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Crude Oil Supply and Demand

Monetary Metals's picture




 

by Keith Weiner

 

We don’t normally analyze the crude oil market. However, there has been a huge price move (which may not be complete yet). With the endless rumors of deals that explain the move, we thought we would look at the spreads. The data shows a startling picture.

You should approach supply and demand in this market similarly to gold and silver. The difference is that there is very little inventory buffered in the system. Notwithstanding what you read about China “buying up” the oil to take advantage of “cheap” prices, oil requires specialized storage facilities. There is a significant cost to store it, and finite capacity too.

Below is a 3D graph of the futures curve taken at various times, from before the crash through January 9. Each line represents the curve at a given moment. Red lines are where there is backwardation. Yellow is a flat curve. And green indicates contango. Unlike our regular Supply and Demand Report for gold and silver, this shows just the price of various futures contracts and does not compare to the spot price. So here, backwardation is when a farther-out contract is cheaper than a nearer one. Contango is when the nearer one is cheaper. As with the monetary metals, backwardation is a sign of shortage, and contango is a sign of adequate or abundant supply.

Crude Futures Curve

You can see backwardation from May through September, with a gradual lessening of the slope. What really stands out is that, abruptly, the backwardation disappeared.

Here is another graph, showing the total spread included in each future curve (measured in dollars per barrel).

Crude Futures Spread

In May, there was nearly a $5 premium of the near contact over the distant contract. Now, there is over a $3 premium for the distant one. That is a picture of a market in shortage turning into a market without a shortage.

Contango is normal. It costs to store oil, and so if you want someone to deliver it to you 7 months out, you will have to pay him to cover this cost plus a profit. Otherwise why should he do that for you? When you buy a futures contract, that is what you are ordering—storage and delivery on a date.

Here is a graph of the price. The correlation to the changing spread is obvious.

Crude Price

The price of oil peaked in June, and began falling thereafter. The drop picked up a little speed in August but the plunge didn’t begin until October. That happens to be when the shortage subsided.

A trend is clear in the spring and summer, and it accelerated in the fall. Either supply increased or demand decreased. We leave it to oil experts to say which, and why.

 

 

© 2015 Monetary Metals

 

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Tue, 01/13/2015 - 11:21 | 5655276 mantrid
mantrid's picture

as usual Keith, you are misusing terms 'Contango' and 'Backwardation'. what you're talking about here is called 'normal futures curve' and 'inverted futures curve' - and these are different concepts!

Tue, 01/13/2015 - 07:31 | 5654739 Uber Vandal
Uber Vandal's picture

From the article:

The drop picked up a little speed in August but the plunge didn’t begin until October. That happens to be when the shortage subsided.

Coinicidentally enough, October follows after the Rockefellers "sold their oil assets as part of a global warming fight"

 



Tue, 01/13/2015 - 07:09 | 5654724 Tortuga
Tortuga's picture

"Either supply increased or demand decreased. We leave it to oil experts to say which, and why."

Geez.

If one can do some readin', writin', and rithmetic; just staying abreast of;

1. Global unemployment

2. USA hydrocarbon recovery tech advancements + new fields and the corresponding increases in hydrocarbon production.

3. Improvements in transportation mpg and ethanol usage;

One is an oil expert, irregardless of the the fraud, manipulation, hypothecations, HFT's, deratives, and cartels.

RICO all banksters and their whore politicians, and their half a million lawyers, for good measure; for the last 40 years.

Tue, 01/13/2015 - 06:15 | 5654700 new game
new game's picture

demand decreased(china) and supply went up in a herky jerky fashion, recipe for falling price, and as is the case most of the time the price discovery over reacts. mid thirties to upper thirties. we are close. now for the lag of actual oil flow shut in. takes about 3 months, so enjoy the low prices bitchez, but don't fret if you have NO need for gas as you have NO job to drive to, bitchez. it can all be done online(unemployment), bitchez...

Tue, 01/13/2015 - 08:30 | 5654813 MalteseFalcon
MalteseFalcon's picture

"A trend is clear in the spring and summer, and it accelerated in the fall. Either supply increased or demand decreased. We leave it to oil experts to say which, and why."

1.  It is neither a change in supply or a rapid change in demand.  Speculators took their profits and left.

2.  Oil "experts" may be "knowledgable", but their opinions have been purchased and are therefore heavily biased.

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