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SPR "Backfire" Trade?
The following chart comes from FT.Alphaville’s Izabella Kaminska. (Link) I want to make a few points about this.
Look at the names of those who bought the crude from the SPR. See any ‘good guys’ on the list? I didn’t.
Note that the basis of pricing for the SPR sales is a formula based on
Louisiana Light Sweet (“LLS”) pricing. I have been pounding the table
for some time that LLS is the benchmark that should be looked at when
considering the true cost of energy in the US. That the SPR sales did
not get linked to the WTI pricing is the best evidence that I can think
of to confirm that the NYMEX’s oil contract is irrelevant.
The crude futures are still going to be the benchmark for all of the
talking heads and even the better news rags. But if one wants to look at
the macro consequences of changing energy prices, LLS is the place to
go. (link)
There is evidence that the SPR sales have had a depressing affect on LLS
pricing. I wanted to measure the results to date. I think in less than
one month any beneficial effects will be gone.
The IEA/SPR deal was leaked. The market insiders knew this was coming. The CFTC has promised an inquiry. Don’t hold your breath.
Because there was price distortion pre the actual announcement, there
is no true apples-to-apples price comparisons. I use the opening rate. I
don’t believe the information was leaked at that point. The results:
Note
that LLS has gone from a premium to Bent of $2.50 to a discount of
$3.22 (5%). That is a pretty big swing in this spread. But when you
consider that $1 drop in the price of a barrel translates to 2 cents at
the pump, the results suggest that this means a 10-cent drop in gas that
can be directly attributable to the SPR sales.
Ho Hum, is my reaction. The real question is what might happen next.
I asked a Greek friend who owns tankers. A synopsis of his thoughts:
At any given time there is about 100 large tankers on the ocean. That
translates to about 100mm barrels of crude. Some of this is on long term
charter with cargos being deliver that are also under contract. Another
portion is not committed and constitutes floating storage that heads to
the geographic destination where the highest value for the cargo can be
achieved.
He gave as one example; Nigerian crude. This is "light" and is
deliverable through the LOOP (Louisiana offshore oil delivery) or
alternatively it could go to a refiner in Rotterdam.
Your average large crude carrier has an operating cost of $60,000 per
day. It takes 10 extra days to deliver crude at the LOOP versus
Rotterdam (5 days in, 5 days out). Therefore there is an opportunity
cost of $600k to make a USA delivery.
This is the equivalent of another 65 cents on the Brent spread. As of
today the adjusted Bent/LLS discount is $3.85. That comes to about $4
million on a 1mm brl. cargo.
The obvious conclusion from the Greek shipper is that cargoes are going
to be diverted away from Louisiana as result of the negative spread.
There is big money to be made.
His expectation is that the premium of 1-2 dollars has to
come back. He added that the adjustment process may not be smooth. Once
cargoes do get diverted they do not change direction. This guy thinks
the US has set itself up for an inventory shortfall as a result. The end
result could be that the premium for LLS has to widen to about $5 to
get cargoes headed to the US.
If this fellow has it right, then gas is headed right back up in a month
or two. It might end up even higher than it was before June 22. That
would be a kick in the pants for those who tried to manipulate this very
big market.
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Is Year of the Goat good to Bruce? Or is he batting like Barry Bonds on steroids?
So are we talking chicken & egg again? In theory, we are talking about more demand destruction in the US. Structural destruction.
Those DICKHEADS want to push more idiots into crappy vehicles from comapnies that publish Unicornian bogus mileage returns. Does anyone do the MATH anymore?
(This is a good time for Phil at Phil's World to blame Michele Bachmann.)
I'm NEVER giving up a V6. I don't care how expensive gas gets. Just cut out the joy rides. This property could not survive without truck & power. The guy I would hire more often isn't going to be happy with Trikky Dick. And he knows this.
And he is telling his buddies why he won't get more work this year. Pidgen doesn't mean stoopid. Believe me the word is spreading.
How much crude do they burn trolling about?
Going up, left and right
Going up, dark or light.
Gong up, highs not lows,
Gong up, food it grows.
for dollar. Almost all refiners around the world run a mix of crude light sweet sour heavy. WHo wants Saudi crude the refiners who consume 9.5 mm b/d of it. Europeans are part of that group.
Light Sweet Crude? Maybe it is going to Europe to make up for what isn't coming out of Lybia. Europe is spoiled on the stuff. Who wants Saudi crude anymore?
Those Murphys are good folks. I like their oil soap.
Big Oil is always jacking us around...who knows...and no, I'm not surprised.
When will the distraction begin? Has to be almost any day now.
forgot f@#k JPM
It a couple years there will be three new pipelines coming from the mid-continent, Canada and Cushing down to the gulf coast. This will effectively put the WTI Brent spread back to a more historical level. The marginal barrel in the world right now is the Canadian oilsands. There is absolutely no place for these barrels to go but to mid-continent refiners. Up until a few years ago mid-con production was balanced with supply. no longer. This is one of the reasons that we have seen huge contango spreads appearing during times of refinery turnarounds.
Now add to this mix significant increase in light crude from the Bakken fracking production and whamo WTI brent goes from historically WTI $2 over to WTI $16 under Brent. The new pipelines when built will change the spread.
I am not sure that I agree with the idea that barrels will be headed from the Gulf Coast to Rotterdam with a negative spread. Nor can we assume prices for gas will be higher because of it.
Anyway my thoughts hope they help.
There are trains going 24/7 filled with Bakken going to the gulf. They bypass Cushing because of the price differential.
I have been expecting the WTI/LLS spread to narrow. But it hasn't. I would not hold my breath on that new pipe line. It is years away.
Nice post. Obama listening to his Wall Street massa again I guess. Wonderful...
Besides the leading edge inside look at LLS, 2 quick points;
- the IEA and the EIA look to have merged policy in the SPR play
- most people who read here know the difference......typo
2 other points;
- looks like the fix is in, again.
- Pigmen love to win, and love Money more.
1 more point;
- trade price
Great stuff Bruce.
In 1964 a quarter bought a gallon of gas.
Today, a 1964 Quarter buys almost 2 gallons
of gas. Real money is worth more today than
in 1964. There's no inflation problem. There's
a fiat currency problem.
Nice work, Bruce. I really enjoy seeing the whole thought process laid out on something like this. One question, though (since I am not an energy expert by any means) - why is LLS a better benchmark than WTI?
It is the feed stock for the Gulf refineries. This is the description of it (note that this cash delivery. This is not a futures contract like the WTI.)
Light Louisiana Sweet traded in pipeline lots of 1,000 to 5,000 barrels a day for delivery between the 25th of one month and the 25th of the next month. These prices are for physical shipments. API gravity: 37 deg Sulfur content: 0.3 % wt Barrels per ton: 7.506 Pour point: -25.0 deg F Loading port: St. James, La.
do you have any idea how much is in US enterprise storage? used to be an amount roughly equal to what was in the La Salt Dome, or 1.5 Bbbls total. Of course some hedge funds have gotten in on the game. you can never be sure what's really there, and how much is really for sale, and at what price, but if oil prices are too high, and they start to come down, and the specs try to dump their oil into falling prices, a bearish vortex could form. truth is there isn''t enough real demand, and privately stored oil has no destination. additionally because of the associated costs, its unlikely gasoline will go much below $3.50 with crude at any price.
thanks for validating reason on the 'correct' US benchmark
Nice work Bruce.
To presume we understand why they are manipulating and to what end is really just a fools errand. Especially if we take them at their word. There are just too many moving parts and way too many hoses siphoning out of the barrel to really know what's going on.
One of the mistakes I make is assuming what's happening in real time is intended to affect real or near real time. Who knows, maybe this bullshit is a payoff for a circle jerk from 6 months or 2 years ago.
Nice read the other nite CD..not to go retread.... maybe this bullshit is a payoff for a circle jerk from 6 months or 2 years ago...happens all the time on the open seas CD....oil is, after all it is a finite commodity and everyone wants it... I call-em the Black Gold Hoarders. The back room deal that Barclays and JPM got was was one of those payoffs....Barclays/JPM got the lowest price by about 3 bucks on the smallest volume...go figure...the SPR product will simply be recirculated back into the SPR....god bless america huh.
margins would be better if it never leaves the SPR. for certain buyers experienced in paper trades, this could just be another.
you hope for an orderly market, (price is secondary) if the Muslim BroHood takes over in Egypt they'll sell as much oil as they can. Likewise everyother former OPEC country inclu Venezuela. the global deflation time bomb is ticking. these guys are scared, and Bernanke doesn't have room for a couple billion bbls of crude on his balance sheet.
Or maybe it fundamentally had no real purpose at all, other than to distract us and drive us crazy in trying to figure out what the point of this move actually was. Sowing confusion can be almost as effective a weapon on the battlefield as a direct attack.
Agreed.
The art of disinformation is a well known and respected strategy of governmental politics, military planning and war, corporate competition and personal relationships.
Bruce thanks for all your time, I just wanted to clarify the vlcc rates....operational cost's at this time in history is moot...average vlcc rate is running around 10,500 a day and breakeven is about 12,800...throw in high risk zone and you can collect a little more. Very little is known or at least talked about and that is BFO (bunker fuel) price and consumption...speed can make or break you.
Bunker fuel and crew at $10k per day. Okay. But what about the cost of the vessel? What about insurance for these beasts (when full these things cost a bundle)
These things cost $100mm and only last 20 years. There is a capital cost and a depreciation cost as well. If you use a very cheap cap rate (5%) and 20 year depreciation you get $9mm a year, That is ~$25k a day. Fully loaded costs are higher than pure operating rates
"It might end up even higher than it was before June 22. That would be a kick in the pants for those who tried to manipulate .."
Unless they had an affection for "skyrocketing" prices and capped markets.
I've spent two years pounding the table on nat gas just so i could say to Exxon/Mobil "you're pricing yourself out of your own market." The next day T Rex spoke of a "significant oil discovery in the Gulf." Prices had been coming down all summer--ethanol subsidies have kept gasoline prices exceedingly low, Cramer had questions about the mighty XOM. Sure they're "not gonna like that blogger" just like all the rest. But "it's about the market working" right? NOTHING PERSONAL. And then "here comes the government." To me "announcing an emergency natural gas reserve" would have been far better--not saying releases from various nations' SPR's won't work in getting prices to go down. Of course the immediate impact has been prices rising. If these prices continue to rise...then what?
Another example of why price controls don't work.
It works for JPM
Can you think of Anything that doesn't?.
Yep, JPM dipping his toes in the oil-pool is not exactly a harbinger for lower oil-prices. So adding this to Bruces' post, I can't see a smack-down in crude in the near future.
But, then again, according to some brilliant minds at Goldman: Higher oil-prices = more petro-$$ running back into the US economy.
I don't know what the USSA has to offer the worlds' oil-producing nations for their petrodollars. . . . unless they are shopping for a war-machine of course.
LMAO
The man from Kenya deserves to have egg on his face over this!
There's a trade here somewhere
http://www.graffiti.org/toro/scam.jpg
Don't think that math was on the teleprompter, do you?
Homey don't do math.
Dig.