My daily OPIS summary weighed in on my side over the level of oil prices. I am beginning to think I may not be crazy at all. 🙂
Today’s “excuse de jour” for the rally has been the reported shut-in of 600,000 b/d of crude oil by Mexico’s state-owned oil company, Pemex, due to inclement weather. In a climate where U.S. crude supplies are dangerously low, such a shut-in would likely spur some panic buying.
Supplies are not dangerously low, however. In fact, stockpiles are near the upper end of the average range for this time of year, according to the U.S. Department of Energy. And in that kind of a climate, news like the Pemex shut-in becomes justification for a move that has little to do with fundamentals.
As has been the case for the better part of 2007, money flow continues to drive this rally. According to the most recent Commitments of Traders report from the U.S. Commodity Futures Trading Commission, speculative long positions on the NYMEX outnumbered short positions by 60,026 contracts for the week of Oct. 26.
In my mind, the only question is whether the correction begins before or after I lose my bet.
(Yes, I know that almost all I have been writing about for the past week is oil prices, but this is a news story that in my opinion dwarfs most of the other happenings in energy.)
While it would be nice to believe that US inventory levels are indicative of global inventories, that is obviously not the case. While US crude stocks are relatively high, they are low in Japan and OECD Europe according to the IEA. This may be one reason US imports were down last week, as crude was flowing elsewhere. So, when OPIS, or anyone else, says that crude oil supplies are plentiful because US crude stocks are high, and so the price is not reflective of supply data, that can be misleading. It’s a global market, not just a US market.
Doug – as a former US refinery scheduler, if I were running the models today, I would likely advise my crude buyers to draw down crude inventory for the next 60 days or so.
Early in the year crude was in the low $50s. The military and political situation in Iraq is better today than it was a year ago. Crude demand hasn’t changed much, supplies are about the same. If the market was in balance at $50 how can you explain $100 other than a lot of paper traders are bidding prices up purely on speculation.
If we can make it another week or two, I think Robert’s bet is safe. But what goes up, must come down – usually a lot faster.
In the article you cited in your “Incoherent Reporting from WSJ” entry, the WSJ article discusses declining global inventories:
Historically, oil consumption rises during winter in the Northern Hemisphere because of its use as a heating fuel in many places. But according to the International Energy Agency, the Paris-based energy watchdog for Western countries, stocks fell 33 million barrels, or 360,000 barrels a day, between July and September. That contrasts with an average third-quarter increase in stocks of 280,000 barrels a day during the past five years.
When talking about the relationship between inventories and price, because oil is a globally traded, fungible commodity, you must look at global inventories, not just U.S. inventories (as Doug MacIntyre said above). You must also look at the direction and speed of inventory changes, not just absolute inventory levels.
I don’t think the oil price story is as important as you’re making it out to be. Of course I might feel differently with $1000 on the line!
KingofKaty: Who said the market was in balance in the low $50s early this year? Perhaps traders were pushing prices DOWN on speculation.
It’s folly to speak of short term prices in terms of market fundamentals. Short term oil price elasticity for oil is essentially zero. If oil went to $150 next week would people stop buying? Would a bunch of extra supply suddenly appear? If oil dropped to $45 would consumers buy more or producers shut in their oil wells? Except for Saudi Arabia, which might exercise a little swing capacity, the answer to these questions is a resounding NO. As such current market fundamentals can justify any price between $45 and $150, and possibly even a much wider range.
“you must look at global inventories, not just U.S. inventories”
Even OECD inventories are in pretty good shape. They have been drawn down, but the last graph I saw showed them comfortably within the normal band (having been drawn down from the high side of normal). To my knowledge, there are no inventories anywhere that are actually low. Could be the case in some areas that aren’t transparent, but I haven’t seen it in any areas that aren’t.
Doggy – true enough in the short term. But you also make my point. There is no incremental $100 oil supplies. There are marginal producers at $40, particularly stripper wells. But if no upper limit, why not $150? $500 per barrel?
High oil prices are destroying demand in the long run. This was something that OPEC used to worry about. China continues to build coal fired power plants, and will eventually shut down its oil fired plants. I’m trading in my gas guzzling SUV for a fuel efficient truck. Some homeowners in the northeast may switch from fuel oil to natural gas. ($17.62/mmBTU for oil vs. $8.10/mmBTU for gas)
International Oil Companies with record profits, but locked out of the best E&P areas will turn to alternative energy sources.
why not $150? $500 per barrel?
I think we’d see rationing before $500. US oil trade deficit would be over $2 trillion, 3x our total deficit today and >15% of GDP. Short term elasticity does kick in at some point, but only with very large price changes.
High oil prices are destroying demand in the long run.
Well, sure. It took a 12x price jump from 1973-80 to bring about serious demand destruction. The first factor of four increase (73-74) didn’t really make much difference. If we use $20 as the 1990’s baseline we’re up 4-5x in eight years. OECD demand looks to be flat-to-slightly-down, but the developing world demand is still going like gangbusters. I’m confident $200 would turn global demand downward, not so sure about $100.
World demand is already flatlining. Last year’s demand was up only 0.7 percent. Where is the runaway world demand? It is just not supported by the numbers.
Unfortunately, thug states have seriously crimped production. The price mechanism will work, always has. But it takes time.
Look for global crude demand to start decreasing year-over-year. At some point, this will break prices, but when?
This is a bull market, and there is no explaining bull markets. Prices are off today. I sense we are near a peak. Another Bush war could push it $100. Does Bush invade Iran? Everyone says no.
“High oil prices are destroying demand in the long run. “
Katy, they may destroy demand, but what will people turn to? You may trade in your guzzler for something else…something else built using oil, as will everyone else. Alternatives? I live on them, and they are ALL derivatives of oil, in some fashion or another. People may want to drive less, where I live(napa valley) but by and large, they can’t. Funny thing, but you buy a big home in the country, buy an SUV to commute back and forth to the city in…well, how much can that lifestyle change? Well, even at almost $4/gallon, not much.
Telecommute? I do, but most can’t, and strangely, there seems to be an inverse relationship between how people use energy, and what they do. Most people I know that telecommute, already probably drive an efficient car, or bike or walk. Those who will probably never telecommute, seem to drive SUVs or big trucks. But maybe its just me. What might be helpful, is a discussion of ‘alternatives’ and how they relate to oil. When I see metal being mined and refined on solar electric, heck, or even biodiesel, I might buy into the whole idea that there is some happy mr. fusion out there. I just don’t see it at moment. Do you?
Early in the year crude was in the low $50s. The military and political situation in Iraq is better today than it was a year ago. Crude demand hasn’t changed much, supplies are about the same. If the market was in balance at $50 how can you explain $100 other than a lot of paper traders are bidding prices up purely on speculation.
Oh, I don’t know. Turkey and the Kurds shooting at each other? Who knows how that’s going to pan out? The risk of the Kurds (or some other group) blowing up an oil pipeline seems a lot higher today than in January. What about the Supeme Leader talking smack with Iran? You don’t seriously expect the market to ignore those comments, do you?
While US crude stocks are relatively high, they are low in Japan and OECD Europe according to the IEA.
Doug, I am looking at the entire OECD when I say that inventories look good. Check the latest Oil Market Report at the IEA:
Oil Market Report
Look at Page 31. It shows high inventories in the U.S., below average inventories in Europe, and average inventories in Asia. It also shows the absolute volume of OECD inventories to be above the 5-year average. What the IEA has done – and they have been consistently wrong about it this year – is to forecast that in the next quarter, inventories are going to plunge. But each quarter proves them wrong. What I believe is that the current inventory pulldown – which has been quite mild as you can see in the graphs – has been played up as much more than it is. Furthermore, the amount of the drawdown per day is less than the incremental amount OPEC has promised to start pumping on November 1. Those fundamentals aren’t much changed since August, that’s why I say a 30% run-up isn’t warranted.
I would also point out that in this year’s January Short‐Term Energy Outlook from the EIA, you guys wrote:
The price of WTI crude oil, which averaged $66.02 per barrel in 2006, is projected to average $64.42 per barrel in 2007 and $64.58 per barrel in 2008.
Further, in your August STEO, you wrote:
Crude oil prices, which have been rising over the last 2 months, are expected to reach a peak monthly average price in August before starting to ease slightly.
So, I am sure you can understand why I might take EIA statements like “the current price is justified by fundamentals” with a large grain of salt.
Cheers, Robert
Well, sure. It took a 12x price jump from 1973-80 to bring about serious demand destruction. The first factor of four increase (73-74) didn’t really make much difference. If we use $20 as the 1990’s baseline we’re up 4-5x in eight years. OECD demand looks to be flat-to-slightly-down, but the developing world demand is still going like gangbusters. I’m confident $200 would turn global demand downward, not so sure about $100.
Interesting comments, Doggy!
Did the 12x increase cause demand destruction or was it a recession that resulted in the destruction of demand? The distinction is obviously important. We would all hope for demand destruction without a recession, but is that realistic?
Personally, I don’t see enough demand destruction to change the long term increase in oil prices. Neither do I see high oil prices causing a recession. How US politicians deal with high oil prices, now that may well cause a recession. But assuming the bird-brained bozo’s keep out of it, I see oil prices edging ever higher, while the world slowly adapts to it.
Personally, I don’t see enough demand destruction to change the long term increase in oil prices.
Neither do I. But in the short-term, I do think the markets have gotten ahead of themselves.
How US politicians deal with high oil prices, now that may well cause a recession.
It’s going to be a disaster. I don’t believe the government has a clue as to what to do, nor do they have the courage to do the things that need to be done. So, they will end up doing things that make things worse.
WTI crude price is down $3.15 today to $90.38. Looking better for Robert today.
Optimist – the market factors in a certain amount of supply disruption. What about no hurricanes in the northern Gulf of Mexico? Shouldn’t that have reduced price price pressures? Iraq production is nearing it’s pre-war high of 2 million barrels per day. Cold weather in the northeast is a bit later than normal, reducing fuel oil consumption. The “longs” want to focus only on the bad news that might drive prices up.
Winelover – if the US cut crude consumption just 10%, that would put 2 million barrels on the market. Even in Napa it can’t be that difficult. I ride my bike to the market and video store, or I pick up stuff on the way home to avoid an extra trip.
WTI crude price is down $3.15 today to $90.38. Looking better for Robert today.
Sad thing is, I told my wife last night that if I had a commodities account, I would sell a contract at $93. I could have just about doubled my margin in a day. Of course that’s presuming that I went ahead and sold today at $90. That’s why this stuff always looks easier than it is. When it’s just a thought exercise, if oil went back to $93 tomorrow I would have a tendancy to say “I would have sold yesterday at $90.”
“Winelover – if the US cut crude consumption just 10%, that would put 2 million barrels on the market. Even in Napa it can’t be that difficult. I ride my bike to the market and video store, or I pick up stuff on the way home to avoid an extra trip.”
Yes, so do I. But is seems you are assuming that biking to the store is enough. There has to be SOMETHING at the store to buy. My family still farms in union county, SD. Believe me, they are putting in as much corn as humanly possible, all for ethanol, of course, a boon to the farmers. Umm, sort of.
It is planted with diesel, covered with nitrogen exclusively derived from natural gas, sprayed with other oil derivatives, then harvested, processed, and shipped with diesel. There is no plan B for this system, BTW. None. And that is only one facet of it. Look up ‘ogallala aquifer depletion’ and read a bit. It is, like most problems, more complex than you might imagine, and not one solved with simple solutions. If anything, demand destruction will probably be a bad thing. If it takes peoples minds off the fact that our high standard of living is utterly dependent on a lot of oil(inexpensive oil at that)we might then lose what little will we seem to have to come up with any alternatives, which, BTW, I am still waiting for list of alternatives made without oil…from you 🙂
have a nice day
Ethanol is a whole other subject – not sustainable from corn. It only lives through subsidies.
In the short run we are stuck with fossil fuels for transportation. But we don’t use them very efficiently. I think ultimately we will move to electric vehicles. They have the potential to double our efficiency with today’s technology. We can use nuclear and coal with CO2 sequestration to provide the power. My commuting needs would be covered by an electric car with a 60 mile range.
The long term alternative is fusion. In reality all our energy comes from fusion. Fossil fuels are fusion energy from millions of years ago stored as hydrocarbons. Solar will bridge us until fusion reactors are feasible. It might take 50 years, maybe 100. With today’s technology, PV solar power costs about 20 cts/kWh. Thermal solar is very competitive today.
At $100 oil, coal to liquids works, biomass to liquids work – lots of things work. The problem is as soon as a couple of million barrels per day of alternatives hit the market, the price of crude goes back to $30 and the alternatives investors take a bath.
A comprehensive energy policy would recognize this fact and set a US oil import tax to protect both investors and consumers.
Katy, I concur, with a few reservations. Liquid fuels are not the only thing that will be in short supply within a relatively short timeline.
At $100 oil, coal to liquids works, biomass to liquids work – lots of things work. The problem is as soon as a couple of million barrels per day of alternatives hit the market, the price of crude goes back to $30 and the alternatives investors take a bath.
I’m not so sure, King.
In the days when OPEC were throttling the valve, yeah, as soon as they cranked it open, the situation you describe played out. But if there is no play in the valve, why would it go back to $30?
I think more likely the alternatives will come online slowly hence avoiding the your “take a bath” situation. Seriously, alternative energy is moving like it’s molasses.
As I’ve said before, the only thing that I see bringing back $30 oil, would be a recession at one of the big consumers.
Optimist – this has already happened once before. Following the 1973 Arab oil embargo and the expropriation of foreign oil assest in Venezuela in 1975, investment flowed into the North Sea and Alaska. When that production came on line, it created excess world capacity which led to lower oil prices in the 1980s. True, it didn’t happen overnight.
Perhaps the difference is that in the 1980s middle east countries were at their peak production from discoveries made in the previous decaces. Going forward from 2007, these same countries will need to increase investments in production. They have become accustomed to a certain level of social spending which may be reduced by both lower prices and reinvestment in energy infrastructure.
Winelover – I think there is a solution that is good for Kansas and Nebraska and the Ogallala. I lived in Kansas on the eastern boundries of the Ogallala for 15 years and attended a big ag university.
Biomass to liquids is economic if done on a large enough scale. You could raise fast growing native grasses that required little fertilizer, pesticides, and water. I would think in 10 section (6,400 acre) blocks or giant pie-shaped wedges with road-train sized carriers to a central processing facility that served the complex. Then putting the biomass into a water liquid slurry to be delivered to the refinery, with the water recycled back to the processing facility.
On second thought, maybe you just put the gasifier near the biomass and send low-BTU syngas down the pipeline to the refinery. You would want large flat expanses of land, whole county sized farming operations. I’m thinking western Nebraska, Kansas, Oklahoma. Maybe the panhandle of Texas.