a no-brainer for a short-term trader. But you have to be sitting in front of that terminal again next Wednesday, because a negative report will cause a fast sell-off.
In the wake of this week’s inventory report, you may have heard that crude set another record high yesterday:
OPEC, which supplies about 40 percent of the world’s 84 million-barrel-a-day oil habit, agreed to boost production by 500,000 barrels in September, but the move did little to calm oil prices.
There had been speculation that the cartel would again boost production at its next meeting in December. One trader downplayed the notion that OPEC would increase production. “No one has any more to give us,” said Nauman Barakat, a trader at Macquarie Futures, the trading arm of Macquarie investment bank.
Of course following the statement that there is nothing left to give, the same trader contradicted himself:
While Saudi Arabia is generally believed to have the ability to pump about 2 million more barrels a day – the world’s only significant remaining spare production capacity – Barakat said they are keeping that in reserve in case of a real supply disruption.
I have long argued that we would find ourselves in this situation. In my first ever essay on Peak Lite, written a year and a half ago, I argued that we would find ourselves in a situation of higher and higher oil prices (which was the basis of my long-term strategy). The move up has been sharper than I expected, but has been exacerbated by speculators and a weakening dollar. However, I suspect these prices are here to stay. And if OPEC is really unable to boost production much more – as some suspect – then this is really just the tip of the iceberg. I wouldn’t bet that we will see $200 oil next year, but we could see $150 oil. If prices continue to ease higher, and OPEC doesn’t start boosting production significantly, the game will be over and oil will be on a run with no end in sight.
In the short-term, the direction of prices is going to be highly influenced by next week’s inventory report. Another large decline will probably sustain this bull market right past $100. However, if last week’s report was an anomaly (or a mistake, as OPIS suggested this week), then the rise will be arrested, and prices will await some other news for direction.
Back to OPIS, here was the blurb this week on the inventory report:
DOE statisticians have garnered a free pass for most of the year when it comes to petroleum numbers. Most of the criticism has been targeted at API or at the lofty demand quotes suggested by the newcomer on the block, the MasterCard SpendingPulse report.
But today, DOE is coming under some intense scrutiny by the physical traders and sellers that move refined products. That group believes that today’s surprising statistical bulletin is at best an anomaly, and at worst “bogus”. Many marketers also disagree with the notion that recent demand is exceeding supply. For at least the first ninety minutes after the data release, the paper markets regard the numbers as credible, with substantial across the board gains in petroleum.
Traders can’t quite come to grips with the 2-million bbl gasoline stock decrease, of which 1.2-million bbl occurred on the West Coast. The smaller 300,000 bbl decrease on the East Coast is attributable to the lower import number. Blendstock cargo arrivals have really tailed off in the last couple of weeks, but some weather delays were a culprit. Next week’s import number is predicted to go well back above 1-million b/d nationwide after this week’s low total of 838,000 b/d.
The distillate numbers were also questionable. Overall stocks fell by 1.8-million bbl and a drop of more than 3-million bbl in ULSD stocks was the major factor. That dip seems severe, even at harvest time, with some traders wondering whether a few exports might have been part of the mix. Distillate output also slumped, thanks mostly to a 193,000 b/d slide at the Gulf Coast.
That demonstrates the kind of hidden risk factors inherent in short-term trading. Was the report unusual? Yes. Could it have been an anomaly? Yes, we have seen those kinds of unusual moves before, only to see them undone the following week. And if it turns out that stocks are sharply up next week, I would take profits very quickly.
On the topic of speculators, I have just had an interesting exchange with a speculator at The Oil Drum. Like many of his tech stock predecessors, he attributes his success to his financial acumen and understanding, and yet at the same time displays a very faulty understanding of some of the “inside the fence” basics. But he can’t see this, because he is making money, and therefore he believes he is making shrewd decisions based on his special interpretation of news reports. More on that later, as the exchange provides a window into the thinking of a speculator.
Robert – I skimmed the TOD posts. You are dangerously close to being sucked down the blog vortex again.
Perhaps we should have a discussion about the decision making process at energy companies. It is much easier for people to believe that some unseen person or entity is pulling the strings and manipulating markets, rather than what really happens.
I don’t think anyone beleives that the CEO of McDonalds calls down to your local franchise and tells the employees there what to do. Neither does our CEO, or for that matter our VPs. They are too busy looking out for the long range stuff, they leave the day-to-day operations to the employees.
A long, long time ago, I scheduled crude and refinery runs for 2 of our refineries. In fact when I started the job the programs we used were on the mainframe (RPMS). I converted them to run on the PC (PIMS) and wrote most of the basic operations models for the refineries. My claim to fame was developing a technique (which I originally learned from Kirby English) for manipulating linear programming recursion to model pure component distiallation and petrochemical production.
Anyway, I was on the job when NYMEX offered the first light sweet crude contract. We had a single Reuters terminal on the floor that we used to pull prices. I prepared the first 30, 60, and 90 day crude/product forecasts, based on pricing information I got from our crude traders, and our marketing folks. (And a lot of other information.)
My job was to schedule the crude and product slates to maximize the profits for our refineries. Not once in all the years that I did the job did anyone above me tell me to change or alter the plans for any reason. Sometimes I would argue with the refinery over turnaround schedules, or forecasted catalyst life, or expenses, but those were operational issues.
Each refinery operates as a seperate business unit, making its own decisions based on local conditions. Over the long haul, management influences production by where they invest capital and resources, but on a day-to-day basis they aren’t involved in the routine decisions. Middle to lower level employees make these decisions on the physical side.
On the trading side of our business, it works much the same way. Individual traders are given objectives, and then make buy/sell decisions around that objective.
You are dangerously close to being sucked down the blog vortex again.
No, it was just a fling. I in the process of disengaging so I can get back to lurking. It may take another day or two (which is of course why I quit this), but I will extract myself from the arguments. And as I am sure you saw from skimming the posts, some of those guys are a waste of time anyway. Positively clueless, and not willing to listen.
My claim to fame was developing a technique (which I originally learned from Kirby English) for manipulating linear programming recursion to model pure component distiallation and petrochemical production.
I know Kirby. He came up to Billings to give us a hand a couple of times, and I talked to him on the phone a number of other times.
I’ve known Kirby for 20 years. I lost touch with him over time. He and others went out to the refineries, I went to chemicals and then project engineering. Now I do business development, I’m working 10 years out into the future.
My point was that senior management in energy companies have too much to do to worry about market manipulation. Nobody sits around saying, “oh we made too much money in Q2, better dial it back a bit.” Such an argument is silly. Oilwatchdog thinks companies withold production or flood the market when it suits them. Nonsense.
Our CEO sets general direction for the company, makes financial decisions, makes personnel moves, sets policy, communicates with the financial community, meets with gov’t officials, and makes strategic decisions. Their primary function is spending financial capital. He decides how much do we reinvest and how much do we return to shareholders through dividends, stock repurchases, and other means.
We are by nature long-term investors in the energy business, not short run speculators. Given the sheer number of facilities and people involved, I’m not sure how a CEO could exert the kind of imaginary market control that your friend at TOD imagines. E-mails and phone messages to the trading floor are recorded and monitored. Even if you wanted to, it is too easy to get caught (see Enron). There are no conspiracies.
If someone else has a different experience, I would love to hear it. Maybe they have secret radios planted in their brains to get orders from Dick Cheney. I just didn’t get one.
I agree with kingofkaty.
I am a crude trading analyst with a US investment bank based in London. I sit next to an expert on refinery process optimisation who used to work for an oil major.
My job is to figure out what decisions producers and refiners are likely to make based on today’s market signals. We try to predict where crude oil will go and in what volumes, and then buy and sell accordingly.
What surprised me when I started doing the job was how inflexible refinery operations are. Apart from selecting the ‘best value’ crude cargo from those on offer, and perhaps delaying a purchase for a day or two in the expectation of lower prices for a particular grade, refineries (especially complex ones) runs as hard and as fast as they possibly can. They run when they’re making $20/barrel, and they run when they’re making $4/barrel. Maintenance occurs on a schedule only rarely able to be modified to optimise profits. Simpler refineries (eg Wilhemshaven or Gothenburg) may reduce throughput or even occasionally shut altogether if they’re losing money, but they are a tiny percentage of modern refining capacity (i’m speaking primarily of Europe).
I do find it a little frustrating when my friends in the ‘peak oil’ brigade start leaping to conclusions about this or that conspiracy by oil companies, hedge funds, governments or OPEC. I think peak oil is serious enough without this sort of tinfoil hat thinking. Even esteemed academic analysis at The Oil Drum occasionally falls prey to the kind of thinking that anyone who actively participates in the physical oil market would know simply doesn’t occur. Why is this a shame? Because it gives peak oil deniers in the industry ammunition to attack the credibility of those raising the alarm.