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Some Interesting Facts Regarding US Oil Supplies

EconMatters's picture




 

By EconMatters

 

Bearish Sentiment Priced In?

 

The futures contract for January 2015 has gone from $102 a barrel in July to $57 a barrel today, a $45 dollar a barrel discounting of price in less than six months. Much of this move is based upon bearish sentiment and future expectations for oil supplies along with bearish headlines coming out of OPEC Members and the exiting of the long side of the market (Players stepping away) and a huge short trade pushing prices lower. But the question is has too much bearish sentiment been priced in too fast? Well let`s look at some EIA Inventory Data for trying to put some actual data footholds if you will on the subject. 

 

US Oil Inventories

 

The US has 380 Million Barrels of Oil in storage right now, and this time last year the US had 375 Million Barrels in storage, yet the futures price was $97.65 a barrel last year at this time versus $57 and change as of Friday. That is roughly a $40 re-pricing of the commodity on a little US Inventory difference on the WTI contract. In fact just a couple of weeks ago we actually had less US oil Inventories in storage, as from week to week the year over year comparisons (noise) can move the needle in either direction (last week`s EIA Report showed a surge in Imports) this can be reversed the following week.

 

Let us dig a little deeper as this is the slow period for the oil market, after the summer driving season and before the heavy cold weather hits increasing demand for heating oil and other energy products in the heart of winter. On July 4th the US had 382 Million Barrels of Oil in storage, so actually more oil in storage at the heat of the summer driving season than we do today at the weak part of the oil market in terms of demand, but yet price has gone down $40 a barrel on essentially the same level of oil supplies here in the US.

 

Another interesting tidbit regarding supplies is that the US had its highest level of supplies both at Cushing Oklahoma and overall when the futures price was around $115 a barrel due to Middle East disturbances, i.e., much more worrisome supply and demand issues here at home with high prices eating into consumer demand for gasoline and a less robust economy.

 

Markets are Routinely Mispriced in the ZIRP Alternative Universe

 

I have always criticized the oil futures market as being an accurate arbiter of value, and frankly these days with Central Banks` Influenced Markets, I have little confidence in any financial markets assigning the proper values regarding the fundamentals of price. But let`s get back to some actual data as there is more than enough of rampant speculation regarding price, value and where the oil market is ultimately headed.

 

US Gasoline Inventories

 

If we look at gasoline stocks the US currently has roughly 216 Million Barrels in storage that compares with 219 Million Barrels in storage a year ago. The RBOB Futures price was $2.73 per gallon a year ago (depending upon the contract), and in the $1.60 range today, so over a dollar re-pricing for gasoline on basically the same level of gasoline supplies, and this is a week after an abnormally large build in weekly inventories which may have pulled forward from next week`s figures. And on July 4th the US had 214 Million Barrels in storage at the heart of the summer driving season compared with just 5 Million more in the weak part of the gasoline demand season. Yet the RBOB Futures price was $2.75 in July versus $1.60 today with what amounts to basically noise in Inventories of actual gasoline products, that`s a sharp $1.15 per gallon difference in price.

 

 

US Distillates Inventories

 

I could continue this analysis with the Distillates Market but it portrays the same picture, in fact prior to last week`s large build in Inventories, US Distillates Stocks were shockingly low for this time of year in relation to the current futures price, and well below last year`s level on the wholesale market, i.e., roughly down 8% year on year at the wholesale level from a supply perspective. Distillate Stocks are at the very bottom of the 5-Year Range, and with prices so low for Heating Oil, and the heavy part of the winter still ahead of the US and Heating Oil demand, we could experience a real squeeze in price with supplies at such low levels if we get 3 or 4 weeks of extremely cold weather.

 

Production Costs versus Futures Prices

 

To sum up there is a lot of future bearishness already priced into the oil market, should prices have been as high as they were, probably not from certain perspectives. But what is a commodity worth, what are the costs associated with bringing it to market? The oil market has essentially prior to this latest breakdown traded in a range from $80 to $110 the last several years, and the last 7 years based upon current price is negative in value. But sure better drilling technology has brought some cost efficiency to the table, however, overall production costs have soared over this same 7 year period.

 

OPEC Short Sighted Strategy?

 

So at what price level should a barrel of oil reflect these costs associated with getting it out of the ground, not just today but six month`s from today, two years, etc.? For example, compare the oil market to healthcare or Education and it sure looks like an undervalued long-term asset and maybe the Saudi`s and OPEC should utilize the strategy of cutting production by 1.5 Million Barrels per day today, let the US Shale Industry run its course, deplete its resources, get a higher value for their current offerings to the market, and have more actual supplies for the real inflation push in the oil market similarly to Healthcare or Education from a price curve perspective during the next up-phase in the oil market.

 

Retracement & Short Covering during Cold Spell in Winter Weather

 

The price of a new automobile ironically reflects the inflation curve over the last 7 years far more than the product that actually fuels it with this recent downturn in gasoline prices. Does that mean that Heating Oil and Gasoline are underpriced at current levels on the futures contracts? Let`s see how the oil market responds to several weeks of hard freezes, the Heating Oil market particularly, and what type of short squeeze occurs in Oil as a result. The amount of shorts in oil right now must be good for at least a $15 a barrel pop in price on a retracement alone during an extremely cold period lasting 4 weeks. My best guess is that there is solid support around $55 a barrel for oil, and a solid retracement is probably in the cards sometime over the next couple of months.

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Mon, 12/15/2014 - 13:25 | 5554251 Ruffmuff
Ruffmuff's picture

I have been trding CL for years, and the shorts just seem too powerful. Only very strong hands can reverse this.

But small hands may come in at any point for hedging like the airlines, hitting it heavier than usual. Making money is also about saving money.

And don't forget for some of you non traders, shorts buy to exit their position. Some days has declined 5 bucks in one day, so traders large and small may be ducking in and out, with big ass smiles on their faces.

When the group gets larger and more greedy, the big dawks will see and kick them in the nuts. but haven't seen anything close to that.

Mon, 12/15/2014 - 13:23 | 5554234 Pareto
Pareto's picture

This is not a supply issue!!  This is a demand issue (i.e volume).  Don't much matta if price is $100, $200, $20, if consumption rates are at measures not seen since the 1970's....well, thats your problem.  Talk about storage all you want - storage is what occurs after delivery.  Storage levels can afford to fall and should fall to accommodate future delivery.  Storge is irrelevant.  If the rate of consumption has diminished that much, then the rate of taking delivery must also fall.  Static storage measures are meaningless, in and of themselves.

Mon, 12/15/2014 - 12:48 | 5554048 exartizo
exartizo's picture

we tried to fake a bid on oil contracts for some folks

Mon, 12/15/2014 - 12:10 | 5553857 ebworthen
ebworthen's picture

The only shortage is in distillates, and that has been consistently low from lack of demand.

I see the lack of demand as finally catching up to supply, though I wouldn't be surprised to see at-the-pump prices get jacked back up come Memorial Day.

Mon, 12/15/2014 - 11:24 | 5553624 TrulyStupid
TrulyStupid's picture

Only more reason to diverse out of oil (and meddling in the Middle East) and towards sustainable, freely owned energy sources. I can't help but feel that this manipulation is also aimed at killing the alternative source energy revoloution and subsidize yesterday's auto manufacturing.

Let's all runout and buy a new hugest pickup truck for the morning commute.

Mon, 12/15/2014 - 10:46 | 5553403 weburke
weburke's picture

no mention ever of ultra deep falklands, except -nothing happening here ! - oh really.

 

Mon, 12/15/2014 - 10:16 | 5553254 JRobby
JRobby's picture

"has too much bearish sentiment been priced in too fast?"

That depends on who's numbers you believe. This is a Putin squeeze with a bunch of collateral damage. The supply numbers will change when the oligarchs decide the squeeze is over.

Mon, 12/15/2014 - 12:47 | 5554035 sun tzu
sun tzu's picture

Perhaps oil at $103 was way overpriced? It overshot to the upside and now will overshoot to the downside. A guy I know who has been in the oil industry for 30 years told me the real price should be in the $60-80 range. That was when oil was still over $90.

Mon, 12/15/2014 - 10:25 | 5553298 El Hosel
El Hosel's picture

Fundementals don't matter lately... They did not matter a few weeks ago when oil was $105 and they do not matter today at $58, but keep writting its good practice.

Mon, 12/15/2014 - 05:55 | 5552738 The Most Intere...
The Most Interesting Frog in the World's picture

The dollar has exploded higher and impacted oil negatively, or positively, depending on your perspective.  The dollar is stronger despite low rates and shows just how shitty the glkbal economy is doing..  i think EconMatters should go back to what they know.  Namely, that US treasury rates are supposed to be rising.  Ribbit

Mon, 12/15/2014 - 03:51 | 5552657 CHX
CHX's picture

Oil IS black gold. Let the shenanigans continue. EOM.

Mon, 12/15/2014 - 01:52 | 5552535 New American Re...
New American Revolution's picture

Wake UP!  The markets are involved in a major monetary play of centralization right now so you can throw any market fundementals out the door, we're having a revolution from the top down, the problem is that it's going to create one from the bottom up at the same time.

Mon, 12/15/2014 - 01:45 | 5552521 russwinter
russwinter's picture

Committment of traders shows speculators are still too long. 

Sun, 12/14/2014 - 23:48 | 5552304 Osmium
Osmium's picture

Doesn't appear that much oil has been added to storage for the price to drop that far that fast.  So basically, we've been getting ass raped with $100 oil?

Sun, 12/14/2014 - 22:49 | 5552093 disabledvet
disabledvet's picture

Glad to know price is calculated based on what's in storage.

 

"Where is supply and demand in your economics" does come to mind.

Let's start with demand which has never recovered in gasoline is what I say.  At least that might offer an explanation for the price "correction" in the first place.I freely admit I am not an economist.  But the argument that oil production is something new to the USA is a little incongruous.

Sun, 12/14/2014 - 21:57 | 5551936 himaroid
himaroid's picture

You may actually be right this time about an oversold bounce, but if you keep cheering like this, I will begin to wonder if you have tits are as big as your pom poms.

Not too smart to extrapolate today's cost of production into the future.

You have only ever seen inflation.

Believing that bankers printed billions can put the air back in a popped credit bubble of trillions will be your end. 

Sun, 12/14/2014 - 22:35 | 5552044 MalteseFalcon
MalteseFalcon's picture

"My best guess is that there is solid support around $55 a barrel for oil, and a solid retracement is probably in the cards sometime over the next couple of months."

"So whistle a happy tune.

And nobody's going to know

You're afraid!!"

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