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Oil in Tankers to Manipulate Prices?

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By EconMatters


The 20 Million Drawdown in a sluggish economy


The last two weeks oil inventories fell by a record 20 million barrels, this event has never happened in 30 years of historical data. So what the heck is going on here? It is not the case that this is the best economy in the last 30 years. It sure isn`t the case that Americans are using more fuel right now compared with any other time period during the last 30 years.

 

Peak Demand Era


In fact, the US market is maturing and using less fuel these days for several reasons like alternative energy, higher fuel efficiencies, fuel blending requirements, and a struggling economy with the highest rate of population on food stamps.

 

Supplies at Record Highs


Sure refiners are running at their highest rate of the year in the 92% range, but that is all normal for this time of the year. Yet this two week drawdown has never happened before, and curiously it happened as supplies were at record highs.

 

 

Increase in Domestic Production Matches Reduction in Imports


Something just doesn`t add up here. It appears there is some funny business going on in the oil market once again. What makes the drawdown even more suspicious is that domestic production was very high the last two weeks at 7.2 and 7.4 million barrels per day, with imports down to 7.4 and 7.5.

 

The imports are low compared to last year at this time which was 8.6 million barrels for the same week a year ago. At first blush that is the reason for the drawdown, just take a million barrels per day times seven days in a week, and it adds up to a 7 million barrel weekly deficit.

 

But then you compare domestic production to last year and it is up 1 million barrels per day compared to this time last year. So the trend of replacing Saudi oil with Domestic oil continues on its natural course given the recent industry trends.

 

Further Reading: Oil Myths & Why WTI Is a Short

 

Where is Saudi and Nigerian Oil Going?


A couple of points worth noting: What is Saudi Arabia doing with their extra capacity now that they are no longer sending this oil to the US? It sure isn`t going to China, it is not like their economy is booming right now. It sure isn`t Europe as they are a mature market with automobile sales at 20 year lows and high unemployment!

 

I know that there is a bunch of Nigerian Oil just sitting on tankers waiting for buyers because the United States isn`t importing as much of this oil given the higher quality domestic production, but what about Saudi Arabia? What are they doing with the glut of oil that used to go to the US?

 

The Real Reason Tanker Rates are Rising?


I noticed that tanker rates have been rising; is the real reason they are rising is that a bunch of oil is being taken off the market and stored in ports around the world to artificially raise prices. This wouldn`t be the first time this trading trick has been utilized by big players in the industry! It is not like Saudi Arabia has reduced production in a significant manner to account for where their excess capacity that used to go to the US in now being marketed.

 

Managing the Market


But the trend is clear if Saudi Arabia was sending the same amount of oil here with the increase in US domestic production currently, oil prices would be much lower. So they are trying to manage prices and the supply glut by trying to offset the increase in US domestic production by exporting less to the US.

 

For example last June 22, 2012 the US imported 9,118 (million barrels per day) for that week ending period, and the US has imported up to 11,153 (million barrels per day) for a July period as recently as 2010.

 

The other question is what does Nigeria do with all their extra oil right now? This oil has to hit some market at some point given some degree of reduced market price, right? Nigeria badly needs the revenue, and is it not like they can just put this oil back in the ground.

 

Further Reading: The Bernanke Conundrum 

 

Lack of Huge Product Builds


The other interesting oddity about the drawdown is that the product supplies didn`t have huge builds the last two weeks. For example last week distillates had a 3 million build, and gasoline had a 2.6 million drawdown. The prior week both products had moderate drawdowns. The conventional wisdom is that if refiners are ramping up production, they are drawing from crude oil, and building up product`s inventories.

 

So a 92% refinery utilization rate is normal for this time of year, but it is apparent that given the numbers not all of this oil went towards refining products. So where did it go? That is the big question! 

 

The Math Doesn`t Add Up!


Because if you add up the numbers it just doesn`t equate: Take domestic production for two weeks, add the import numbers for two weeks, add the refinery inputs for two weeks, the refinery outputs for two weeks, and the draws in product inventories for two weeks, there is no way to account for this record breaking two week draw in oil supplies.

 

A lot of this oil isn`t being captured in the refining supply chain statistics, so the oil went out of storage, the official storage numbers went down, but it wasn`t all processed into products, so where is it being stored?

 

It is obvious that something is amiss here in the data as the US didn`t suddenly allow for large exporting of oil, not that there would be a market for it anyway under current global conditions! My best guess is that this oil is being moved from the official storage facilities that have reporting responsibilities to other storage facilities of some kind that aren’t captured by the reporting requirements.

 

Purposeful Manipulation or System Reporting Glitch?


Whether this is for explicit purposes of manipulating the inventory numbers to affect price is another question, or whether this is just a system which has flaws in accounting for oil being moved from one storage facility type to a different kind of storage facility is another possible explanation.

 

Oil Market is Well-Supplied!


But the main takeaway is that the recent drawdowns don`t reflect any change in supply and demand fundamentals in the market. This is an accounting anomaly whether for purposeful manipulation or system failure of the data.

 

Further Reading: China GDP To Hit 6.7%

 

Two Sides to every Transaction: Excepting Fake “Accounting Trades”


Some analysts have been talking about another big drawdown for this week because the market is in backwardation. The rationale is that why would you hold onto oil if you are going to get a lower price next month, so sell all you can now!

 

Well, what about buyers? Every transaction has two sides: Why would a buyer acquire oil this month when it can be acquired next month at a cheaper price, and in two months it is even cheaper? It is not like there is any shortage of oil right now!

 

System Constraints on Volumes


If we experience another large draw something funny and potentially illegal is going on in the oil industry because there is no way this oil is being used to manufacture petroleum products. The system just cannot  handle these type of volumes in three weeks without domestic production or oil imports dropping off a cliff which they haven`t!

 

History of Oil Market Shenanigans


Ergo, oil is either being taken out of storage and stored on tankers to artificially have the appearance of tighter supply markets, and thus influence price, and will be dumped back on the market at a later date; or some other market shenanigan is taking place where this oil isn`t making its way into the refining supply chain.

 

It wouldn`t be the first time traders found a way to game the system in energy markets. There is a long and storied history of just such behavior from Enron to J.P. Morgan. But something just doesn`t add up right now in the oil market! 


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Sun, 07/14/2013 - 23:51 | 3753215 rocker
rocker's picture

I'm glad to see somebody else sees the manipulation by the greedy Central Banksters as I do.  They are responsible.

They don't want to lend their money so they keep pimping theri investments.

Don't forget. Many already own tankers of the stuff.

Sun, 07/14/2013 - 23:09 | 3753137 GottaBKiddn
GottaBKiddn's picture

Hidden inventory? Say it isn't so.

Tanks, rail cars, and tanker ships as the shell game is the oldest story around.

Sun, 07/14/2013 - 22:14 | 3753030 CPL
CPL's picture

All the oil in the tankers has been there for around 6 years.  All anybody needs to  do is look at is shipping indexes.  They haven't gone anywhere in five-six years.  Completely gutted.

 

For a world awash in oil and food we certainly aren't shipping very much are we?  

Then again nobody wants to ask the real question.  How long is left?  I personally don't believe there is an answer because nobody really wants to know the answer other than conjuring energy consumption models from the 70's that didn't include the rise of the Bric's and 7.2 billion people.

For some demented reason it wasn't public policy to discuss the obvious many mouths so few resources conundrum that was/is unstopable.  Doesn't matter now does it.  Oil could be $300 a barrel and everyone here would pay it and then we would see true capital inflation costs.  Right now the central banks are just shuffling money around to create the illusion something is happening, the rest of the world isn't having it anymore and are trading directly with oil producers in a frantic move to bolster their flagging supply's.

 

Why would the rest of the world be completley disinterested in following the Washington party line of follow the dollar?  What possible single reason would people be elbowing each other to get the last drop of sweet light crude when there are all those 'alternative' tar/coal/shale sources?  Why would that be?

 

There is only a single answer to these questions.  But the real question is, How long have we got?

Sun, 07/14/2013 - 21:50 | 3752994 optimator
optimator's picture

We export the refined POL products.  Remember when Gold Sacks leased a bunch of super tankers for a few  months as gas prices went up?  Just one of their ways of making the big bucks, just one.  And the free money instead of investing their own doesn't hurt.

Sun, 07/14/2013 - 21:39 | 3752968 Elvis is Alive
Elvis is Alive's picture

The excuse given for higher prices I read was the revolution in Egypt might result in Suez Canal closing. 

The drawdown in oil supplies is a non-event IMO. Last I checked Saudi production was down a million bpd. That means 365 million barrel draw down versus 20 million barrels. Then since the U.S. cracked down on European purcahses of Iranian crude, Iran's production went down by 800,000 barrels or so per day. Again, a draw down is peanuts compared to that. There is plenty of oil.

The only issue with your analysis is that short term oil pricing is based on supply and demand and nothing could be further from the truth. Sure, the fed devaluing the dollar has its role, but the biggie is trader sentiment. 

I still don't get why the drunk British trader, Stephen Pekins,  pushing oil prices up $1.50 per barrel didn't get more press. It's a fucking hilarious story: http://en.wikipedia.org/wiki/Oil_futures_drunk-trading_incident

The problem with Perkins wasn't that he was drunk nor that he pushed oil prices higher. It was that he lost his firm money.  In 2008, Goldman Sachs blew up the oil company Semgroup with a classic short squeeze and pushed oil up to $147 per barrel. I am sure that they made billions in the process. Now THAT is a how you do it. You blow up the market and drink AFTER your do your evil deeds.  The Brits need to learn lessons in evil from GS. 

Sun, 07/14/2013 - 21:43 | 3752954 KansasCrude
KansasCrude's picture

I'm beginning to think Econ Awipe has the goods on the Tylers how else could it get audience everytime his short position starts to hurt bad!  Once again for dumbass,  you can't continue to expect a market to be cheap and well supplied when marginal production is vastly unprofitable,  when your fiat system is exporting inflation, and when your commodity if still in high demand versus inventory levels not going to even dwell on  the tenderboxes in the ME..... 

Please show me how the PRODUCERS especially in North America's Bakken and Oil Sands uh the marginal barrels are getting rich.....no they are still losing money but maybe inching towards at least making some money...heaven forbid.  If WTI discounted prices dont creep up from here a bit and the WTI discount doesn't  continue to narrow vs. the WTI price then future supply will contract even more. 

You never come clean with a decent rebuttal you just continue distorting facts......wake up! the world is past waking up to the continued devaluation of the USD in spite of the derivative markets managed repression and growing increasingly less tolerant of the Petrodollar hegemony.....and it will only get worse..... sucks don't it.

Sun, 07/14/2013 - 21:20 | 3752930 assistedliving
assistedliving's picture

its a mess.  Saudi's think they're "on their own" vs the Shia Crescent.  they were told to raise production..they did.  they were told to lower production...they did.  now they've been Mursied.  That and the double whammy of paying off all their domestic projects (no debt nowadays, thank you very much Harvard, Yale & MIT) and beating the Shia.  they think its at a tipping point.  tis true higher prices better for Iran as well but they got no customers.

Sun, 07/14/2013 - 21:20 | 3752925 ebworthen
ebworthen's picture

When the economy sucks so bad that consumption has continually dropped - they have to create a lack of supply to increase cost, to increase price at the pump, and profits.

Who's going to stop them?  DOJ?  SEC?  CTFC? 

May as well ask Jon Corzine to look into it.

Sun, 07/14/2013 - 21:11 | 3752911 DEVILDOG
DEVILDOG's picture

Here is the math that adds up for you. CORRUPTION + NO RULE OF LAW + FRAUD = HIGHER OIL PRICES for the middle and lower classes and the THEFT PROFITS go to the CORRUPT, CRIMINAL, FRAUDSTER/BANKSTER .01%ERS. Of course, our paid off and TREASONOUS politicans get their cut too. This is what America leads the world in today.

Sun, 07/14/2013 - 21:01 | 3752894 kchrisc
kchrisc's picture

Is it possible they are building up stealth supplies for a planned bombing of Iran? Reduce imports and increase domestic production while building up a stealth "shock" absorber supply as a cushion?

"Hey Nigeria/Saudia Arabia, keep pumping and storing, you won't regret it when the bombs start falling and Iran goes off-line. But you didn't hear that from me."

Things that make you go...

Sun, 07/14/2013 - 20:58 | 3752888 assistedliving
assistedliving's picture

SAUDI ARAMCO ULCC rates are way up.  Have a look at the BDI

Sun, 07/14/2013 - 20:43 | 3752865 The Shootist
The Shootist's picture

Hey, look at that, big oil working together to boost profits. If only the World Gold Council and Silver Users Associations weren't Trojan horses.

Sun, 07/14/2013 - 19:40 | 3752729 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Backwardation in oil futures may have some large funds covering and buying front month hence driving up spot ...oil was stored because it was a profitable though low margin, carry trade ... interesting piece in FT Alphaville last week.

Sun, 07/14/2013 - 22:43 | 3753098 disabledvet
disabledvet's picture

multiple millions of barrels? i'd like to yell and scream "do your job Federal Government" because this is such blatant market manipulation but at this point why not just go full on bread and circuses right?

Sun, 07/14/2013 - 19:16 | 3752677 sethstorm
sethstorm's picture

Interesting that "maintenance" gets called when prices are too low for their wants instead of actual needs for maintenance.

Sun, 07/14/2013 - 18:56 | 3752616 BlueCheeseBandit
BlueCheeseBandit's picture

Maybe the nefarious conspiracy is people buying now and taking oil off the market in anticipation of higher future prices.

You know, trading. Maybe EconMatters should look it up.

Sun, 07/14/2013 - 18:31 | 3752549 TrustWho
TrustWho's picture

Maybe record rains and floods in western canada disrutpting shipping routes to Cushing should have been mentioned. 

Sun, 07/14/2013 - 21:40 | 3752973 JamesB
JamesB's picture

Changes in inventory in the system look reasonable.  The only strange number in the inventory report was the drop in imports of crude.  Was that number strange because of some off shore oil storage, or for a more mundane reason as TrustWho mentions?  The article comes to a conclusion on that question, but doesn't seem to use any data to do so.

Sun, 07/14/2013 - 22:08 | 3753024 philipat
philipat's picture

You mean that the market is being manipulated by Wall Street? I'm shocked. SHOCKED.

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