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Swimming In Crude Oil? Record High Inventory Will Continue To Build
By Dian L. Chu, Economic Forecasts & Opinions
Despite the recent price surge in crude oil this week, basically going from $81.50 to $87 a barrel within this week--thanks to a Fed's QE2-induced weak dollar-- oil inventories actually added another 2 million barrels build to the current stockpiles.
These are the highest inventory levels for Crude in 2010 and are just shy of the 370 million mark, which will be punctuated next week with another build in crude stockpiles. (See Stocks Chart from the U.S. EIA)
61% OPEC Compliance
Oil imports fell to 8.6 million barrels per day from the prior week's 9.5 million (See Chart). So we even had a build with lower imports, and this trend will not continue as even before the recent price spike, OPEC members were producing beyond quotas (OPEC average compliance rate was at 61 percent in Oct.)
With elevated oil prices and the need for revenue in these challenging times for countries struggling with increasing debt burdens, expect the over producing to only get worse. .
Contango Tankers & Non-OPEC
Another factor that is eventually going to put downward pressure on crude oil prices is that at $87 a barrel, any oil that was being stored in container ships is going to be dumped on the market at these elevated prices. Not to mention the fact that non OPEC countries will be producing as much oil as they possibly can with these higher price levels.
Seasonal Low Demand & Reduced Refinery Run
Then, there's the reduced refinery utilization rate . U.S. refineries cut utilization rates to 81.8 percent, the lowest since March, as refiners try lower swollen inventory levels in the products market. We are also in the middle of the refinery turnaround season, which would further reduce the run rate.
Moreover, we are currently in the slower part of the demand side for crude oil products, the summer driving season is over, and historically, this is the weak part of the oil market from a calendar perspective, this is just in the U.S.
Quantitative Tightening - China, et al
If we take a look at China and India, they will be using less oil as well since both are struggling with escalating inflation levels. Both countries have raised gasoline and diesel prices the past month, lowering the subsidies for these products, which will only hurt demand.
As China, India and other emerging countries are implementing fresh “quantitative tightening”, including raising interests rates, among other measures to rein in inflation, "hot money", and partly to combat Fed's QE2, growth is expected to drop for the next couple of quarters, and longer. That means the emerging markets are not going to be a factor in eating into these swollen inventory levels for the next couple of quarters either.
Econ 101 - Supply, Demand & Prices
Evidently, we have a problem, and the problem is that we have more supply of crude oil in the market than demand, and this isn`t going to improve over the next couple of quarters, especially with higher prices which only incentivizes more crude to come to the market, and dis- incentivizes consumption or demand for oil and oil products.
This is economics 101, and evokes the old adage there is no cure for high prices like high prices. In other words, when you have rising levels of supply that is more than demand, prices have to come down, this is sound economic theory.
Rollover or Take Delivery
So expect crude oil to reverse some of these gains and trade back in the $75 to $85 range after the initial hoopla surrounding Mr. Bernanke`s QE2 initiative wears off and reality starts to set in come physical delivery time at Cushing.
The December 2010 Crude Oil contract expires trading on the 19th of November, and in an over-saturated market with limited storage capacity, crude Oil is likely to go lower over the next couple of weeks due to the fact that nobody will want to take physical delivery at these prices.
And given the record number of historic longs (See CFTC Chart), the Commodity Futures Trading Commission (CFTC) report released on Friday shows cumulative net long positions at a record of 194,128. There were nearly 18,000 new net long positions against 2,551 new net short contract positions added in the week up to November 2.
Over the next couple of weeks these record number of long contracts have to be either rolled over or take physical delivery of the commodity, and given that a low number of market participants actually take physical delivery, the large number of rollovers will entail selling the Dec. 2010 futures contract and buying the Jan. 2011 futures contract.
These two factors of physical delivery and contract rollovers will be bearish for Crude Oil prices over the next couple of weeks.
Much Ado About Inventory, Credit & Housing
There is definitely an inflationary argument for higher crude prices (e.g. QE2) sometime in the future for the crude oil market, but not till inventories start going down, not when they are at record levels, and will only continue to build over the next couple of months based on the discussion so far.
The bottom line is demand has to improve considerably just to keep current supply levels at equilibrium, and this is just not going to occur in this economy with higher prices. The supply model was established at the peak of the credit bubble where you had a healthy housing market, healthy state and local budget revenue streams, and a robust credit market where small businesses, entrepreneurs, and individuals could easily attain credit.
The private contraction in the credit markets from the 2007 highs is still a major drag on the economy, and will not return to those levels for some time. So don`t expect crude oil demand to really start picking up steam till the housing market starts recovering, maybe by March 2011 is when both markets will start showing some improved demand fundamentals.
Swimming In Crude?
Crude, unlike gold and silver, which do not have weekly transparent inventory reports, and has much higher storage costs and capacity issues, actually has to adhere to the economics of supply and demand, and despite future inflation concerns, in the near term prices must go down due to swollen supply in the market.
Otherwise, we literally will be swimming in crude oil.
Dian L. Chu, Nov. 6, 2010
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The reason inventories are at record highs is because the price of oil is going up.
Has everyone forgotten the oil crisis of the 70 when tankers were parked in bays all over the world, waiting for the price to be reset at a new higher level. The oil in inventory must have been at record levels until reset.
IMHO, The record high build up of crude is being ready for the war in the middle east and to make boodles of money.
I saw a poster on a different thread mention the $USD heading towards $86. If that happens while crude inventories are at peak levels, you could easily see oil hit $70 within 2 weeks (just like the May correction). Afterall, the net long positions held by large speculators (hedge funds) are at the highest levels...ever. Bagholders?
China's auto purchases are 17 million in 2010. Unlike the US, ALL of those are new consumption. The US purchases scroll some off the back end as obsolete junkers and all US purchases are not new oil consumption. China doesn't have a history of car ownership so they have no scroll off. Those are all new buyers.
17 million at better-than-US 30 miles/gallon and driving less than US 10,000 miles per year adds up to about 0.35 new million (42 gallon) barrels of oil consumption per day.
That's just from the 17 million cars. Not other China growth.
China's projected car purchases in 2011 will be 23 million. In 2012 they expect 27 million.
This will be well more than 1 million bpd additional global oil consumption, just from cars in China (not incl India).
The only solution to this is to call on Saudi Arabia to produce their claimed excess production capacity. There is considerable doubt that it exists. After all, a year ago Russia surpassed Saudi Arabia as the number 1 oil producer. The Saudi reason given: There is no demand, so we do not produce.
How odd it is that Russia found customers for their 10 million bpd of production but the Saudi's could not find customers for any more than their present 8.5 mpbd of production.
Strategic commod, wont necessarily conform to conventional economics at all times. Plus forecast 15% production growth and 17% demand growth in worlds largest auto market, very bullish for oil demand..
so stupid manipulation,, cant believe you guys fall for it..
oil break out 6month hi, and suddenly demand is weak, glut of oil etc etc etc
sucker seems upto his gills in SHORTS.. so try anyhing to reverse..
we will see 100 $ oil in 2 months
alx
While taking your point about inventory levels...
But what about QE 3/4/5... (we may be talking about different time frames)
When the dollar drops, oil increases - in US dollars.
Even with a pull-back in "Price", you are left with with the question, priced in "What".
There may well be no pull-back in USD.
BTW - re peak oil, to those mentioning it..
It isn't necessarily just about peak production, price is also part of the equation.
If the rate of price increase is faster than the rate of production increase, you are into Peak-oil.
Your point is well taken.
They're in control of price because they print the fiat debt notes out of thin air, debt notes that denominate oil's price.
These are debt notes that private central bankers hold that are assigned as an obligation to the consumers. The higher the price of oil, the greater the debt obligation the oil customer has to the private central bank's economic, industrial and political control.
These are the same debt notes that pay for the military camped out on the planet's cheapest and most accessible points for oil production which ensures production will be controlled and directed to achieve maximum depletion and scarcity affect, hence a higher price and debt obligation and increase profit (control) to the bank rollers.
So the concept and definition of 'peak' oil is completely in their capacity to be defined as they wish regardless of scientific physical availability or supply. Distribution, like in all resources, is the key to maximizing commodity price. As it stands now oil can be used as a dwindling resource to herd the sheeple populace away from free range economic and political markets and into the corral of central control.
So profit is no longer a monetary sense or even a political one but begins to take on the creepy taint of social engineering and we begin to get a sense that the forces masterminding the atrocities of 70 years ago were never completely extinguished nor perhaps ever properly exposed in the first place, for that matter.
Peak oil is just another bad religion. And we all know how cults thrive, with the sacrifice of the stooge true believers...
They wouldn't have it any other way, nor have they.
Good analysis, I agree with it. A lot of pushing on the market with speculators feeling they Fed will backstop their risk. Will it?
Bernanke is pushing on a string and crude is too expensive @ 5% of GDP a recessionary level.
Never underestimate the longs who can obviously access credit somewhere and who have collateral. Producers can be longs, too since they can always cover.
So far this year the market has always retreated from this level and I don't think there is anything different fundamentally this time.
As again, monday:)
you guys know way more about the fundamentals than i do but i've got a feeling it will be awhile before we see $150 oil again. maybe like 20 years, just like what happened in gold and silver. we still haven't seen new inflation adjusted highs in those yet.
i know it doesn't make any sense with whats happening in the dollar, but when the dollar stabilizes at a lower level and the economy hasn't improved worldwide, on a relative basis i think oil equilibrium brings it down to levels like we saw when it was $15-30 for years. but adjusted for inflation, maybe that level is $75-100 for years. perhaps it could spike again to $120 on speculation but it will only help spur the alternative energies. supply and demand are too elastic. i'm not sold on peak oil theory but if it's true it could be decades away even if the supply graph looks to have formed a peak ... i think it's a head fake.
i'm not really trying to persuade anyone .. just trying to express my gut feeling
So thats where the Gold from Fort Knox went.
Not so fast! GoldFinger got the real Gold.
But to your point, with all the negative fundies writ up, down, and large on Crude; that fact alone is the best reason by far to buy OTM calls as usual.
Pathetically obsolete analysis. Cushing Oklahoma's dipstick is no longer the proper measure of oil inventory. China doesn't care what's in Cushing. Neither does Russia, who are now the largest producer of oil, and pipe it to China.
The correct measure is what comes out of the ground. That flow rate. It's not rising. World population is. And that's that.
It is rising, oil production has not peaked - 86.9 million barrels a day is higher than it was in 2005 when people were saying "peak oil is here".
Also - worldwide storage is at 2.79 billion barrels. 61 days of cover in storage is the highest since 1998, and it has been going up every month.
Be sure you do not confuse crude with crude + condensate. Different organizations report different things, and sometimes change from year to year.
There's been no particular rise since 2005. In fact, the 2009 production level was lower than 2004.
http://www.bp.com/sectiongenericarticle.do?categoryId=9023770&contentId=7044467
Download the excel spreadsheet in the top right column.
Also, the numbers in your table dont match the IEA numbers for some reason.
<deleted>
Production dropped in early 2009, then came back up.
http://omrpublic.iea.org/
Thank you for that clarification,Crash. I was beginning to think I had to demand physical delivery.
The author may be factually correct but the primary conclusion is wrong.
First of all, one cannot simply assume that high inventories imply that the market is oversupplied. Who is to say what the correct level on inventories should be if oil users want to hedge against a falling US dollar? Then we have the issue of the wrong type of oil in the wrong places. Has everyone forgotten about the Gulf oil disaster already? What about the two pipelines break this summer in the upper Midwest that lead to massive supply disruptions? Get this – we do not pour crude into our vehicle tanks – just gasoline and diesel. Diesel stocks are below last year’s level’s and gasoline stocks only slightly above a low 2009 level.
Second, the comments about China and India are misleading, to put it nicely. Maybe China and India will slow demand growth, but they will not be using less oil. A simple check of IEA figures will reveal that demand growth has been very strong for them this year.
However even if the author’s basic conclusion about demand was right, the price of oil would rise anyway. The QE2 card trumps just about everything.
Nice piece, and quite correct in pointing out that hot money gets burned in commodities, because they don't understand the dynamics of contract rollover. Unlike stocks or physical PMs, you can't just buy a futures contract and forget about it for a while. Buy and hold has consequences.
So, the fundamentals for oil are negative. Producers of nat gas are predicting a 10 year glut at near all time lows in price. Nat gas already competes directly with heating oil. Let the games begin.
PS - Anyone know why diesel remains above gasoline in price? I've heard several rationalizations involving conversion to diesel in Europe, but it's been a while. That story has whiskers.
I think it has 30% more BTU's/gallon than gas does.
Real Estate was a commodity, Yet supply exceeded demand and a 2005 Realtor pumped the price. When the World runs low in oil, it will be a catastrophe! I love the infinite production on/of finite resource thought process! Reality will prevail and a true price will follow.
i think deisel is taxed more
The fed tax is only 6 cents more. The higher price is a function of supply/demand; there are fewer middle distillate hydrocarbons per barrel with increasing demand. My 1984 300D gave up the ghost last year after 390,000 miles, and the TDI Jetta wagon that replaced it should be the wave of the future.
In a world of fiat currencies, commodities are the new money, no question about it.
And as they take on this role, supply and demand got nothing to do with prices.
Oil is now priced world wide instantly, all day and all night. We don't know how much of the local stocks are actually for sale.
Seems all the insider selling monies must be making their way into oil futures....again.
I think some of the action in the price of oil is that oil is being traded like a currency in many ways like silver and copper-a commodity that has industrial uses but has tremendous inherent value and is in limited supply.
i would think that at some point in time, the producers who are settling their contracts in rapidly depreciating dollars are going to raise the price just to get rid of the FX detriment of the QE2 effect-regardless of oversupply.
Peak Inventory
The oil will be stored as long as the contango covers the cost of carry (ie charter, insurance and finance), and no longer.
What happens on the WTI contract is almost entirely irrelevant to the global oil price, which is set by reference to the Brent/BFOE complex. What we may well see is WTI declining relative to Brent/BFOE on the ICE arb to an atypical discount, as opposed to the normal premium.
IMHO the crude oil price is being maintained by producers - probably the Saudis - at an upper bound where demand destruction sets in, and they are able to achieve this through borrowing at zero % from ETFs and structured funds invested in oil using financial oil leasing (essentially oil repo's).
http://ftalphaville.ft.com/blog/2009/12/16/114161/introducing-financial-...
If there's one thing we've learned (the 1985 Tin crisis; coffee cartel; Sumitomo/Hamanaka in copper) it's that if producers can maintain high prices by manipulating the market with the connivance of investment banks, then they WILL.
'then they will'. Excellent and right on. That's why C, JPM, and GS are renting tankers and holding it offshore.
They bought on the pull back and will wait it out on a as needed basis. I'd like to know who's holding the most corn.
Corn futures can get ugly. Somebody might be eating a lot of popcorn soon.
Oil lasts forever, corn has a shelf life of about two years. Best you can do with it after than is sell it to the US and make meal for fast food. In the terms of the oil, the oil will last longer than the ships holding it. Cute take on the oil storage though, but the oil stored in the tankers wouldn't last the world a day in terms of usage. Like asking a bum to hold half a bottle of rum and make it last longer than two hours.
Besides when has anybody here every heard of a JPM, BAC or C actually owning the goods they are busy pumping? How about gold for that matter?
Naw, it's ETF speak for "I hope I can leverage my contract before I'm called on it". If 70-85 bucks is the best the masters of the universe could do from 68 bucks in 2008. This isn't contract push back anymore than hanging market to market in the wind was saving the street from the banks.
It's an honest to god rise in costs along with exchange rates and pointless maneuvers by countries around the world to shove their currencies around (well down).
Paper Dollars Chasing Paper Barrels, Great Writing its Jed BTW
interesting to hear an opinion other than "oil UP" and "peak oil"
but china is extremely bullish for oil. china assures continued military compettition, and provokes many countries to beef up their military capacity; including india, russia, japan, US, iran, etc.
the thought of china building its military is far more confrontational and provocative than, say, the USA military buildup was, mainly to russia and india. especially india, they see china as a direct threat to their territory, as will russia.
the idea of chinese military and regional ambition, like we're seeing now with the confrontations with japan, is perceived as a threat to current international border "agreements". if the US is collapsing, all these old claims to international territory will reemerge; we're already seeing it between russia/japan, japan/china, and soon it will be india/china and russia/china. we've seen how china feels about its territorial claims; they ram into vehicles even if they are in/over international waters. like it or not, china will become increasingly aggressive and, dare i say, arrogant as americans are. i predict the UK will go back to their previous levels after the cut back, and we will see a type of conventional arms race in asia....
just having the threat of nukes aint enough; there needs to be a show of force that the geo political paradigm can see. and using nukes is pretty much off the table; the military precident is to not use them i.e. russia us cold war. but conventional arms its open season, and they use oil. no major country could justify using nukes if conventional forces would do the job.
especially with the US falling and other political powers like russia and china rising, theres alot less security in the world, and the makings of some big conflicts where the winner cannot be easily predicted.
Thanks, and good to see you on zh.