Crude Oil Flips to Contango

By Brad Zigler

As spot crude oil rushed past the $133 level, the oil market's term structure tipped into contango, ending a stint of backwardation stretching back to July 2007. Depending upon who you talk to, that either means the market's building in permanent expectations of higher-priced oil or it's a signal that the current price run-up has been overextended.

There's no doubt, however, that yesterday's U.S. Energy Department inventory report was bullish. Oil supplies fell by 5.4 million barrels last week amid analysts' expectations of a 900,000 barrel increase.

U.S. oil refineries were operating at 87.9% of capacity last week, a shade higher than insiders' expectations. Gasoline production ramped up while distillate fuel production, including diesel and fuel oils, decreased as the summer refining pattern took hold.

Gasoline inventories fell 800,000 barrels last week, surprising analysts who had forecast a half-million barrel increase. Distillate fuel inventories increased by 700,000 barrels, less than Street expectations.

Crude's recent spike has been tied to strong demand for diesel fuel in China. Beijing has been buying diesel oil in preparation for this summer's Olympic Games. Additionally, fuel is being ordered to replace nearly depleted coal stocks for power generation. Earthquake-ravaged areas of the country, too, have been forced to rely upon diesel generators for power, further adding to demand.

Downstream profits for oil refiners held steady at 8.9% this week. That translates to $12 per barrel at current prices. Crude oil rose 8.6% this week, while unleaded blendstock gasoline gained 8.4%. Heating oil prices were up 9.1%.

These hikes were mirrored by gains in petroleum complex ETFs. The United States Oil Fund (AMEX: USO) ticked up 8.1% to $108.31. The United States Gasoline Fund (AMEX: UGA) was boosted 7.6% to $63.25 and the United States Heating Oil Fund (AMEX: UHN) surged 8.8% to $64.16.

On the alternative fuel front, the ethanol corn crush slipped 14 cents per bushel to 83 cents this week.

 

Comments

[oil myth]

Oil prices will correct in near future. Today's pullback might signal a shift in the trend as it confirms that the price spike has been primarily due to speculation since the pullback happened in the absence of any demand/supply news. If oil continues to rally higher from now, it will send a clear signal as to the speculative nature of this rally and might result in some kind of regulatory intervention by the government. Also, my guess is that the Fed will hike rate in June as inflation is now the primary concern which will give a floor to the dollar and then more importantly, we find that Obama is the presidential nominee in June as well. Once that happens, I guess the current fed machinery will gear their strategy keeping in mind the new boss in the office next year and we already know the radical changes coming when Obama becomes the President.
To summarize, I guess the oil rally is over and there are strong downward pressures for commodities going forward.

[dan957]

If oil is too expensive, why dont americans use Natural Gas (liquified petrolium Gas). I use it hear in australia, it gets the same milage, and i pay 62c per little as opposed to 158c per litre for unleaded petrol.
Gas also produces less polution, and costs about $4000 to install, we almost have dollar parity so we can assume prices should be simular. Do US gas pums include LPG? If so, how many have it? More than half the Bowsers have had LPG in australia over the last 10 years.

Finally, Oil will probably continue to go up in price since inventories are declining, but if you start to impliment an alternative to oil, then the price will start to go down as demand subsides.

Regs

Dan

[fxtrader07]

@dan957 as a matter of fact, americans are only starting to wake up to reality. oil and gas have been way way too cheap in relation to their scarcity and value inducing little or no efforts to save and to build alternatives. changing habits and building alternatives takes time, effort and money. that's why oil is also very inelastic to demand and suplly changes over the short-medium term (mobths - 3-4years)
painful as it may be, gasoline will probably have to hit $8 a gallone before something will really change. over here in europe we pay 8-9$/gallone and even we have only started changing a couple of years ago and are wery far from really having accomplished something significant

[ElliotMiller]

As to the comments by Mr. Oil Myth (who, by that designation appears to be a short), there is virtually nothing that government regulation can do to interfere with a multi-trillion dollar international market, where trading can originate in London, Frankfort, Hong Kong or Singapore as easily as in NY. And anything the government tries to do won't work. For example the suspension of the SPR was political grandstanding that had absolutely no impact on oil prices and did nothing other than make Congress look as inept as it is. And when the government increased the margin requirements for trading crude, traders who were short and who either could not meet the margin increase had to cover and that again caused an increase in the price of crude.
The hard fact is that speculation plays a small role only where there is significant increasing demand and only marginally increasing supply at best. The IEA's view that production will not meet world demand shows the cause of the problem, and thrash about as they may our brilliant elected officials cannot repeal the laws of supply and demand. Look at the brilliant job they did with ethanol.

[2Rae]

fxtrader07 --- The wholesale price of gasoline in the US is at $3.40/gallon (The taxes and retail markup give us the pump price.) What is the wholesale price in Europe? If it is different from the US price, do you know why?

[msgtb]

Speculation plays a small portion of the current cost of oil? Who are you kidding?

[humberto]

we know prices of Deasel , Jet fuel, gas are going up not down
the petroleun contries are getting Billion of Dollars and Investing on USA,Canada,Japan purchasing and Investing on real state ,Airplanes
contries like Nigeria ,Malasya ,Indonesia,Lybia,Ecuad... Oil producers are going negative on investing on infraestructure and own
local people and food prices will go high on basic products and will get riots and goverments will fail to provide stability and peace.
the Chinese will get more Diesel stock and get prices up
India will get more need of oils , Venezuela will not export more oil on october price will go very high Ecuador economy will colaps .
Argetina ,Chile, peru, Paraguay,Uruguay will feel the econmic impact
and their economies will change .