The price of which oil? Considering market dynamics, currency gyrations, and questionable assertions about supply and demand, it could be both West Texas Intermediate – WTI -- and Brent, and then the spread would be back to where it was, or virtually nothing. If that were to happen, the other question would be which oil contract to use as the world benchmark. It's not important.
On October 12, I wrote the article “Oil Demand Forecast Down And Spread Expands Again,” pointing out how the price spread between WTI and Brent had expanded:
Brent November futures were last trading at $111.26, having risen as high as $113.00. West Texas intermediate was going for $85.50, setting the spread at over $25.
Tuesday’s article “Swing in WTI price curve leaves oil traders reeling” published by the Financial Times, added a different angle to the oil market, and I sense that the price is being “talked up" because a “five-year average” is not a common reference point in trading.
The sudden move into backwardation on Monday comes as US crude oil inventories have dropped below the five-year average. Physical oil traders, who have warned for months that global oil supplies were running too low even when considering a weakening demand growth, have got it right. A year ago US crude and oil products stocks were 70m barrels above the five year average – enough to supply for a month a country such as Germany. By last week, the surplus had evaporated. US stocks are now nearly 10 per cent lower than a year ago, in spite of weakening economic growth.
Yet another Financial Times article mentioned inventory tightening, with no balancing note about projections for lower demand, which in itself may address the reason why inventories are low. It’s not as if a merchant will stock the shelves while expecting fewer customers:
The oil market tightening that started in Europe and Japan has now spread to the US, with US crude and oil product inventories having fallen at a rate of nearly 1m barrels per day over the past month, and currently standing below the five-year average after three long years,” said Barclays Capital in a research note.
As of late, the dollar’s retreat helped the oil price, although the price of gasoline continues to decline, creating a puzzle out of the demand/supply claim, while the oil price spread shrunk from $25 to $17. The Middle East/North Africa conflicts have faded from memory, especially with Libya’s civil war resolved, and one must notice how the issue indicated is about inventories, not production.
One other item that I highlighted in a previous article, “Oil Price Spread Gets A Good Explanation,” are the impending changes to the Brent contract, setting a positive trend for WTI, while Brent entered a flat zone and is in no mood to follow through to the upside thus far:
Platts, in a notice issued on Friday, said it planned to move with the changes by January 6, 2012, adding that it had “received substantial support for the move”. The changes would impact on the multibillion-dollar Brent market, which consists of layers of physical, forward, swaps, futures and options contracts. According to Houston-based consultants Purvin & Gertz, Brent and its associated derivatives are the benchmarks for as much as 65 per cent of the world’s crude trade.
Which brings us to Wednesday's crude oil inventories release (pdf) by the Energy Information Administration:
At 337.6 million barrels, U.S. crude oil inventories are in the upper limit of the average range for this time of year. Total motor gasoline inventories decreased by 1.4 million barrels last week and are near the upper limit of the average range.
I know that some will say that the U.S. is not the barometer of the world, although it still burns the stuff like nobody else. But for the sake of an open mind, and considering that one or two readings not a trend makes, Reuters provided news on October 13 about the Chinese oil story:
China's daily crude oil imports fell 12 percent in September from last year's record high, remaining below 5 million barrels per day for the fourth consecutive month as refiners drew on inventories amid volatile crude markets. A marginal rise in September versus August fell short of estimates that imports would recover more quickly because of rising refinery throughput after maintenance and new plants coming onstream.
And what the statistics show is that inventories are plenty – oil and gasoline alike – even if they are at low levels. Lastly, the inventory levels may say more about future economic times than about the oil market itself.
In keeping up with disruptive technologies, I came across a story by Reuters titled “Turning wood into oil, in two simple steps.”
Efficiency and simplicity have long eluded renewable-fuel researchers, but a Maine scientist has developed a two-step process he says can make oil from the cellulose in wood fiber.
Certainly it’s not an immediate solution, but what I found amusing was that he "accidentally stumbled upon it 11 months ago while trying different reactions with biomass and acids.”
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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