Fri Sep 8th, 2006 at 08:06:21 AM EST
As always with apologies to Jerome for teasing him with the title.
And with the agreement up front that $100 is only matter of time. The question I'm asking is what will the path look like over the next 3 months.
World Oil markets are piling up bearish news in the last few days and prices are dropping pretty hard. The true tin hatters out there see collusion designed to help Republicans, but I'm not buying it. http://www.eurotrib.com/comments/2006/9/6/213625/6185/4#4
So what could make oil drop into the $50's in the next few weeks?
First, remember where we were. The last time I wrote one of these, June, front month WTI was $69.5. Today we are at $67.5. Basically we had a spike in July August due to BP's giant cockup being uncovered in Alaska, saber rattling at Iran and the Lebanese invasion. In the wet oil market, crude remained in contango (front cheaper than deferred) implying plenty of real supply.
Only the BP situation pulling 200 MBD of crude off the market was a fundamental issue. The rest adds to the fear or risk premium but that can evaporate pretty easily if traders get their nerve back.
What are the bearish inputs to price?
Iran sanctions looking to be benign. Bushco has no credibility left with the world for military action and no military might left over. Russia is telling him to piss off on serious sanctions. Unlikely that the flow from the AG will be interrupted.
Lebanon cooled off.
Mexico hasn't erupted in strikes/violence over their bitterly contested elections.
Nigeria news has been light.
Hurricane Season has not hit the USG. Repairs continue unabated. Shell has their Mars platform back to 190 MBD which is above the level before Katrina/Rita for example. Started up ahead of schedule in May.
BP announcing a plan to have the entire ANS field back up by November. If it's at all safe, it will be approved as Alaska's govt is utterly dependant on the oil tax revenues.
Ultra deep water USGC find of 3-15 billion bbls. While the oil is 5 years away and only likely to produce around 1 MMBD, it gives the back end of the market some downward pressure.
Real Physical Data -- the important issue when politics/news is benign.
Stock Levels are high -- US crude stocks are above 330 million. Not too high but very comfortable heading into the low demand fall period.
Mogas stocks are very high for September at 206 million bbls. Moreover, stocks built this week in a period where we normally draw stocks. This is a period when heavy summer demand draws stocks down to more like 190 MM bbls. Having an extra 16 in tanks and a build has scared the speculators out of the mkt. Mogas cracks have collapsed from $16 in June (July/July crack) to $2 on 9/8 (oct/oct). Gasoline is actually contango to December (mostly because crude is as well and cracks are at minimum). Gasoline is pricing as a byproduct to distillate at these levels.
Heating oil/diesel stocks are very high. This week the EIA reported 139 million bbls in tank. That's huge for this time of year. Thats more of a late Oct/early Nov level before consumers start filling tanks for winter.
This could really hurt the HO complex. The crack on heat is still excellent for a refiner at $12/bbl (they used to be happy with $3-6). Jan Crack is $15 so speculation is for tight supply/cold winter. So refiners will be rapidly moving to max distillate and trying to sell those cracks forward.
The heating oil price easily could puke just like gasoline just did. The trade will start sell down the cracks to jump in front of the refiners and the speculators will trim their positions. If we then get a mild Nov/Dec, we could have a rout like we just had in mogas.
If so, with both main products down, refiners will cut runs piling up crude even faster. If OPEC is slow to respond, we could easily have a very sloppy crude market very quickly.
So there's a route to WTI in the $50's. World events could easily wash away this scenario so don't bet the farm.