Jonathan Christopher

Deploying Cash for a Slight Upward Market Bias

Just some thoughts about how I look at the Petroleum Market and crude prices.

There are several forces acting on the market simultaneously, and short term prices bounce around based on those forces, in the same way particles in a liquid bounce around due to Brownian Motion, flicking one way or another as hit by incoming atoms.

In the case of oil prices we have the following:

1. Current production
2. Current consumption
3, Expected production
4. Expected consumption
5. Permanent storage (tanks)
6. Transient storage (tankers on voyages)
7. Temporary storage (tankers with cargo - Contango)
8. Current overseas value of the dollar
9. Expected overseas value of the dollar.

Recent prices (6 weeks or so ago) were low because current consumption was low, expected production was low, the value of the dollar was high, and excess oil production, (which had been going into Contango, but was no longer going there since many tankers were full), was high. At the same time the oil put into contango months ago was being delivered, creating excess supply.

Now, the dollar looks week going forward (In July the FEDs spent $330 Billion but had an income of only $150 Billion), this is creating a lot of dollars. Like bananas, when you have too many of them, the price goes down, and eventually, they go bad. In addition there seems to be some feeling that China and the US will be increasing usage of Crude.

The increasing price of future oil delivers is set to create a new round of contango, as the cost of oil storage, loosely calculated at $0.40 per day, is less than the price of oil for guaranteed delivery in the future including the cost of storage.

The result is upward pressure on oil prices as increasingly bad dollars are attempting to buy Oil.