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Impending Crude Correction by Mass Rollover
By Dian L. Chu
Thanks to Muammr Gaddafi’s airstrikes near a Libyan oil terminal, and protests in Iran adding to the continuing chaos in Middle East and North Africa (MENA), on Wednesday, March 2, Brent oil settled at its highest level since August 2008 at $116.35 a barrel, while WTI futures on NYMEX also advanced to $102.33 per barrel.
Peace by Chavez?
However, crude oil retreated on Thursday, March 3 after Al Jazeera reported that Gadhafi had accepted a plan proposed by Venezuelan President Hugo Chavez for a multinational commission to mediate the conflict with rebel groups.
The International Energy Agency (IEA) said between 850,000 and 1 million barrels a day (bpd) of Libyan crude output has gone offline, and that the unrest in Libya had started to affect Europe's oil supplies. Indeed, since Europe is the largest importer of Libyan crude, the supply disruption there had Italian and French refiners rush to secure cargoes driving an 18-fold surge in oil-tanker rates in two weeks.
Saudi & Nigeria Stepping In
Then, Bloomberg reported that Saudi Arabian Oil Co. said the kingdom is “ready to supply incremental change in demand,” to cover any shortfall from Libya. Saudi Arabia pumped 8.43 million bpd of oil in February, according to Bloomberg.
Moreover, Nigeria, an alternative producer of Libyan crude grade and a favored oil supplier to U.S. refiners, said it will also increase daily crude exports of 14 main grades by 9.3% in April from this month.
Small Oil Disruption Risk
Crude market would react to the faintest geopolitical event as remote as North Korea shelling South Korea's Yeonpyeong Island. So far, the shortfall from Libya is not significant enough to cause a major supply disruption. However, the real oil supply risk is actually with Saudi Arabia, which accounts for about 12% of global oil production in 2009 and holds almost 25% of the world’s oil reserves. In a worst case scenario, the entire MENA oil supply could be at risk.
But from all indications, things most likely will not get out of control in Saudi as they did in Egypt and Libya for several reasons. The Saudi royal family maintains a tight control of the military force, and there’s not a significant opposition force. Furthermore, Saudi is in a much better economic state than Egypt, Libya, etc., and with a whole lot of petro dollars and resources to go around. And most importantly, the rest of world would hate to see any instability in Saudi Arabia.
Cushing Inventory at All Time High.
Against this backdrop, the U.S. EIA reported the first draw in the U.S. crude inventories in six weeks. However, instead of demand-driven, the 364,000-barrel drawdown was primarily due to falling imports and higher refinery runs. And guess what? Crude inventory at Cushing, Oklahoma just rose 1.1 million barrels to hit a new all-time high of 38.6 million barrels (See Exhibit 1)
Take Delivery or Rollover
So basically, there’s not a real physical oil shortage, and crude prices primarily have been moving from fear and speculation depending on news and rumor coming out of MENA.
Now with crude prices bid up so much, traders are left with a dilemma - to be in the crude oil trade, players basically either have to take delivery, or rollover contracts and options comes expiration time. However, with storage at Cushing, Oklahoma pretty much at capacity, and price curve front month (April) loaded, it is doubtful that anybody would be in a position to take physical delivery.
It's The Rollover That'll Get Crude
And don’t forget that the humongous United States Oil Fund (USO) is a futures-based ETF that has to rollover as scheduled (from Mar. 8 to Mar. 11). The USO effect, plus the record open interest almost exclusively long and heavy in April, suggest there will likely be a massive rollover starting with USO around March 8, then to all the other market players, when April contracts and options expire (See Chart). That will push down the April price for both Brent and WTI, regardless what’s going on in Libya and MENA.
From the current price and technical signals, WTI could easily correct down to $94 to $95, Brent could drop to $110 to $106 range. From a trading standpoint, short WTI at the beginning of the rollover, then cover when the trend starts to wane would be a good move this March month.
Of course, there's always the possibility that both oil markers could drop like a rock before the rollover should Gaddafi decide to step down in the next few days.
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On average better than 95% of spot month contracts go unexercised. Why does an impending spot month expiration imply that the market will correct? Dian L. Chu writes without any sense of how futures markets work or how traders behave. Does she really think that traders don't have positions in other than the front months - especially strong money position traders? Chu should open a personal futures account and get familiarized how and what traders do before writing drek like the above. That is a distraction to people coming to ZH for good info.
Shorting oil with DXO was going to be my next move as well. Just wasn't sure on the timeline.
Thanks, asiablues for the coming opportunity.
calling for shorter term highs of 122 and correction 90. if you want to see which sectors i would traffic in during oil rallies: http://www.hedgefundlive.com/blog/crude-oil-rally-which-sectors-to-buy-and-stay-away-from
Not bad insight....some of us play it differently. I agree 120-125 will a tipping point, I don't think we will see 90 again for a long time, if ever. BTW, I refer to Brent not WTI.
"I don't think we will see 90 again for a long time, if ever."
The same was said about oil in the Summer of '08.
I may well eat my words...There is lot more fabricated liquidity sloshing around and the oil market is just as tight. It will go to 90 if the world economy repeats it's cliff dive, and it that case, there are better to things to short from a risk reward perspective.
A rollover is coming -- in China, and it will take most commodities and PMs down with it. Dr. Coal is what you need to watch:
http://www.infomine.com/chartsanddata/chartbuilder.aspx?z=f&g=127663&dr=1y
Good point Flak. Yes, not ramping production...instead selling from storage. That might tell us something.....maybe something we don't want to hear.
Bruce is correct. Geopolitical events aside, 8.43 m/b day from Saudi in February doesn't even equal their 2010 monthly average. Granted, it is more than feb 2010. I wonder why nobody even hints here that Ghawar may have already peaked. Does everybody think it could never happen? I submit that is alreay has.
Just watching something from 2006, and they're talking about needing 30 mbd out of Saudi, with then production touching 12 mbd I believe.
Yeah, not looking good for 30 mbd. And that's notwithstanding the corruption and the amount of oil used for desalination.
And even in 2006, they were talking about corruption and unemployment coming back to bite them
Came across this....
http://www.arabianbusiness.com/saudi-aramco-said-sell-crude-oil-cargo-from-okinawa-383182.html
Ties in with the thesis "ramp in production = run down the tank farm"
Interesting, and then there's this. I think they dost protest too much
http://www.upstreamonline.com/live/article211270.ece
"We are not doing our pilot CO2 project because the field is depleting..."
Good find....
The tea leaves are all there....but hey, I'm preaching to the choir.
PS Just ignore CunningTrader, he is a fool. Your "politeness" only feeds him.
I wrote about the cost of crude for gulf delivery being at $120 the other day. I got this comment that I thought was very interesting:
Today is March 2. A 100 tank car train left Stanley North Dakota loaded with Bakken oil headed to St. James Louisiana...delivered price was $104.60 a barrel....burlington northern rail road is charging $6 a barrel for freight...........bypassing cushing oklahoma because it is full.........and with limited oil out of the offshore rigs it pays to haul it all the way across the continent.........
This suggests that Gulf prices have exceed the arbitrage of Cushing by around $6. Meaning if you have canadian oil you can sell it for more in the Gulf than Cushing. So the Glut in Cushing is going away.
Gulf crude was at 119 last night. Something has to give. Either WTI moves up to Gulf minus 6, Or brent/LLS falls. My bet? WTI is headed higher.
Spot on Bruce... a related factoid is that Chevron will not reverse their Cushing-Gulf pipeline because of the refining profits gleaned from their stock at Cushing...
While I agree with your thesis, I think it's important to consider that it is a "free market" one.
In manipulated, centrally planned markets, this kind of logic can get you in trouble.
I think it's possible they continue to let there be a glut at Cushing because it allows them to paint the crude price (WTI) lower than it should be which is good for keeping J6P in the dark a little longer.
By the way Bruce, I always enjoy reading your commentary BECAUSE it is logical.
TY BK. I saw that then and wondered.
If Oil goes down
If stocks go down
If bond yields rise
Why would one think gold and silver would rise?
GLD is an excellent hedge for long bonds. If one were to go long GLD and BLV, for example, you would be able to collect the divs on BLV basically risk free. Obviously there are a lot better ways to play that from a div yield standpoint, this is more to illustrate that even a complete retard could make money off that play.
The price of oil is as slippery, its mechanisms as dark and murky, as the stuff itself. It's a strategic asset commodity held by governments; value added at well-head, transported, transfer priced from tax havens, delivered and refined, converted to petrochemicals; by a bunch of oligarchic multinationals who control the politicians of the so called developed world. Can't get less level playing field and manipulated than that. So much for the invisible hand of the market. All those who are big players in this game are the true lords of the universe. It is their old world order that will come toppling down under their own pyramid of lies, deceit, hubris and conceit. From its debris, fed by the rage of new generations of the global information age, we will see the cry for a new economic paradigm based on : economia, ecologia, humania. These are civilization change transition times. Keep your eyes glued to the ball. The lightning falls where we least expect it. As the tinsel curtain of make belief gets torn down under its own sagging weight and the winds of rising storm. The contradictions inherent in the old paradigm of "Reagonomics-NWO" now so evident, even its greatest supporters of the ruling plutocracy, their paid media-financial community hacks, or their world-wide surrogates, of the great asset/commodity bubble Ponzi, cannot save it going down like a house of cards.... When? Ah...lets be men, not instruments of divine redemption. Our sacrifice in numbers, droves, a part of the winds of change. Brave new world. It is still the age of Sisyphus.
I am sure the prices of oil are not sustainable at these rates, as the pass through effects on everything will ruin most economies rather quickly.
oil may be for the 'nimble' trader right now; but nat gas is the the real energy bargain at current prices for people who don't sit in front of the computer all day.
and everyone's going to have to run to it
Yep....
I am sure the prices of oil are not sustainable at these rates, as the pass through effects on everything will ruin most economies rather quickly.
I am sure the prices of oil are not sustainable at these rates, as the pass through effects on everything will ruin most economies rather quickly.
So, where would you put your stop on a short?
I think it is a tough call as the metastasis of MENA civil unrest can put a floor under OIL price and that dictatorships are the simplest, most manageble and most cost effective strategy in terms of profitable natural resource extraction for the multinationals as opposed to democracies which in theory would support a higher price as the wealth is spread more widely.
In other words democracy in the ME is an expensive proposition for Western standards of living.
I also think that risk is skewed to the upside for OIL price and that risk may serve as a tax against the equity markets.
Sort of a dammed if you do, dammed if you don't proposition for the FED.
I may be wrong but I think shorting OIL under the unfolding social/politcal drama is very risky unless you can be a very nimble trader. I will look to be buying dips in OIL, and Cushing may turn out to be a piggy bank.
The social and environmental costs of OIL are catching up to reality.
The Mar 8 (Tues) rollover date almost coincides with the Mar 11 (Fri) demonstrations planned for SA.
Terrific article. Thanks.
Good news.. my V8 is thirsty.
Looks like good advice for the coming few weeks.
But in fact oil (and gold’s) best friend is the US Federal Reserve and it’s printing press. The more they print, and they’re going to print like there’s no tomorrow, the higher they’ll push the price of oil, gold (and silver).
You can embrace the new bear market as prophesized by Robert Prechter and Elliot Wave, or you can simply buy gold and put it away for the remainder of this decade.
In an age where debt has run amuck and every western central bank is printing fiat currency to extremes, Gold’s message and BTD, and oil's too.
Sit through corrections firm in the knowledge that a year from now you will be richer in real terms, and you’ll sleep better.
You’ll be the only one on your block that does. Most of us have been reduced to praying that somehow things work out because of debt.