All of the PowerShares DB Crude Oil ETNs are based on a total return version of the Deutsche Bank Liquid Commodity Index-Oil (the "Index") which is designed to reflect the performance of certain crude oil futures contracts plus the returns from investing in 3 month United States Treasury bills. The Long ETN is based on the Optimum Yield™ version of the Index and the Short and Double Short ETNs are based on the standard version of the Index. The Optimum Yield™ version of the index attempts to minimize the negative effects of contango and maximize the positive effects of backwardation by applying flexible roll rules to pick a new futures contract when a contract expires. The standard version of the index, which does not attempt to minimize the negative effects of contango and maximize the positive effects of backwardation, uses static roll rules that dictate that an expiring futures contract must be replaced with a contract having a pre-defined expiration date.
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A change to the weightings in the widely tracked S&P GSCI commodity index could lead to a further widening of the Brent-WTI spread that is already running at very high levels. The disconnection between the two contracts, and their susceptibility to localized supply-and-demand issues, could force traders to start looking around for a new benchmark against which to price oil.
Energy futures are broadly lower after the Department of Homeland Security waives the Jones Act in a move to allow additional foreign-flagged tankers from the Gulf of Mexico to enter northeastern ports after Hurricane Sandy shut two New Jersey refineries. WTI crude -2.3% to $85.04, natural gas -4.1%, gasoline -2.4%, heating oil -2.5%.
Pump prices continue to fall, now $0.11 lower than a week ago, as the Sandy dynamic now favors lower prices. Gasoline futures fell ~1% today to reverse yesterday's gains, on concerns about lower energy consumption and the belief that east coast refineries emerged from the storm without much damage. Crude futures edged higher, reflecting higher demand for oil in the Midwest and Gulf Coast.
Fuel supplies to the northeastern U.S. should recover quickly in the aftermath of Hurricane Sandy, according to BP CEO Bob Dudley: "It has disrupted logistics, but there is an efficient infrastructure... It will bounce back quickly... I don't think [the disruption] will be long-lasting." BP has no refineries in the region but it operates supply infrastructure there.
Colonial Pipeline, the largest U.S. oil products pipeline that connects the east coast to Gulf refiners, is set to close its main line up to Philadelphia and NYC by 7:00 tonight, halting delivery of up to 15% of the region's fuel demand. Nearly 70% of area refinery capacity is now shut or shutting; the remainder have been brought to their minimum safe operating levels.
It looks like most east coast refineries will continue to operate during the hurricane, and there are no signs that the Colonial pipeline, which brings gasoline to the area, would have to shut down. “We’re going to lose far more demand than refining supply... right now the Philadelphia area refineries are certainly attempting to run through the storm," an oil expert says. Dec. crude -0.9% to $85.54.
The hurricane likely will cause oil and gas prices to drop, as drivers avoid roads and air and rail traffic shrivel, depressing regional fuel demand more than supply, John Kemp writes. The net result should be bearish for crude and product prices in coming days, provided there is no serious and sustained damage to east coast refineries.
Only a few months ago, traders and investors were fretting about a shortage of crude oil. Now, many are worried there may be too much crude at a time when economic reality is causing demand to contract, sending crude prices dropping fast. But skeptics note that there still aren't enough pipelines to bring all the increased production to refineries along the coast, limiting the impact of rising supplies.
Could crude oil slide to $80/bbl? West Texas crude futures finish with a fifth straight loss, -1.1% to $85.73, pressured by a climb in U.S. supplies and continued concerns about weak global demand. Following the Fed decision to make no changes to its easy policy stance, the "conclusion is interest rates will continue to remain low for the foreseeable future," a Tyche Capital analyst says.
TransCanada (TRP) hopes to restart the Keystone pipeline today after shutting it down on Wednesday because of a "small anomaly." On Friday, TransCanada said that no leaks had been detected on the 590K-barrel-a-day line, which transports oil from Canada to the U.S.
More on yesterday's Goldman oil call: It includes a cool chart plotting the breakeven point on all of the planet's major oil projects. Goldman estimates the industry needs $115 oil to be cash flow neutral on its exploration vs. just $84 four years ago. "Further capex growth from current levels will likely be more constrained unless oil prices move higher."
More from Goldman's oil call: With the Seaway pipeline ramping capacity by early 2013 to 400K b/d from the current 150K, Goldman expects the current $20+ spread between Brent and WTI crude to narrow to just $4 over the coming months. A chart of BNO vs. USO YTD. Is a reversal coming or is Goldman just stocking up on Brent?
Unimaginable even a few years ago, booming domestic supplies have major traders applying for licenses to export substantial amounts of oil from the U.S. for the first time in decades, reports the FT. Exports would not only affect worldwide trading patterns, but also put pressure on the price of Brent crude, which currently sits at a hefty premium to the U.S. benchmark.
West Texas crude pushes past $90/bbl. on rising tension between Turkey and Syria, as yesterday's pipeline blast raises concerns about supply disruptions. Meanwhile, Brent and WTI crude see its largest spread in a year, widening to nearly $23/barrel, largely due to Mideast tension which gives Brent price support; WTI crude supplies remain at multi-month highs.
Total (TOT) Oil Trading, one of the world’s largest oil trading groups, warned IOSCO during its manipulation probe of “inaccurate pricing” in energy market benchmarks underpinning billions of dollars of trading each day in contracts such as Brent and WTI. It's not good news after the discovery of widespread manipulation of Libor, the benchmark for borrowing in interbank lending.
Mid-East and North African energy producers intend to invest $740B on projects over the next five years, led by Saudi Arabia with $165B and UAE with $107B. High crude prices are allowing the countries to restart schemes that they delayed because of the financial crisis.