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Crude's Crash Conundrum Explained
For the third year in a row, crude oil prices have stumbled in April (-26% in 2010, -17% in 2011, and -10% in 2012 so far). Much has been made of the help this will offer the economy and consumer spending but this is ceteris-paribus linear thinking. There are a few other critical aspects to consider that make many, including Barclays, believe "there is little to the latest price action than the increasingly self-fulfilling prophecy of ‘sell it in May and go away’, exaggerated by market positioning, with broader macroeconomic concerns used as a lightening rod." With crude inventories on the high side and gasoline (and other oil product) inventories relatively low and falling - we would hold our breaths on the recent crude price drop funneling along to the retail pump price anytime soon as there is one critical aspect of the supply-demand equation that many have missed - a period of heavier-than-usual refinery maintenance which while temporary have reduced demand but tell us nothing about the state of final demand. In other words, even if a balance of sorts was achieved in terms of crude flows in March and April due to maintenance, that balance is likely to be disturbed from June onwards. The mainstream media is full of talking-heads on the chronic weakness in US oil demand, but it does not appear to be a real phenomenon according to the steadily improving flow of data and while Greece, Hollande, and US macro data has dragged out macro shorts, it would appear the fundamentals support oil prices higher from here. With the upward-sloping curve in crude to year-end and the relatively small drop this week (-1.2% only in WTI) despite all the derisking, perhaps the market is already starting to realize.
a large part of the apparent weakness has stemmed from a heavier-than-usual global refinery maintenance programme. However, these factors should prove temporary. European refineries are set to return en masse, Saudi refineries, which too have been in maintenance, are likely to run more crude, and Asian crude runs are also slowly increasing. Refineries in maintenance are not a sign of weak final oil product demand. They are the sign of a period in which oil product inventories are likely to fall, but they do not tell us anything about the state of final demand.
3rd year in a row of seasonal weakness...
Crude inventories remain high (potentially exaggerated by the recent maintenance programs)...
But Gasoline inventories (also impacted by the refinery maintenance) are lower than normal...
and Oil vs Gasoline vs Retail pump prices...
Charts: Bloomberg and Barclays
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Accoring to Mastercard, avg gas price down 1.3% from year ago, but gasoline consumption down a whopping 6.1% from a year ago ..in the debt basket case US that is.
I'd rather have wealth in the ground, than fiat in the bank. No matter how volatile it is.
http://silverliberationarmy.blogspot.ca/
actually world new tonight reported we are exporting oil like crazy now for the first time
Fewer discretionary trips, more fuel-efficient cars hitting the road, people hitting their hard budget limits...
Wrong.
Its those damn spekulators, bitchez.
if stocks go down, oil should go with it.
Economics is a discredited "science". Therefore all its tenets are discredited -- including supply and demand. That "law" of economics is not physics. It's not F=ma. It's not nature. "The Law Of Supply And Demand" is a human invention that may mean nothing at all.
Oil's price is not informative about its scarcity. Drilling in 3 miles of water and in 20 degree below zero temperatures is.
US crude imports plus domestic production are in total down 1.2 million barrels per day since 2006. This is far less than the decrease in reported consumption. Exports of crude are only 48K bpd. That is not the explanation.
The explanation would seem to be that how we measured "consumption" in the old normal (shipments of gasoline to retail stores) is no longer valid in the new normal. Very much analagous to how people who are put on disability don't file new claims for unemployment. There's no manipulation or cheating with the data. The data just doesn't measure what it's supposed to anymore.
speculation is just for dekorayshun.. print some more money if you want to put a more solid floor under oil..
earl is expensive, we're pulling as much as we can out as fast as we can.... yet demand seems to be off because no one has any fucking cash or jobs...
Where is the doomtard trade at today?
You're working on the assumption that WTI crude oil is priced due to the tenents of supply and demand. As someone who has worked on the floor of the NYMEX for the past 11 years can attest, that is simply not true.
totally correct
No, lets see if someone can tell the truth. This is all about the banking cartels attempt to get their liberal man elected. Nothing more and nothing less. They have been able to steal at will wth this man in office, why not try to get more?
Why are the fundamentals for crude supportive of higher crude prices? I'm not understanding this point made about refinery maintence. If the refinery is shutdown and they're building inventories, though they may work down the inventories when they come back online, the fact that they've built the inventories as theyve been shutdown certainly does effect demand for oil. Final demand for oil products aren't affected by inventories of oil: supply does not effect demand. But if you already have something, you demand the incremental unit less.
Gasoline inventories may be in line with last year, but there's very little in the way of gasoline storage. If end use consumption of gasoline is down, you're unlikely to see it in gasoline storage numbers. You're likely to see it in gasoline production numbers that are seasonally adjusted.
Just an election year coincidence. Team Obama's been working the refs in the oil patch pretty hard as Mr. O knows $5 gas means he'll have to pay for Michelle's vacations himself next year. Ouch!
"period of heavier-than-usual refinery maintenance which while temporary have reduced demand"
If refineries are down for maintenance, that would affect supply, not demand. How does a decrease in supply cause a decrease in price? (Only if the decrease in demand was greater.)
Is this a trick article?
Refiners are the first consumers of crude.
You buy no crude. You buy gasoline. Refineries buy crude. If they are down for maintenance, there are no crude customers.
Thanks. Good explanation
The cost of production of the marginal barrel is at $92 per barrel now. Unless there is massive permanent demand destruction, that has to be the floor for the crude price (I would argue that the floor is at $100).
Given those facts, $112 oil (Brent) is not expensive and $96 WTI is cheap. Add inflation to that and you get the picture.
That $92 number was for mid 2011. Higher 1 year later.
Source on the marginal cost of crude oil? I know it's not $92 in Saudi Arabia. Are you saying the worldwide average for the marginal cost is $92? If so, where did you get this information?
I found a gold coin the other day. It toke me a minute to pick it up. Does that mean it is worth only a few bucks? Price comes from supply and demand on the long run at least. Diamonds are also relatively easy to mine, but there are only a few mines in world. How much is a diamond going for now? I am sure it is NOT the marginal cost.
Marginal cost is the price for the next barrel of oil added to supply, essentially. Ultra deep water wells and such. IOW, where the rest of the oil is.
http://stochastictrend.blogspot.com/2010/12/mrginal-cost-curve-for-crude-oil.html
does ZH factor in the fact that the US is now EXPORTING over 1 million barrels of refined products PER DAY compared to last year (and forever, really) because FINAL oil/product demand in the US is down nearly 10% YoY?
on one hand, ZH points to being in a recession/depression and then claims oil demand is actually rising.
SERIOUSLY?!?!?!?!
dont get me wrong, i want higher oil. its the one thing that keeps ben from printing.
Yea things dont add up, demand down 6% yet demand is rising? Not in the US anyway, maybe demand in China is rising.
Not a big deal there 101. Oil imports remain huge. Much of that exporting takes place because all oil is not the same. The dirty thick oil that is more and more the norm can't be refined by some overseas refineries.
So it is sent here to refine, and the gasoline output is exported. Don't think we're extracting so much from US domestic oil fields that we can export it. That's not what's happening.
We imported 8.92 million bpd of crude (not all liquids) last year. We produced about 5.3 mbpd. Crude only, all liquids have higher numbers.
Exporting a million bpd of gasoline is not significant in comparison to these numbers. Odds are pretty good that in an analagous way to how unemployment no longer in the new normal measures what we want to know, the old normal measures of "consumption" no longer are valid.
Crash, I'm tired of your facts and figures. I want EMOTION, hope, greed, fear, not thoughtful analysis. How can I attack your posts if they are factually correct? (oh, I just did........)
this is obamas' worst nightmare, falling asset prices, since he has made propping up asset prices the cornerstone of economic policy. if oil starts to fall in price, MBS won't be far behind, and the Feds troubled balance sheet will spill over into UST, which is a liability on the taxpayers obama is trying to lie to in order to get reelected. romney is not lieing to get reelected, which gives him an edge. in the real world most of the feds mortgage paper would be worthless, and oil would be $50. any sign of the real world is especially troubling for them.
Yea ObaMao is now clearly flailing and having to run to gay marriage and abortion issues....those are fall-backs and media talking head diversions.
I couldnt believe while grabbing coffee this morning there are iron workers standing around talking about abortions and gay marriages....I said 'You bunch of poofters stop sipping your lattes and get to welding, ok ladies?'
he is also in favor of puppies, rainbows, ice cream. but to make the economic case in reverse, if Bernanke could bring commodity prices DOWN by raising interest rates, does it seem possible that falling commodity prices (on their own) would cause a RISE in interest rates? they listed the five largest companies on the NYSE? four oil companies and GM. keep those campaign contributions coming. and puppy flavored ice cream rainbows
obama is trying to lie to in order to get reelected.
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Worked the last time.
Just like it worked for Bush and every president for the last 100 years.
Wake the fuck up moron, there is only one party, for the banks and financial sector, by the banks and financial sector. Another stupid sheep trying to apply their Amerikan perspective to a global commodity controlled by international corporations and banks.
I'll vote for truth, no matter the pain, because at least an armed society is considerably more polite and willing to enforce the fucking rule of law. Ron Paul 2012.
For pete's sake, in order to be a politician, you have to be able to lie.
How come you didn't point out that Hess closed one of the top ten refinies that supplies the East coast. Just asking.
Just as an FYI, these refineries are closing because they can't refine the relentlessly lower quality oil that is the norm now.
All oil is not created equal. The good stuff is all gone. We're refining thicker and heavier and dirtier liquids now and the older refineries can't do that without a billion or so dollars of upgrade -- which can't earn a return on investment with purchase price of the raw liquid so high.
This is what the post Peak world looks like at first.
The faster gas hits $6/gallon the better.
And, that woman on the "Meet established men" ad on the homepage is fat. I wouldn't let her lick the 22's on my Rover.
Every day there are fewer and fewer people who require gasoline in order to get to work....
However, apparently the demand for molotov cocktails is increasing ....
FUNDAMENTALS - SUPPLY AND DEMAND - when you see these words in any article just move on - dont give it the time of day.
the markets today move on none of the above . these words should be banned when looking at markets. a fart in europe or sneeze by fed has far greater impact .
My gut tells me prices will fall the more we move towards the election time. I think obama needs it to build momentum. am I missing something?