BrotherMaynard

Don't Believe This Rally in Oil

(sorry US SPR purchases since JAN 16 2009)

Don't Believe This Rally in Oil

agree with a lot that has been said (esp. MHFT).

re: the SPR...a lot of people minimize the effects that its purchases have on prices...price elasticity of demand for oil is obscenely low (aka its really inelastic) so SPR actions have much bigger effects than casual glances would deduce. Stack China's recent SPR filling and the floating storage and there is a huge impetus for an unsustainable run.

We'll look at the US SPR purchases since 16 2009 was when EIA reported the SPR started purchases again (first time since week of Aug 8th 2008). If you plot the band where SPR purchases were heaviest and then compare to WTI prices...2/27/09 thru 5/22, you will see the SPR filled at a 1.3m bbls per week rate (average)...or roughly 20k per day. According to phil verleger's study (see here: www.iie.com/publicatio...) he concluded that the elasticity of WTI is as follows: "a one-percent reduction in the light sweet crude supply would require a price increase of between 25 and 40 percent to balance the market." (as usual, there are numerous assumptions, so i will no go over them here, please read the study). Given that the DOE may
be taking between 0.1 and 0.5 percent of the light sweet crude from the market on a daily basis (over the period cited above)...this means 15-20% of the runup can be directly attributed to SPR purchases... then combine floating storage demand which has grown at a multiple of the SPR storage (150m bbls over past 6-9 months vs. 20m bbls in SPR over past 3 months...so, the SPRs run rate would be 1/2 to 1/3 the private run-rate) plus Chinese storage (i have no clue how much they have stock-piled, but its probably not any smaller than the US' purchases), pile on delta hedging and we get a better picture of how we doubled in 100 days. These drivers are clearly transient and do not (in my opinion) represent any sort of sustainable behavior (the SPR just halted purchases last week, in fact).

(no positions nor should this be construed as a recommendation to take any positions)