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Countdown to $50 oil (2)

by HiD Tue Nov 29th, 2005 at 06:31:19 AM EST

Just to be upfront:

  1.  I don't dispute that the era of cheap oil is over.
  2.  The purpose of this info is just to provide some counterbalancing perspective to the idea that we're in deep caka this winter on petroleum supply.  And to explain why prices seem to go down despite predictions of doom from some quarters.
  3.  Nat Gas -- whole 'nother story and one I have no knowledge base in so I'll keep my mouth shut.
  4. I'm talking my book.  My guess in the pool is around $52 Feb WTI/$51 Feb Brent on Dec 30, 2005 (31st is a saturday so no quotes).

The US oil market (which dominates the pricing for the rest of the world) is looking very soggy to me.  Absent a really sharp Arctic blast before Xmas, prices look to settle more like $50 WTI than the $100 many predicted.


Hoary old trader hand waving reasons:

  1.  The markets move in the direction that screws the most people.  The trading/speculating world really expected the price to shoot up.  The common wisdom is usually wrong.

  2. Oil industry had too much time to recover from Katrina/Rita.  You simply cannot give the refining industry 4+ months to fix a supply problem.  They find a way to kill their margins every time with that much notice.  Not to mention, the margins forward were enormous.  Money is a strong motivator to find a way to cram more through what was left running both in the US and abroad.

More quantifiable reasons:

1)  Heating oil stocks have recovered from Katrina
See http://tonto.eia.doe.gov/dnav/pet/hist/wdistus1w.htm
for distillate stock data.

Last weeks stock level at 124.5 MM bbls is 9 million bbls ahead of last year and roughly 5 million bbls over the 3 years prior average.  We were lucky that we had a huge inventory at end August when the winds/waves took out the USGC.

2)  Heating oil production is back in the normal range

At 4.16 MMBD total supply, we are at last year's figure and well above prior years.  Imports are only 10% of the total and only about 150 MBD more than last year.  So while the refining industry was hit hard by Katrina, most of it is back and jamming.  Imports helped quite a bit, but aren't really surprisingly high given the obscene profit margins on the table.  IIRC, only Murphy Meraux won't be back for Xmas, so the USGC is basically back to normal on production by then.

3) Mogas production/Imports/stocks are getting back to normal.  Stocks are back above 200MM bbls which is typical for this time of year.  Imports are up, but not by a huge percentage of the total.  Total imports are only about 12% of the total and up only about 3-5% of the total.  This is very sustainable in winter as mogas production is surplus.  Assuming the econs will justify the production.


1) NYMEX mogas crack has collapsed.   Dec HU is about $1.42 vs prompt CL (Jan) at $56.8.  Gives a paper crack spread of $2.84.  That's a typical winter crack and will have refiners whining that they are not making any  money.  When Katrina hit, gas settled about $2.40 vs $69.5ish for a crack of $31+.  (I ignored the last day foolishness on  sept mogas where it traded as high as $2.90 ).  As you can see, we've dropped 90% of the margin.
http://www.nymex.com/index.aspx  for data.  Click through the disclaimer to see the  current market tables for yourself.

Mogas is also heavily into a contango market.  Prompt is $1.42, Jan is $1.47,  April is $1.65.  That 23cts/gallon is a HUGE spread.  it tells you two things.  

First, the front is sloppy (oversupplied).  There's no way it costs 5 cts to store gas for 30 days.  Anyone with a tank could buy Dec and Sell Jan futures to lock a profit.  Typically what happens when the mkt looks like this is the 2nd month will keep rolling down to the prompt price as the prompt contract expires.  So the pressure is downward.  

Secondly, every trader/refiner/speculator will be looking for tankage to fill with cheap prompt components to store for spring.  (prompt gas is wrong RVP for summer use so you can't directly compare).  This will eventually lead to the spring cracks getting hit too.

2)  NYMEX heating oil cracks are also under pressure.
Dec Heat is $1.63ish vs CL at 56.8 gives a crack of $11.6 which is still quite robust.  However, it's way down from 6 weeks ago.  Dec expires in 2 days.  Jan is $1.69.  Again, there's no way the real cost of storing heat for 30 days is 6 cts.  Finance cost at even 10% interest for 30 days is just 1.4 cts/gallon.  Obviously, no one is really all that interested in heat for prompt delivery and this spread implies that tankage in the secondary market is pretty full.

3)  Crude price itself.  While not as deep a contango as the products, the Jan/Feb spread is still not trivial.  USGC production continues to climb.  Imports for the last 6 weeks aren't that different than the last 2 years.  No refiner is having trouble buying enough crude given the shape of the curve.

Home free?  With a horrible winter, no.  Are we in normal shape for this time of year?  yep.

Will we have high stocks of mogas come spring?  I predict yes.  As long as the heat crack stays $10+, refiners will run and tank the byproduct mogas to the extent possible.  One caveat.  I suspect refiners deferred shutdowns this fall until spring if they could.  If we have a heavy shutdown schedule in Feb/march, stocks won't build so heavily.

Does any of this say anything about 2009?  Nope.  Your guess is as good as mine as to the supply/demand balance 3 years out.  If Iraq has a new strong man and is producing another 3 MMBD, we may well be glutted again.  Especially if the US driver falls in love with hybrids over the next few years.

It's 1:30 AM in the Sandwich Isles, so take your shots and I'll try to respond in 12 hrs or so (morning meeting).
by HiD on Tue Nov 29th, 2005 at 06:33:29 AM EST

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