This page has been archived and commenting is disabled.
Why I’m Not Touching This Rally in Oil
I’m not touching this $11 spike in oil prices (USO) with a barge pole. The contango which has been supporting prices in the face of lukewarm demand for the past year has been rapidly disappearing.
Contango involves buying crude on the spot market, taking delivery, storing it in leased supertankers, and reselling it in the forward market for returns that at times have exceeded a non leveraged 100%. This enabled the US hedge fund community to effectively operate the world’s second largest navy, keeping so many ships bulging with Texas tea you could almost walk across the Caribbean without getting your ankles wet.
At the peak, there were thought to be over 100 ships slow steaming in circles to conserve fuel, creating enough demand to support charter rates globally. By my calculation, the annualized contango return has recently shrunk to a mere 7.12%, not much more than you can get with investment grade corporate bonds. That means when the current crop of forward contracts expire, they won’t be rolled over, dumping vast amounts of crude on the open market.
Another factor cutting the knees out from under crude has been the recently strong dollar. Many managers last year found a barrel of oil a much more desirable hard currency than our flaccid greenback. That monetary demand now seems to be on hold. Don’t buy any more oil at these prices than you can use in your salad dressing. If the economy does slow in the second half, as many are predicting, it will be nice to buy your own tankers full of crude at lower prices.
Don’t get me wrong, I still love Texas tea for the long term. If anything, the peak oil advocates are understating their case. Linear growth in supply is about to get overwhelmed by hyperbolic demand, as it is for most other commodities. There is just a pig in the python in the form of a supply bulge that has to be digested before we can break out to a higher range.
For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily, or listen to me on Hedge Fund Radio at http://www.madhedgefundtrader.biz/ .
- advertisements -
Oil is still priced in Doelarrs, and without inflation, a barrel is $50. Inflation is 10%. Inflation rose 7% last year and is set to double or triple this year. The purchasing power of the star BUCK is not going anywhere but down, so oil prices are set to go up. Will that turn profit? Not in and of itself, but I think demand will stay where it is now for some time, and considering we have hit PEAK OIL, well, supply and demand works in this case. Also, with countries on edge (middle east/africa/etc), I think that the ensueing chaos will increase the price and value of oil. I think oil/gas is the next best market to invest in behind PMs.
from www.crudewire.com
Rbob Ramp Redoux
One of my favorite conspiracy theory's is that Rbob is used by TPTB and Goldman Sachs etc to manipulate markets. I notice it leads the way lately, followed by crude, and often subsequently generates a commodity lead equities rally. Not bad for a relatively small market....on a snow day.
From the most recent COT report;
Crude O.I. .
Total: 1,301,624
Long Short
Money Managers 165,827 45,356
Swaps Dealers 279,712 120,643
RBOB O.I.
Total: 255,823
Money Managers 55,163 6,484
Swaps Dealers 41,989 764
Eventually somebodies got to burn the stuff.
Again sometimes you have to think, if the contango pay is so little, then why is it being bought? (PS on a risk adjusted basis it is muuuuuch lower than a bond yield) In the old days a shrinking contango was a very bullish indicator short term.
My friend and I are using electric heaters instead of our Oil Burners. We have found that it is cheeper than buying Oil. Electricty this time of the year is cheeper than in the summer time.
Cantarell (Mexico) Production (bopd):
Jan 2009: 772,000
Jan 2010: 537,000
YoY: -31%
How much capital is required in Alberta to create 240,000 bopd of capacity? Under what pricing assumptions?
Non-OPEC capacity continues to decline.
Long-term crude bull here, but I too am not sure what is behind this rally.
Signs of strength in the economy? Where?
"but I too am not sure what is behind this rally"
Poker.
Face it, paper is worthless. Oil and Gold aren't.
"If anything, the peak oil advocates are understating their case."
What possible rationale do you have for the above statement?
An independent yardstick! Have a look at that:
http://mike-emmel.blogspot.com/
"Checking The Exhaust Pipe For Peak Oil Determining Oil Consumption From Atmospheric C02 Measurements"
Highly original and completely frightening !
Shit of the bull. Most anthropogenic economically-linked atmospheric CO2 comes from coal burning for electricity and heavy manufacturing and "slash and burn" deforestation. (Other CO2 comes from coal seam fires and volcanism, but that's mostly a constant baseline.)
Peak oil is real, but I agree with madhedgefundtrader in the short term. The double dip is coming, and *that* will be the buying opportunity for lots of stuff.
:-) you obviously have not understood a single word from that paper. Never mind, if true, we will know very soon what this is all about. It's clearly not in the interest of the gambling community to have an independent verification of all the "bull" oil data out there...
We agree. Which means I need to go back to the drawing board and look at what I'm missing.
good post but your ignoring the fact we are about to go into crude's strongest season march > july
The reason why The Fed's $$$ goes into international comodities. The reason why the Fed may stop inflating. The reason why oil, Gold is built on a policy that can change in one minute
The reason why deflation may be our lot
Key words --- The Fed has one thing to sell ---- money
They will not let their only product become worthless
When the teat runs dry ---- people may bite
Watch this
http://www.investorvillage.com/smbd.asp?mb=3532&mn=39199&pt=msg&mid=8643722
Well, maybe, or maybe everyone has it wrong out there.
According to this guy, the market is as corrupt as the financial markets, and is about to implode:
http://mike-emmel.blogspot.com/
One thing is for sure: all that oil data is murky at best
and manipulation has run deep, as in other markets
An average VLCC (Very Large Crude Carrier) is about 2 million Bbl. So there is about 200 million bbl. plus in contango crude slow steaming or at anchor around the world. Will this all be dumped on the market at once or slowly fed in so as to not upset the applecart? Who is out there that knows oil trading and can comment?
Most of the contents of those tankers is diesel/heating oil, not crude (which is why it's ridiculous when the market runs up oil during spells of cold weather). Last time I checked, it looked like roughly 40 million barrels of crude still on tankers. (The diesel doesn't really matter right now, because gasoline is driving oil prices at this time because of lack of demand for diesel.) It will not trickle out gradually--pretty much all of it will be showing up in inventory reports in April, just because of how the contango was structured.
This crude has already been sold on the market, but it doesn't show up in inventories until it's offloaded from those tankers. The tankers have essentially created an appearance of less supply than there really is. (And we already have a lot of supply in the official reports.)
Also, a lot of the demand for crude over the past few months has been coming from China, but the boost has largely come from their new refineries, which are exporting roughly 60% of the gasoline they're making from this extra crude they bought. They're not actually using all this supply in China. So we can expect extra pressure on U.S. refineries as well.