Tue Jan 9th, 2007 at 06:25:38 AM EST
Oil markets have looked pretty dull for a couple of months now. In November and Dec, the markets were biding time to see whether OPEC would actually cut the 1.2 MMBD promised and how winter weather would shape up.
The answers came in and we had a sharp reaction once the holiday hangovers cleared (not to mention the year end books closed and bonus' were set). January has been painful for the oil market longs so far and good for price conscious consumers.
So bit of 20-20 hindsight from the world of capitalist running dogs follows below:
From Nov to year end, we treaded water in the $59-62 range for the most part. Contracts went off the board weakly (Dec went out sub $56) as speculators were forced to dump contracts to get rid of them at the bitter end, but for most of the period, prices were stable.
Jan 2 - 5 the markets fell sharply to $55 and after a brief bounce we are back there today. 2 main reasons:
- US Northeast weather has been mild. Heating oil usage will have been low and inventories are swollen. Last week's report estimated stocks of distillate at 135.6 MMbbls which is very high. Even worse for price, they increased by 2 MMbbls in the dead of winter. Estimates are for further builds this week which may renew downward pressure. Speculators can now see enough stocks to ensure we get through winter without supply shortages. Will be much tougher for OPEC to jawbone heading into Feb/March's lower demand period than back in Nov'y with winter staring us in the face.
- Estimates are that OPEC did not reach the 1.2 MMBD cuts promised. Gulf News reports on a survey that says barely half of the target was actually cut. The Bloomberg estimate is 800 MBD in cuts or 2/3rds of plan.
Supposedly they are cutting another 500 MBD come Feb 1, but their credibility is suffering already. The Kuwaitis are whining they'll have to start cutting investment if prices keep dropping (unlikely just yet).
The shape of the WTI crude futures market still shows fear of higher summer prices or at least a willingness to bet on same. With the front contract (Feb) at $55.25, July is still almost $60. $5 is plenty to motivate traders to tank wet oil and sell futures.
Margins remain good however. The Feb/Feb heating oil crack on NYMEX is still almost $10/bbl. the same Feb/Feb crack on RBOB gasoline is $6. Low by recent standards, but high compared to the 90's for this time of year. Refiners are still doing very well with these crack spreads.
So with refiners running hard to grab those nice cracks (even if it means selling outer period futures and tanking the product), all products and crude stocks still building and no new news from OPEC on production cuts, we could easily have a second sharp leg down if the weather remains warm.
With a gun to my head I'd still pick $60.00 before $49.99 as there is still too much tension in the middle east for anyone to get comfortable. But $49.99 this spring is a real possibility especially if OPEC squabbles.