Oil: Supply and Demand? Hardly! 43 comments
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By Julian Murdoch
For most commodities, you can look at the underlying forces driving supply and demand and understand what will move the market. Except, it seems lately, for oil. Prices have risen so far, so fast from their mid-February lows that some investors have started to wonder: Is the price of crude decoupling from supply and demand?
Not quite. But right now, supply and demand only tells part of the story.
Oil Supply And Demand
Globally, we are awash in oil. As reported in the EIA's latest "This Week in Petroleum," crude oil inventories went up yet again this week, gaining 778,000 barrels. While this increase was less than half of the 1.91-million-barrel increase analysts had forecasted, crude oil inventory is still well above the five-year average for this time of year. (Oil still dropped a bit though, due to a huge increase in gasoline inventories when the market had expected a drawdown. See "This Week's Oil Guesses Off The Mark" for more on that story.)
OPEC has publicly stated that they believe inventories in developed OECD countries to be equal to roughly 61 days of demand—a number OPEC is none too happy about. They'd prefer the world to be constantly on the brink of running out (that is, 55 days or less). So with all of this supply, you'd expect to see OPEC talking production cuts—or at least a drop in the price of oil.
Instead, last week the group discussed the need to increase production, so as to keep oil under $80—it seems even OPEC thinks prices are still too high. As OPEC Secretary General Abdalla El-Badri told Bloomberg:
"Anything above $80 will really hamper economic growth. Watch the floating storage, if that is eliminated, and watch the stocks, if they are at 52, 54 days, then OPEC will take action."
Of course, if the floating stocks (that is, oil stored at sea) remain at current levels and inventories stay full, then apparently OPEC will just sit back and rake in the money.
It's The Dollar, Stupid
So if supply and demand isn't driving oil prices, what is?
It comes back to the strength—or lack thereof—of the U.S. dollar. As OPEC member Qatari Oil Minister Abdullah bin Hamad Al-Attiyah told Bloomberg:
"Sometimes the price of oil has no correlation to demand and supply. Now what we are seeing is that oil has a strong correlation with the dollar."
Of course, what he most likely meant to say is that right now, oil has a strong negative correlation with the dollar. Just look at the relationship between oil and the dollar since the beginning of 2007:
The top graph compares the movement of oil prices to movements in the U.S. Dollar Index, which measures the dollar against a basket of global currencies to show its relative strength (or weakness). Underneath, we've plotted the correlation between the dollar and oil over the same time period.
In periods of positive correlation (fairly rare for oil and the dollar), rising oil prices coincide with a strengthening dollar. But when the correlation is negative, increases in oil prices coincide with a weakening dollar—which is exactly what we're seeing right now. As the dollar moves down, oil moves up and vice versa.
Note that although the dollar doesn't swing very widely compared to the price of oil, the correlation between the two often does. In addition, it's rare that oil and the dollar move in lockstep—far more commonly, the two will move in opposition to one another.
There's an inherent logic to this: All else being equal, oil, being priced in dollars, should go up in price, simply because the dollar weakens on the world stage.
And as our friend from Qatar points out, we're at a cyclical nadir of correlation.
Where Does Oil Go Next?
With such ample supply and prices tied more to the dollar than demand, where does the oil market go from here?
Clues can be found higher up the supply chain, since oil, like all commodities, needs to be transported. Just as looking at the Baltic Dry Index reveals insight into the health of base metals and coal markets, we can look at the tanker industry to get a feel for where the oil market might be headed.
So far, all signs there have pointed to glut as well. There is ample supply of oil tankers in most areas of the world. In fact, rental rates on ships traveling from the Middle East dipped below running costs this year, because too many ships were available, allowing oil producers to have their pick of contracts.
That may be about to change, however, as rental rates are starting to rise on routes such as the one from Saudi Arabia to Japan, which had climbed 10 percent as of October 26. As the economy recovers and oil demand begins to rise, so too should rental rates for tankers.
Nor can we forget about China, whose demand for oil continues to grow; September imports were 15 percent higher than the previous year. China has also shown an interest in acquiring more oil resources, even though many of these deals have not gone through. Last week's "Weekly Tanker Opinion" by Poten & Partners, a global broker and commercial adviser for ocean transport, said the following:
"Though some future Chinese imports will be received through pipelines, tanker owners have reason to welcome China's recent energy investments as they will ultimately result in incremental increases in ton-mile demand. Chinese sponsored exports have already helped transform the West Africa to Far East voyage from a sleepy backhaul into a primary money-making voyage and Venezuela's increased exports to China have supported Caribbean to Far East rates."
The one fly in the ointment, however, is the 890 million barrels of capacity that should come online over the next few years in the form of new tankers. More ships will add noise to any effort to use tanker rates as an early-warning indicator of Chinese demand.
Does all this mean that supply and demand no longer matter? Of course not. But it does point to the momentary hypersensitivity of oil as a dollar play, not just an energy play. With the caveat that Chinese demand seems to be staying strong, there's little doubt the world is at least temporarily oversupplied—not at all-time highs, but replete with oil nonetheless.
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This article has 43 comments:
Anyone really interested in knowing why we are still sending billions of dollars overseas to countries that are not our friends should check out this web site.
www.opensecrets.org/
lots of speculation by the hedgie funds.
> jack
That's funny, I wonder when people will start believing that the "speculative premium" is neither speculative nor a premium. It is OPEC reducing their output when they think that a reduction is appropriate - in other words, doing what you would do if you were lucky enough to be in their place.
> "...Instead, last week the group discussed the need to...". to wash
> their hands after a visit to the toilet.
>
> That's funny, I wonder when people will start believing that the
> "speculative premium" is neither speculative nor a premium. It is
> OPEC reducing their output when they think that a reduction is appropriate
> - in other words, doing what you would do if you were lucky enough
> to be in their place…
And all this time I thought you were just an egotistical, pointy head that cared not a wit about the world at large, bordering on a Unabomber mentality. You’re actually human, or a closely related species, with a humorous and greedy streak too.
Most decision are multifactorial from access to transport, price, currency fluctuations ones own perceived needs and on ad infinitum.
As to the supply side " peak oil' is a reality and inconvenient to acknowledge in our political system. China recognizes it clear and simple but then they have a different pattern of decision making. As to the many bbls you see coming on line it will be more than eaten up by declines in world production. Yes, even at $80 a bbl. with our dollar going down the porcelain pot hole.
Hey, it is finite and difficult to find and produce. The US does not control the world oil market it is a world market and the big locals have little interest in low prices and certainly not cheap as dirt alternative liquid fuels.
China is out there producing auto and diesel fuels from cola in the form of dimethyl ether and methanol. That is not permitted here as it would break the oil companies monopoly on feeding our liquid fuels addiction. Again China has a different decision making procedure.
Oil priceas will continue to bounce about but with a clear upward long term trend. Bet on it. I have and am not ashamed of my comfortable success.
I know you want a simple explanation but sorry all questions do not have human answers. Richard Belman taught me this back in 1970 over looking the Pacific.
They don't take delivery. They sell their positions before the last trading day.
koolsool,
Check out any oil sands companies annual report and you'll see that costs aren't as high as they make you beleive. Costs are closer to $50/barrel to extract, not $70 or $90 like some people state.
> pure supply/demand considerations, oil should be trading in the
> $40-$50 range, not the $85 that we have seen. That means $35
> premium can be laid purely at the door of the big hedgefunds.
Maybe. Maybe half or more is war risk (Iran, Lebanon)
The one thing you miss in global oil supply and demand is the URGENT need for certain countries to increase their hoard of oil. Particularly, China URGENTLY needs to increase its strategic petroleum stockpile. The fact of the matter is China is hastenly building up infrastructure to be able to stockpile more oil and it could not build them fast enough, nor could it buy oil fast enough to fill up the new facilities.
This is due to decades of neglect. For years China has been hoarding up a useless paper called US dollars, but neglect to hoard the more important stuff, petroleum, and critical industry metals.
As it is now, China's petroleum stockpile is merely enough for 15 days of supply. If China's oil importation is cut off, due to catastrophic events, within 15 to 30 days, China will be completely crippled.
I don't think any Chinese leader can sleep well at night knowing that fact. I don't think China can buy enough oil fast enough to fill this void. This is one fundamental reason that oil price is driven up, regardless how you put the supply/demand numbers.
seekingalpha.com/autho...
I agree that in the long term the oil price is a matter of supply and demand. But at the moment there is a financial/physical market arbitrage going on, and the oil price is tracking other financial assets.
See
av.r.ftdata.co.uk/lib/...
I think that the problem today - as it was for last year's bubble which culminated in the 'spike' - is systemic manipulation of the physical/OTC market via the Brent/BFOE Complex in particular.
In essence funds are loaning money to producers, who in return are loaning (selling forward) oil they have in the ground. Investment banks and oil traders intermediate this process, and the result is, as we see, that oil prices track money prices (ie the yield curve) very closely in these circumstances.
I think that the BP/Goldman nexus is key to the financial/physical arbitrage, but other producers - possibly even the Saudis - are also caught up in it because they have the most to gain from higher prices....but it's a fine and dangerous path they tread.
The problem with such macro oil manipulation is that it has no reverse gear. Eventually - maybe not even in the medium, but always in the long term - downstream losses from reduced product demand become insupportable, and the bubble collapses - like the tin market did, and as the oil market did last year.
The physical/OTC dog is wagging the derivatives tail. That's why the GLG hedge fund is getting into the physical market; why Oxy bought Phibro from Citigroup; Vitol are buying Petroplus assets etc etc
The outcome is not dissimilar to the way that tin producers were able to keep the price artificially inflated for years until they ran out of money to support the growing tin stockpile. Mike Riess set out how macro market manipulation works in the metal market here
www.materialsmanagemen...
As he outlined, Hamanaka and Sumitomo manipulated the copper market for some ten years, and this manipulation carried on for five years even AFTER David Threlkeld blew the whistle.....
Every American need’s to call, write, fax and email their representative ASAP and ask these same questions! Where will the world be when the oil industry has all the money? The current world depression will not heal as long as fuel cost continues to escalate. The cost of fuel is the corner stone of any recovery because it affects every aspect of the world’s economy. It is so simple, just get off oil and start keeping our $25 Billion a month that we spend on foreign oil here at home to rebuild our economy. Our government has way too much oil money in it and Congress needs term limits.
www.opensecrets.org/
>> "The cost of fuel is the corner stone" >> of civilization as we in the Western world know it. And while we are an amazingly adept species at problem solving, we sometimes don't address the right problem. yes we can find and exploit more fossil fuels. For a limited time, because the resources are finite. They will NOT last forever.
We would be wise to put out bucks behind converting to sustainable energy.Our children and their children would be thankful. But our corporate and political leaders ( ??there's a difference ??) seem to prefer to walk on the razor's edge of the supply/demand continuum.
When the dollar index drops into the 40's, where will the money come from to build green energy ??
"Bring on a “W” recession and poof!, thatpremium disappears, as it did last year." <-- totally agree.
Next quarter gdp numbers won't be as rosy. National sentiment is getting worst on the economy front. Double dip is as probable as recovery at this moment.
On Oct 30 08:41 AM Mad Hedge Fund Trader wrote:
> cgy Crude has been trading like a 3X short dollar ETF. If you look
> atpure supply/demand considerations, oil should be trading in the
> $40-$50range, not the $85 that we have seen. That means that a $35speculative
> premium can be laid purely at the door of the big hedgefunds. The
> big oil producing countries, seeing Obama’s policies leadingto a
> weak dollar for as far as the eye can see, are also ditching theirbucks
> as fast as they get their hands on them. That is why the Gulfsheikdoms
> were one of the biggest buyers of crude near last year’s $148peak.
> This leaves industry insiders clueless about the price directionof
> their products, not an easy way to run a business. They understandrig
> counts, tanker deliveries, and depletion rates, not commitment oftraders
> reports, Bollinger bands, and Fibonaccis. No doubt it was theircarping
> that brought regulators to pressure Deutsche Bank to shut downits
> double long oil ETN (seekingalpha.com/symbo...). Of course,
> this all means the consumeris getting shafted, paying $3.39/gallon
> at the pump, instead of $2.This premium is causing a drag on the
> economic recovery as well.Europeans and Japanese who are paying up
> to $10/gallon are wonderingwhat we are bitching about. Bring on a
> “W” recession and poof!, thatpremium disappears, as it did last year.
Oil and Gold also are favorites of speculators, because the the distribution of both commodities you have unusual and out sized influence from companies like Saudi Arabia and South Africa.
The Saudi have an especially inflated sense of importance, but when you understand that this isn't a country as much as a family run business with a total GDP of $600B (this is also the market cap of the two, only 2, largest US companies, Exxon and Microsoft) it is clear to see that the story is more interesting than the reality.
Letting the dollar slump for a while is fine by me as it pressures state controlled currencies like the Renambi and the Real to be exposed in the free market.
While I've been thinking oil will go up next yr if it continues like it has, it won't!!
And OPEC sees this as oil hitting $100/bbl will trigger a full scale move away from oil. But I don't think they can cut production as they are too greedy, thus sowing the seeds of their own destruction.
To say speculators are not driving it up is a joke. You only need to look at inventories to see that. But investors have proven they can't see such things.
With the US not coming out of this downturn for quite a while it's getting harder to see where demand will come from. China can't continue to prop up their market nor can we. Most of the countries depend on our market and it's not coming back as we are all broke and the only thing we can do to get out of it, a straight fossil fuel tax on oil, coal to reduce import costs and create jobs, isn't going to happen because of repubs and oil, coal state dems.
Myself, my home is paid for and my EV doesn't need oil.
Bbut most middle class is hanging on by a thread with many already unemployed. With a real unemployment rate of about 17% here if unemployment isn't extended and small business, start ups can't get loans, we are screwed.
I don't see where the value of the $ has anything to do with it as it hasn't changed 5% up or down for a long while. It's just another excuse to get people to churn their investments.
On Oct 31 09:10 AM invest4free wrote:
>
> good weekend reading: financeopinionss.blogs...
On Oct 30 02:46 PM bindlepete wrote:
> Your really don't understand this market. There are not often single
> elements driving any decision out side of a coin toss and even these
> can be subject to influence.
>
> Most decision are multifactorial from access to transport, price,
> currency fluctuations ones own perceived needs and on ad infinitum.
>
>
> As to the supply side " peak oil' is a reality and inconvenient to
> acknowledge in our political system. China recognizes it clear and
> simple but then they have a different pattern of decision making.
> As to the many bbls you see coming on line it will be more than eaten
> up by declines in world production. Yes, even at $80 a bbl. with
> our dollar going down the porcelain pot hole.
>
> Hey, it is finite and difficult to find and produce. The US does
> not control the world oil market it is a world market and the big
> locals have little interest in low prices and certainly not cheap
> as dirt alternative liquid fuels.
>
> China is out there producing auto and diesel fuels from cola in the
> form of dimethyl ether and methanol. That is not permitted here as
> it would break the oil companies monopoly on feeding our liquid fuels
> addiction. Again China has a different decision making procedure.
>
>
> Oil priceas will continue to bounce about but with a clear upward
> long term trend. Bet on it. I have and am not ashamed of my comfortable
> success.
>
> I know you want a simple explanation but sorry all questions do not
> have human answers. Richard Belman taught me this back in 1970 over
> looking the Pacific.
I'll use one example: Illegal immigration. What person in their right mind, thinks that throwing the borders wide-open is in the best interests of America? Not that they're in their right mind, but almost all of the Senate thinks so. The Speaker of the House thinks so. Now, are they acting in our best interests or are they thinking of themselves and maybe some lobby money thrown in for good measure. Maybe they think it's ok to have people here that don't pay taxes because they don't pay their fair share either.
So why don't we tap into our own natural resource? Could it be the way Washington has been run for decades know, where the big special interest call the shots because they have the money to fund the campaigns so politicians can get re-elected? It's just like the hugh profits the Banks,Insurance companies & Big oil interests at the demise of our once strong nation. "We Sit Back & let it All Be", that's right we as a nation are so divisive we will fall pray to the media, both far left and far right. We are not a united people that can have our own opinions but in the time of true decision making we do what's right for the good of our nation. No, we follow the powers to be that have their own agenda that we think that has our best interests when really we are ponds in a nation on a chest board that is not only made overseas but heading to a point where people overseas will be deciding what is the next move on the board. We have to wake up. It is time to realize that we are still 10 to 20 years away from being weaned off foreign oil. If we invest in our own natural resources we create good paying jobs, help stop the flow of money to terroist organizations, strengthen our dollar and best of all lower energy costs for ourselves and cut the costs for businesses so they can do more business by being more competitive. People wake up and walk away from the heard before we reach the cliff.
Right now drilling costs rise exponentially with the depth of the well. New methods promise linear costs vs depth.
Some links:
www.azom.com/news.asp?...
www.sciencedaily.com/r...
www.dallasnews.com/sha...
www.technovelgy.com/ct...
Lots of people knew there was a housing bubble before the market broke. Lots of people knew there was a tulip bubble before the market broke.
BTW taxing energy is not the way to fix the oil/energy problem.
1. The government will just waste the money.
2. Raising the cost of everything is no way to induce a recovery.
Where will the oil cos get customers if they have all the money?
oil will go below 60 than rise from there toward 100 by next june.
An excellent point, although I'm not convinced oil will go below $60/bbl. OPEC was unusually diligent in complying with quotas, when oil was at its lows, although compliance slipped as the price climbed. I'd suggest that if oil drops much below $70, you'll see compliance jump back up, adding support to the price.
On Oct 31 02:45 PM Northstar10000 wrote:
> oil at sea is very carefully managed. they bring in what they want
> only. This is not random supply showing up at undetermined times.
>
> oil will go below 60 than rise from there toward 100 by next june.
"Supply and demand is ALWAYS the driving force behind the price movements.
ALWAYS. That's economic 101."
Whilst I understand where the comment comes from, it isn't ALWAYS so.
I would liken it to saying that "the market always gets it right". Perhaps, it eventually will, but it also invariably overshoots, both ways, there are some lengthy time lags and often there is vital information that is delayed, hidden or never presented.
That's economics reality!
On Oct 30 07:58 PM Mark Anthony wrote:
> Supply and demand is ALWAYS the driving force behind the price movements.
> ALWAYS. That's economic 101. If you apply supply and demand and could
> not draw the correct conclusion, that only means you missed something
> in your supply/demand equation.
>
> The one thing you miss in global oil supply and demand is the URGENT
> need for certain countries to increase their hoard of oil. Particularly,
> China URGENTLY needs to increase its strategic petroleum stockpile.
> The fact of the matter is China is hastenly building up infrastructure
> to be able to stockpile more oil and it could not build them fast
> enough, nor could it buy oil fast enough to fill up the new facilities.
>
>
> This is due to decades of neglect. For years China has been hoarding
> up a useless paper called US dollars, but neglect to hoard the more
> important stuff, petroleum, and critical industry metals.
>
> As it is now, China's petroleum stockpile is merely enough for 15
> days of supply. If China's oil importation is cut off, due to catastrophic
> events, within 15 to 30 days, China will be completely crippled.
>
>
> I don't think any Chinese leader can sleep well at night knowing
> that fact. I don't think China can buy enough oil fast enough to
> fill this void. This is one fundamental reason that oil price is
> driven up, regardless how you put the supply/demand numbers.
>
> seekingalpha.com/autho...
But taxing oil, coal will give us a tax cut, help getting off oil, cut imported oil costs, stop supporting Iran, Russia, oil dictators and since it will drop US consumption, it will drop the price of oil making Iran, Russia, oil dictators pay most of it.
By putting the cost in it makes a free market where all energy sources can compete on a level playing field. And with oil, coal going up with a bullet, RE which major costs are labor, equipment will make millions of new US jobs.
Or we can stay broke, at war and give all our money to our enemies, your choice. Basic econo 101.
On Oct 31 02:17 PM MSimon wrote:
> "To say speculators are not driving it up is a joke. You only need
> to look at inventories to see that. But investors have proven they
> can't see such things."
>
> Lots of people knew there was a housing bubble before the market
> broke. Lots of people knew there was a tulip bubble before the market
> broke.
>
> BTW taxing energy is not the way to fix the oil/energy problem.
>
>
> 1. The government will just waste the money.
> 2. Raising the cost of everything is no way to induce a recovery.
Every American need’s to call, write, fax and email their representative ASAP and ask these same questions! Where will the world be when the oil industry has all the money? The current world depression will not heal as long as fuel cost continues to escalate. The cost of fuel is the corner stone of any recovery because it affects every aspect of the world’s economy. It is so simple, just get off oil and start keeping our $25 Billion a month that we spend on foreign oil here at home to rebuild our economy. Our government has way too much oil money in it and Congress needs term limits. Where is the investigation into the oil and gas industry?
On Oct 30 09:38 AM boby wrote:
> What do you think will happen when the market takes delivery of the
> 110m barrels floating?
On Nov 01 09:37 AM The Greatest Rip Off of our Time wrote:
> Crude inventories are rising, gas inventories are rising, so why
> does the price at the pump keep going up?
> Every American need’s to call, write, fax and email their representative
> ASAP and ask these same questions! Where will the world be when the
> oil industry has all the money? The current world depression will
> not heal as long as fuel cost continues to escalate. The cost of
> fuel is the corner stone of any recovery because it affects every
> aspect of the world’s economy. It is so simple, just get off oil
> and start keeping our $25 Billion a month that we spend on foreign
> oil here at home to rebuild our economy. Our government has way too
> much oil money in it and Congress needs term limits. Where is the
> investigation into the oil and gas industry?
On Oct 30 07:58 PM Mark Anthony wrote:
> Supply and demand is ALWAYS the driving force behind the price movements.
> ALWAYS. That's economic 101. If you apply supply and demand and could
> not draw the correct conclusion, that only means you missed something
> in your supply/demand equation.
>
> The one thing you miss in global oil supply and demand is the URGENT
> need for certain countries to increase their hoard of oil. Particularly,
> China URGENTLY needs to increase its strategic petroleum stockpile.
> The fact of the matter is China is hastenly building up infrastructure
> to be able to stockpile more oil and it could not build them fast
> enough, nor could it buy oil fast enough to fill up the new facilities.
>
>
> This is due to decades of neglect. For years China has been hoarding
> up a useless paper called US dollars, but neglect to hoard the more
> important stuff, petroleum, and critical industry metals.
>
> As it is now, China's petroleum stockpile is merely enough for 15
> days of supply. If China's oil importation is cut off, due to catastrophic
> events, within 15 to 30 days, China will be completely crippled.
>
>
> I don't think any Chinese leader can sleep well at night knowing
> that fact. I don't think China can buy enough oil fast enough to
> fill this void. This is one fundamental reason that oil price is
> driven up, regardless how you put the supply/demand numbers.
>
> seekingalpha.com/autho...
I understand part of the priuce has been absorber. However I work in the oil trading/shipping industry and we are floating tons and tons of crude. So a delivery will have to take place at sompoint. Shipowners are still extending options due to the low spot market but as soon as it goes up traders will have to deliver the oil in NY and whever it has been sold. There are about 150m bbls being floated at the moment. The contango has closed for the crude but is still wide open for distillates and light ends. So i do think someone is going to have to take responsability, or in other words the oil spot will crash quite soon
30+ lobbyists per congressman and senator