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Oil Myths & Why WTI Is a Short
By EconMatters
The Cushing Myth
"Going along with 'drill, drill, drill' is now 'ship, ship, ship,' " said John Kilduff, energy analyst with Again Capital.” The bottleneck has been addressed in Cushing [Okla]. We're seeing those inventories plunge. We're seeing it from all the rail movement. It's having an impact, as are the pipeline reversals."
That is the rhetoric and here are the facts from the latest EIA report: Last year Cushing had 46.8 million barrels in storage and today Cushing has 47 Million barrels in storage. Thank goodness for all the rail and pipeline movements of the last year. I guess “plunging inventories” justifies the recent narrowing of the WTI-Brent spread from a year ago.
Further Reading: Pipeline vs. Rail: Canada Oil Train Crash
Funny Business Going on with Inventories
There was a 20 million withdrawal from inventories the last two weeks for the first time in 30 years. What are the odds that this is wholesalers stocking up for the rest of the summer? Expect a substantial build next week in inventories as Saudi Arabia`s upcoming increased export shipments finally hit the market, many wholesalers summer needs have been met, and product inventories are higher than this time last year.
2% GDP Economy
But the one thing that is apparent is that consumer demand for products didn`t all the sudden spike by a factor of 10 over the last two weeks. Furthermore, Oil inventories still stand at 374 million barrels compared to starting 2013 with 361 million in storage. This is after an unprecedented and highly unusual withdrawal occurrence that doesn`t fit with the 2% GDP growth environment that necessitates the Fed having to stimulate the economy with $85 Billion of monetary stimulus each month, and a total unemployment rate well above the 10% level.
Oil is Fungible
Oil is fungible, and with the emerging markets including China either in a recession or on the brink of a hard landing the Oil has to go somewhere as producing countries need to generate revenue from their primary resource for capital to support budgetary commitments.
The US is the strongest economy and the largest consumer of oil and petroleum products so with China cratering the global competition for oil revenue finds its way to flooding the US market with spare capacity. This brings the price of Brent down, and even if WTI is equal to Brent in terms on the spread, the abundance of Brent will pressure all grades of oil in general, and WTI in specific terms.
7.4 Million Level Reached
Because of the large draws in supplies the fact that US domestic production reached the 7.4 million barrels per day level with the latest EIA report went largely unnoticed. Once refiners revert back to lower capacity utilization rates where is this excess domestic production going to go? You guessed it straight into inventories as unlike the Saudi`s, the US just keeps producing oil regardless of seasonal demand.
Price started the year at $90, and we have 13 Million more barrels in storage Look for oil inventories to finish the year at higher levels than they started the year. Oil inventories are well above the five year range, and the remainder of 2013 will continue this historical trend of increasing levels of oil in storage facilities around the globe.
The Speculators just passed an Oil & Gas Tax
Gasoline prices have gained 30 cents in two weeks, and once futures prices are passed onto the consumer, expect the trend of the last four years to reemerge as every time prices reach the current levels, miraculously, the US economy slows down considerably. And why shouldn`t it as oil and the derivative products are the major input that makes all business and industry run. Therefore, a major increase in oil and gas prices acts as a major economic headwind for the economy.
Rinse & Repeat
The trend of the last four years is that speculators push the price of oil into the triple digits and gas prices to the $4 a gallon level, and the economic data and overall economy shows the impact of this new tax, causing a pullback in the economy. This cycle is followed by the speculators shorting oil back down to the low 80`s on economic concerns and building supplies with all the analysts citing a slowing China or increased domestic production as causes for the decline.
What is really at work here as not much has changed in the underlying fundamentals of the oil market in the last two weeks is pure and simple speculation. They run the price up as high as they can until consumers cry uncle or the governments brings out the SPR card, and then sell oil off hard in the opposite direction for at least 20 handles.
It is all about making money, and the oil market is one of the surest ways for speculators to make a fortune. They move the market up, collect their tax, then move it down, and collect the difference again. It is a nice scam, if the government lets them get away with it!
And being this isn`t an election year President Obama has been quiet as a mouse compared to last year when WTI crossed the 100 threshold he threatened speculators with an SPR release.
The Liquidation & Volatility Game
The overriding myth is that things are different this time, that somehow the fundamentals in the oil market have changed, nothing has changed, just a couple of months ago Longs were liquidated at $86 a barrel with the same level of oil and product inventories on hand.
The Downward Cycle is in the on deck circle warming up, and will be coming to bat soon in the Oil Market Speculation Game!
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Fucking EconMatters.
I was thinking about shorting oil a few weeks ago but didn't because I saw an EconMatters article on ZH saying to do it.
Thanks EconMatters, the Stolper of shorting oil.
http://www.bloomberg.com/news/2013-07-11/iea-sees-20-year-supply-peak-ou...
The specs are more long now than they have been in years. It has been a building position since 2009. It is too big. Gold's move in the last 6 months leads the way. Oil is going to get hammered eventually only due to specs moving into a more supportable asset. Examine COT data below:
http://finviz.com/futures_charts.ashx?t=CL&p=w1
I fully believe we are hyperinflating. But hyperinflating is an ugly volatile business. Those same specs are just as likely to put on a massive hyperinflated and leveraged short bet with their free money. And since oil has storage costs, unlike hard money assets, you can't hold it for the duration in your closet. You will get blown out.
This guy has written 1980s style oil articles before, and the comment threads eviscerate him.
He must pay to appear.
I'll offer him a thought. Why talk about inventory? It's stored underground. "Production" in the world of oil isn't really producing it. It's just removing it from inventory.
what other commodity has inelastic demand?
these numpties have been shorting it since the low 80s and telling everyone why they're really right the whole time. Tyler's obviously trolling us by publishing this shite.
I would like to see Econmatters trading book. What was he saying when crude was trading at 95 and inventories were at 48 mmbbl?
Someone should explain to him that it is called a "futures market", 8 weeks from now when inventories are 10-15 mmbbl lower I will check back to see if his opinion has changed. All WTI is doing is catching up to the world price of crude as pipelines are moving barrels out of the mid-con into the gulf.
As I mentioned long ago the when wti/brent arb was trading at -$12 look for it to come in as the logistics start to take hold, it closed at -$2.05 over today. The idea that everything is a conspiracy is getting a bit old. Zero was and in most cases still is a great web site, three years ago it had less people pushing their agenda. Everything that moves is not JPM's fault.
Egypt on fire - flooding in Canada - Oil spill in the gulf and new pipelines running south is what is this making this market move. EM go short and let us know where your stops are so we can track your psuedo-expertise.
BTW I reread EM comments about speculators running the price up until people cry uncle, is he aware the Brent has been trading at these WTI levels and higher for the past few years.
EM STFU
Have to agree.
The individual commodity, stock, and sector rotation is how Wall Street is making bank.
Retirees, pension funds, and IRA/401K owners the bag holders along for the ride to provide the capital base.
The "ONLY" reason oil is pimped is so that the pimp's, ( J.P. Morgan, Deutche Bank and others who used FED Bail Out Money to buy tankers of it when it was over $100 dollars as proved and verified by ZH), can unload their balance sheets of oil before it crashes. They better do it now, even if it is at a small loss.
That oil has been off those tankers for a good 3 years now, the backwardation of international benchmarks like Brent would have otherwise killed those pimpsters. But it does indeed look like JPM are long (paper) commodities right now and their recent reco was indeed genuine (coming from the trading desk and not research this might be particularly confusing but, hey, once in a while you got to play your hand straight otherwise bluffing becomes meaningless).
This guy is an oil analyst and he hasn't mentioned the effect of the flooding in Alberta?
WTI may indeed be a short at present, but the case sure as fuck wasn't made in the above article...
+100. There is no correlation between inventories and prices. Take a look. What our author neglects to mention is:
1) massive and escalating unrest in middle east.
2) massively more expensive cost of production in US vs. middle east and elsewhere (for now, but that will grow, too).
3) china does not need to grow to continue to suck down massive amounts of the stuff, nor do we.
Prices may decline from here, but we've drained the cheap stuff. Simple inventory analysis doesn't really convey what's going on.
HAHAHAHA. seriously stop posting articles on a topic you clearly know nothing about. not one thing in this article is an example of critical thinking.
+1 I thought exactly the same thing. The rally may run out of steam, but not because there is an actual game called 'commodity bashing' and oil may be next in the deck. If people want to get their name out there with a certain view, at least use some confusing graphs and a font that is a little easier on the eye (/sarc). Please. This was painful.
Could not have said it better myself...
Where's the beef?
https://www.youtube.com/watch?v=aRF1eeFrPS8