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Countdown To $50 Oil (5) Stopped Clock

by HiD Wed Oct 4th, 2006 at 07:40:20 AM EST

It's been about a month since the last of these.  At that time I laid out a case for how we could get into the $50's on crude oil.  And like the stopped clock, I got one right.

Where are we overall now?


Front month WTI has dropped $20/bbl from it's summer peak and $10 from just a month ago.  Gasoline has truly crashed from August 2nd's $2.33/gallon ($98/bbl) on Sept HU contract bbls to $1.45/gallon for Nov HU ($61/bbl).  The new RB contract is roughly $1.50/gal ($63/bbl) also Nov.

Heating oil (HO) has fallen from $2.13/gal ($89.5/bbl) on August 2nd to $1.66/gal ($69.75/bbl) today.
(Sept and Nov contracts)

Crude (CL) has dropped from $76 on Aug 2nd (Sept contract) to $58.7 yesterday for the Nov contract.  March 07 is $63 so the market remains more concerned about 6 months from now than tomorrow (deep contango).

Why?  Fundamentals are dominating instead of news/politics.

Distillate stocks are enormous in the US.  151 million bbls in primary storage (refiners + tank farms) Secondary = distributors, tertiary = retailers IIRC.  True heating oil (>500 ppm sulfur which can no longer be used for road diesel) is 63 million bbls which is 20% over the average of the last 5 years.  UGLY.

Gasoline stocks are also huge for this time of year.  213 MMB and rising is a very flush level.

Crude stocks at 325 MMB are also flush.

So why are refiners running so hard?  It's still profitable to do so.

Check those product margins or cracks.

RB/CL is $63-58.7  = $4.3/bbl.  This would have been normal to good for this time of year a decade ago.
HO/CL is $69.75-58.7  = $11/bbl -- huge money.

a 3/2/1 crack (3 crude vs 2 gas and 1 heat) which is more typical of what a USGC refiner might sell to lock his margin gives $6.5/bbl.   That's a nice margin though the USGC refiners may get less as they are about $1/bbl away from the NY market (pipeline tariff).  No way you'd expect run cuts and there aren't any to speak of.  Runs remain at about 92% of capacity down only 2% from the summer peak.  And this time of year is when maintenance is done.

Where are we going?  

In about 3 hrs the EIA will put out new US stock data. That will be a trigger.  If heat and gasoline continue to pile up, we're headed lower, especially on heating oil.  Moreso as  weak el nino weather usually means normal to mild temps with more rain for the US northeast which is heating oil's market.  That crack would have been $3-4/bbl 10 years ago and lower with this much oil in tanks.

OPEC is already starting to rumble.  Their basket is at $55 according to their website. The high population, broke nations of Venz, Iran and Nigeria are already talking production cuts.  Saudi is mum so far.  The rest either export so little as to be irrelevant (Indo) or defer to Saudi (Kuwait, UAE, Qatar).  It usually takes a month or so of pain before Saudi reacts and I'm not sure they consider $55 on the basket pain--they've been looking to move the market lower.  The next meeting is Dec 14.  It's unlikely OPEC will do squat before then unless the complex collapses to say $50 WTI.

My guess?  We'll chop around a bit here as the shorts take profits then have another leg lower particularly if heating oil stocks continue to build rapidly.  It's too early in the year for weather to pull up prices, but also a bit too early for the speculators to capitulate completely.  But if heat drops vs crude, the refiner's margin drops enough to trigger run cuts putting pressure on crude which takes down the entire complex.

All bets off when/if saber rattling of Bush v Iran begins again.  Though I doubt he has the balls to do that running up to an election with an electorate burned out on elective war unless wagging-the-dog will distract the fundies from the latest wag-the-willie scandal.

All data from nymex.com http://www.nymex.com
or the US EIA
http://www.eia.doe.gov/oil_gas/petroleum/info_glance/petroleum.html

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The Oil Drum has this graph on stocks, which suggests that the absolute levels are not so significant, as the relative levels are "normal". what do you think?



In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Oct 4th, 2006 at 08:28:55 AM EST
are ample.  If they get much higher OPEC trims production to bring them down--they carefully track crude stocks.  OPEC can't control product stocks directly though, and they are becoming sloppy heading into winter.  That's pretty unusual.

Days of supply is both a good measure and a little misleading.  Obviously as demand rises, constant days of supply means more oil in tank, but also no more days cover in case of a problem.  With fewer and larger refineries, it's easier to operate with less crude stock.  No real user uses crude (with a few bizarre exceptions) so what is important to the market in the short run is product stocks absent political events that bring fear of running out of raw materials into play.  Also in the 90's management insisted on removing old tankage to avoid the cost of new double bottoms and to keep operations from stockpiling to make their lives easier.  The double whammy of tank cost + capital cost was too much to swallow.

To me, what is telling is the shape of the market.  A $5.5/bbl contango to next June is huge.  At say 7% interest, 9 months is only worth $2.75,  If you own tankage it's free to use as long as your management will let you tie up capital.  Tank crude, sell futures, lock a big margin.  Even I can make money like that.
That deep contango tells me no one is the least concerned about their next bbl of crude.  

by HiD on Wed Oct 4th, 2006 at 06:29:12 PM EST
[ Parent ]
What if the Democrats win in November, announce a one-year Iraq pull-out plan, and declare Iran and her friends to be somebody else's problem? Prices lower, because of no more sabre rattlin? Or prices higher, because of fears of even worse instability?
by asdf on Wed Oct 4th, 2006 at 09:15:44 AM EST
Without question, if one or the other, lower on the hypothetical Iran news.  Probably higher on the Iraq news, at least in the short run.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Oct 4th, 2006 at 09:31:18 AM EST
[ Parent ]
if I knew that I'd be rich.  The difference of opinion is what makes a market.  It's when everyone agrees that things get crazy (and ususally snap the other direction soon after).

I don't think anyone is counting on Iraq at the moment.  As long as Saudi still has a little spare capacity AG crude buyers should be fairly relaxed re Iraq.

Now if my magic Iraq became calm, openned their fields to Western players and looked to be headed toward 5 MMBD in 2 years, that might cause an OPEC quota battle.  odds 1 in a million.

by HiD on Wed Oct 4th, 2006 at 06:41:20 PM EST
[ Parent ]
my typing sucks.  my proofreading is worse.
by HiD on Wed Oct 4th, 2006 at 08:33:19 PM EST
[ Parent ]
Apologies if I'm being obtuse, but is there a glossary of oil trading terms somewhere out there? With regard to this particular diary, I must confess I could use some help with front month (=current month? subsequent month), HU & RB.

And please keep your diaries coming - I read them with great interest!

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt št gmail dotcom) on Wed Oct 4th, 2006 at 09:32:13 AM EST
sorry.  You might want to wander around the NYMEX website.  They have a glossary.  I'll try to avoid jargon when I can.

Front month = the first contract still in play.  In June that's July, in Oct would be November.  Products expire the last day of the month prior, Crude about the 21st of the month prior.  Brent on the IPE is cash settle rather than physical so it's not critical what the last day is but I think it's about the 25th or maybe the last day of the month.  For WTI there are pipeline schedules to set up so they stop trade and settle up early.  On NY products, the settlement is delivery in the NY harbor area starting about the 5th day of the month so there's a little time to set schedules if people take the contract to delivery.

HU is/was plain regular unleaded gasoline.  the contract is being dropped as NY now requires ethanol.  So they are switching to RB = regular gas blended to be on spec upon addition of 10% ethanol at the truck racks.  They like to add etoh at the last minute to avoid water issues.

by HiD on Wed Oct 4th, 2006 at 06:37:15 PM EST
[ Parent ]


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