Oil Supply and Contango: Drawn Down 8 comments
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Real-time Monetary Inflation (last 12 months): 1.3%
October crude oil was slightly higher overnight after Wednesday's price action ticked above the contract's four- and 10-day moving averages. The market was buoyed, in part, by an upward revision in the International Energy Agency's demand forecast. The agency's new estimates are based upon stronger-than-expected U.S. and Asian fuel consumption.
OPEC contributed to market bullishness as well. The cartel says it will maintain current oil production quotas, relying upon a global economic recovery to maintain prices at current levels.
Trade in the October contract seemed balanced around the $71.50-barrel price point in the Wednesday floor session, but moved higher in subsequent electronic transactions. Prices stayed above $72 for most of the night, but began to falter as daylight arrived in New York. Then, the contract plunged below $71 ahead of the NYMEX opening bell. The price recovered, though just before the Energy Department's holiday-delayed inventory report was released.
Traders' attention seemed to vacillate between yesterday's forecast by the American Petroleum Institute of a 7.2-million-barrel drawdown in crude oil stocks and a less dramatic estimate from sell-side analysts. Oil Patch watchers figured an off-take in the neighborhood of 1.5 million to 1.9 million barrels would be reported by the Energy Department.
The API estimate proved closer to the mark when the Energy Department figures showed crude oil supplies fell by 5.9 million barrels from the previous week.
Analysts had been looking for gasoline inventories to fall by 1.3 million to 1.5 million barrels and distillate fuel stocks, including heating oil and diesel, to build by 600,000 barrels as refinery usage slowed.
Refining didn't slow, however. Operating at the same rate as the previous week, refiners cranked up both gasoline and distillate fuel production.
The resulting 2.1 million-barrel build in gasoline inventories reported this morning caught analysts flatfooted, while the 2-million-barrel increase in distillate stocks was larger than expected.
Over the past week, traders pushed up front-month crude prices $3.26 a barrel, or 4.8%. Gasoline and heating prices ticked up 3.1% and 2.3%, respectively. Crack spreads continued to migrate in favor of heating oil over gasoline, though this week's upturn in crude prices actually lowered margins across the board. Gross refining margins fell more by more than 2 percentage points this week to 7.5% (based upon a 3-2-1 refining run). Seasonally, margins are thinnest in the fall, often reaching a nadir in October.
Product Cracks
The oil market's contango continues to shrink as oil inventories are worked off. This week, the three-month roll for NYMEX crude shrank by 50 cents to $1.59 a barrel. In mid-January, the spread topped out at $15.21 when front-month crude traded at $35.40 a barrel.
Oil Inventories Vs. Three-Month NYMEX Contango
Some key technical indicators have turned bullish for October crude, though the market could end up range-bound between $75 and $67 without fresh supply or demand impetus. Open interest is also starting to migrate to the November contract. Resistance at Wednesday's high of $72.52 will first need to be overcome before an attack on the August high of $75 can be sustained. Near-term support is at the 10-day moving average of $70.13.
Note: The monetary inflation rate is calculated daily and represents the change in our proprietary index over the last 12 months. We update long-term inflation in real time as well. Since 1999, the compound annual growth rate in our index is 5.0%.
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scarcewhales.blogspot....
See chart at bottom of the article.
Floating oil has increased by 100 million barrels this year.
On Sep 11 01:51 PM Ron2008 wrote:
> I bet those inventory numbers don't include the floating storage.
> Oil on tankers increased by about 30 million barrels in August and
> Sep.
> scarcewhales.blogspot....
>
> See chart at bottom of the article.
>
> Floating oil has increased by 100 million barrels this year.
> "I bet those inventory numbers don't include the floating storage. Oil on tankers increased by about 30 million barrels in August and Sep.
scarcewhales.blogspot....
See chart at bottom of the article.
Floating oil has increased by 100 million barrels this year." >
---
I join Road Runner in thanking you for the link to the link to scarcewhales.blogspot....
I don't doubt the 100 million barrels stored at sea figure, but would expect that to wind down now as the contango has eased.
According to this article in Oil & Gas Eurasia:
www.oilandgaseurasia.c...
"Morgan Stanley hired its tanker at $68,000 a day, the two brokers said. That works out at $1.02 a barrel a month, based on a 2 million-barrel cargo. Benchmark U.S. oil futures are trading at an average of $3.65 more than the previous month between February and June."
But the contango is now apparently below the break even figure or less. At a minimum it is much less than it had been.
According to this chart, the contango is certainly less than one dollar as of the close on Friday, 9-11-09:
quotes.ino.com/exchang...
69.29 Oct 2009
69.72 Nov 2009
70.20 Dec 2009
70.68 Jan 2010
71.14 Feb 2010
71.65 Mar 2010
At those rates they would be losing money paying $1/month for storage. Of course a lot of the tankers floating out there now may have been locked in by prior contracts, but it would seem to me that they wouldn't be rolling any over or buying new futures contracts to get the arbitrage on the much lower contango currently available.
As those contracts come due and the oil is purchased, I would expect a draw down month by month unless the futures prices bring about a larger contango again than is currently available.
After paying paying finance and storage costs, there is indeed a negative carry now. Using nominal fee assumptions, you'd be in the hole by 67 cents/bb, for an annualized loss of 3.7%.
Historically, the reversal of the carry trade precedes a flip into backwardation. The question now is whether we'll see history repeat itself.
On Sep 13 12:44 AM JeffDB wrote:
> On Sep 11 01:51 PM Ron2008 wrote:
These supply conditions will take some time, several months minimum, before demand will catch up with them. Combine this supply news with the short-term outlook for the dollar and oil seems well poised to gain some ground from here. Technically, oil is forming a bullish pattern and a daily close above $75 should give it some good momentum.