Why isn't the price much higher and/or oil shortages?

Totally_Baffled · Post by **Totally_Baffled** » 30 Mar 2006, 19:39

I was just thinking today about how tight the oil market is , and how demand = production capacity since about last summer (at least?)

Since then we have lost: (?)

1 mpd from the GOM
0.6 mpd from Nigeria

Now these are over and above the forecasted depletion, so in theory demand > supply at $60 (the price last summer). I would of thought the loss of 1.6mpd would of meant a lot higher prices than $60-$65?

The recent price rises seems to be due to the Iranian issue.

So who is making up the production from Nigeria and the GOM?, there has been no spare capacity for at least 12 months?

The IEA shipments from storage finished ages ago didn't they ?

What are your thoughts?

PowerSwitchJames · Post by **PowerSwitchJames** » 30 Mar 2006, 20:19

I think a big part of the explanation is demand destruction in poorer countries, and for poorer people.

Totally_Baffled · Post by **Totally_Baffled** » 30 Mar 2006, 21:12

PowerSwitchJames wrote:I think a big part of the explanation is demand destruction in poorer countries, and for poorer people.

Yeah thats what I though initially but then we are told world consumption is still increasing...

Be interesting when we get the figures for 2006 to see if any countries oil consumption actually fell?

andyh · Post by **andyh** » 30 Mar 2006, 21:44

Well it looks to me as though we are about to see an extended surge in oil, so you may be about to get a partial answer. Its now only a month or two from the US driving/hurricane seasons and this time last year oil was sitting near its low (which in essence it may well be doing now!). When the wind starts to blow in the GoM I cannot now see how $80 wont be breached, and the whole graph will move up with a base in the $70-75 area (as opposed to the $58-64 level which has been the floor for the past 4 months or so). Gold is looking like a good proxy for the price of oil at the moment (overlay the graphs and see how they move together) and gold has just broken through multi-year highs, so that maybe telling us something (other than the fact that US$ is under pressure!).

The real interest will come once oil is up around $85-90. This is the level at which various pundits etc have said oil needs to reach to match the equivalent levels at which the damage was done from the oil price spike of the 70s. I imagine when these comments were made to reassure folk last year when oil briefly hit $70, those making them cannot have realised that $85-90 was indeed just a year or so away......

dr_doom · Post by **dr_doom** » 30 Mar 2006, 21:58

I think there is something of a disconnection between the oil futures market and whats going on in the real world.

I believe this is what Matthew Simmons was getting at in his book, when he described oil speculators as having an inflated sense of their importance in the industry.

As well there is so much dodgy / incomplete information floating about I would imagine it is very difficult for anyone trading oil futures to get a complete picture of supply and demand. Therefore market movements are driven by news, and no news is good news.

Could someone explain to me how exactly the oil futures market works? I would guess the amount of contracts released onto the market would correlate to how much oil there was available to be delivered in a given month. Therefore if various events took 1.5mbd offline then the number of contracts would need to be reduced; therefore more suppliers chasing the same contracts.

RevdTess · Post by **RevdTess** » 30 Mar 2006, 23:19

dr_doom wrote:I believe this is what Matthew Simmons was getting at in his book, when he described oil speculators as having an inflated sense of their importance in the industry.

We certainly watch what the speculators are doing. For example, the market is aware that as March ends and the second quarter begins, there is likely to be an infusion of new hedge fund money into the market, as there was in January. So selling at this point has an added risk.

As well there is so much dodgy / incomplete information floating about I would imagine it is very difficult for anyone trading oil futures to get a complete picture of supply and demand. Therefore market movements are driven by news, and no news is good news.

True. A complete picture of supply and demand is nigh on impossible, not least because even government inventory numbers don't typically add up.

The market therefore trades on news ("How will other people react to this news? I'll do that!"), then in the absence of news we drop back to a mix of fundamentals and technical support and resistance.

Could someone explain to me how exactly the oil futures market works? I would guess the amount of contracts released onto the market would correlate to how much oil there was available to be delivered in a given month. Therefore if various events took 1.5mbd offline then the number of contracts would need to be reduced; therefore more suppliers chasing the same contracts.

It would take a while to explain the futures market. However, if you change 'contracts' to 'cargoes', then you've just described the physical market. Producers offer cargoes of crude (eg 500k barrels at a time) and other large companies buy the cargoes, hire a tanker to take it to a destination, and then either put it in storage or sell it on the spot market.

In the meantime they may have hedged their cargo by selling it on the futures market, thus locking in the selling price while the cargo is still en route.

And of course the cargo may be sold and resold a dozen times twixt loading and unloading.

There's no limit to the number of contracts that can be exchanged on the futures market.

RevdTess · Post by **RevdTess** » 30 Mar 2006, 23:25

Totally_Baffled wrote: So who is making up the production from Nigeria and the GOM?, there has been no spare capacity for at least 12 months?

There's quite a lot of new supply coming online, particularly in Kazakhstan, Canada, West Africa and Saudi Arabia. In March alone we see around 500kb/d of new supply available.

The mysteryis where are the huge amounts of crude imports into the US coming from. Prices haven't been strong enough in the US recently to make it profitable to move many light sweet cargoes from Europe and West Africa to the US. Yet they are coming anyway. Apparently.

andyh · Post by **andyh** » 31 Mar 2006, 01:48

Tess - is there an unusually large number of open long contracts on oil at the moment? Do you have a link to where these can be seen (rather like COT for gold?)

Post by **mikepepler** » 31 Mar 2006, 07:18

Another point - I read a story yesterday that said the amount still offline in GOM was 300-400kb/day, not 1 million. Still substantial though...

Also, although the prices are down from their peaks, they aren't down a lot - $67 was reached yesterday. Remember this is a period of traditional low demand, and yet we have prices climbing a few dollars over the last week, even while stockpiles of oil in storage tanks are huge. I seem to remember that Q2 last year was when a new all-time high price was reached? I remember being surprised as it was meant to be the "quiet" quarter. Will be interesting to see what happens this year... Also, it's only two months until the Atlantic hurricane season starts...

RevdTess · Post by **RevdTess** » 31 Mar 2006, 07:37

andyh wrote:Tess - is there an unusually large number of open long contracts on oil at the moment? Do you have a link to where these can be seen (rather like COT for gold?)

The Commitments of Traders Report shows all that data for oil as well.

http://www.cftc.gov/cftc/cftccotreports ... cotcontent

or go to
http://www.cftc.gov/dea/futures/deanymesf.htm
and search for "CRUDE OIL, LIGHT SWEET" where you will find

Code: Select all

CRUDE OIL, LIGHT SWEET - NEW YORK MERCANTILE EXCHANGE                Code-067651
FUTURES ONLY POSITIONS AS OF 03/21/06                         |
--------------------------------------------------------------| NONREPORTABLE
      NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
  LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
&#40;CONTRACTS OF 1,000 BARRELS&#41;                         OPEN INTEREST&#58;      928,551
COMMITMENTS
 128,840  135,177  153,850  591,054  568,164  873,744  857,191   54,807   71,360

CHANGES FROM 03/14/06 &#40;CHANGE IN OPEN INTEREST&#58;    -51,729&#41;
  -1,246  -10,167   -5,419  -35,262  -38,977  -41,927  -54,563   -9,802    2,834

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
    13.9     14.6     16.6     63.7     61.2     94.1     92.3      5.9      7.7

NUMBER OF TRADERS IN EACH CATEGORY &#40;TOTAL TRADERS&#58;      263&#41;
      68       90       99       74       87      204      227

and there is an equivalent report for options.

Next data release is this evening, 9:30pm our time (normally 8:30pm, but we're out of sync with the US this week due to time change).

To answer your question about open long contracts, the current situation is that speculators (aka "non-commercials" in cftc language) are net short futures, but very long options, which I think reflects a feeling that the risk of upward spikes is high.

When you add the futures and options positions together you get a total speculator position (spec net length as we call it) which is quite low in historical terms (about 1/7 of its peak in March 04).

RevdTess · Post by **RevdTess** » 31 Mar 2006, 09:30

mikepepler wrote:Another point - I read a story yesterday that said the amount still offline in GOM was 300-400kb/day, not 1 million. Still substantial though...

Also, although the prices are down from their peaks, they aren't down a lot - $67 was reached yesterday. Remember this is a period of traditional low demand, and yet we have prices climbing a few dollars over the last week, even while stockpiles of oil in storage tanks are huge. I seem to remember that Q2 last year was when a new all-time high price was reached? I remember being surprised as it was meant to be the "quiet" quarter. Will be interesting to see what happens this year... Also, it's only two months until the Atlantic hurricane season starts...

This year, US refineries did most of their maintenance in Q1. Europeans will mostly be doing it in Q2 (sounds rather, um, crude I know

) . This allows for crude stocks to build ahead of the peak gasoline demand in the summer. However, there is a bit of a panic during the run up to summer as traders try to figure out if there is enough gasoline being produced to meet summer demand. Perversely, even with crude stocks building we can see crude prices go up when gasoline stocks are falling rapidly (as they are currently). This is exacerbated by changes to gasoline specifications in the US (no more MTBE blending) which some fear may cause shortages.

So it's difficult to say there's a 'quiet season' for crude. If it's not crude inventory that's worrying the market, it's one of the products, and then crude follows that product's lead.

We have to think of things in more relativistic terms. "Is more crude being stored than expected for this time of year? = bearish", for example. If prices dont go down then we start wondering what other people are seeing that we don't...

bigjim · Post by **bigjim** » 31 Mar 2006, 10:10

Re the hurricanes thing- surely hurricane damaged oil rigs in the GoM can't be that common otherwise they wouldn't bother building rigs there. Last year's hurricanes look like they could have been a one off event- after all, New Orleans doesn't get hit too often like that.

Having said that, if climate change is really dodgy then violent hurricanes could become more dodgy in the GoM

andyh · Post by **andyh** » 31 Mar 2006, 10:56

Thank you Tess, most helpful.

Bigjim - you raise an interesting point; if the hurricane season was again very bad in the GoM with many rigs destroyed etc will companies start to abandon some activity there? Certainly the insurance bill this summer must be huge.

dr_doom · Post by **dr_doom** » 31 Mar 2006, 11:13

Thanks for explaining that Tess.
It's obviously a lot more complex than it appears on the surface.

Out of interest, do you know if it is possible to get an exact figure on how many
oil futures / cargoes exist for delivery in a given month.

Does 100% of oil traded in the world go through the new york / london exchanges?

If this information is available you'd think it might provide a pretty good
indication when the world has peaked.

Post by **clv101** » 31 Mar 2006, 11:30

dr_doom wrote:Does 100% of oil traded in the world go through the new york / london exchanges?

Oil traded or oil produced? I would suspect that most of the world's oil isn't traded in the NY/LON exchanges. Much is consumed in the country of production and never sees the open market, much is traded unilaterally between friends and again never sees the world market...

I've often wondered what the global average price paid for a barrel of oil is since it's certainly a lot less that the market price for we see on NYMEX.

Why isn't the price much higher and/or oil shortages?

Why isn't the price much higher and/or oil shortages?

Re: Why isn't the price much higher and/or oil shortages?