Financial Times and Floating Storage

I was quoted in a Financial Times story today on floating storage barrels coming ashore being an oil price lid for the moment: 

“The contango has come down,” said Morgan Downey.....“There’s no incentive to keep it offshore any more.” (Financial Times)

Low Volume Week

This is the last week of the Summer US driving season. With US bank holiday Labor Day coming up next monday and the UK end of August bank holiday on the Monday just gone, liquidity in oil markets is low. During such periods of low liquidity, oil market reaction to events tends to be a little larger than usual. I was quoted in the Wall Street Journal:

"On any day that you're going to have low liquidity and there's going to be a move in the market, that move is generally going to be exaggerated," said Morgan Downey (WSJ)

The Waiting Game

Crude oil prices are stuck in a range between US$55-$75 per barrel. Today I was quoted by the Wall Street Journal:

"We'll stay in this range until will get a weather event or we get a change in supply from OPEC," said Morgan Downey. (source: WSJ)

Oil Price Boundaries

I discussed the rally up toward US$70 per barrel with the Wall Street Journal:

But higher oil prices could prove the oil rally's undoing, said Morgan Downey....Rising crude futures will eventually translate into higher retail petrol prices, which would force consumers to spend more on fuel and less on other goods that might spur growth in the wider economy. "The increase in oil prices has a real impact on consumers wallets. It's money that is not going to be spent on purchases," Mr Downey said. (source: WSJ)

Blaming Oil Speculators = "I Don't Know"

The US government has on occasion during several administrations acted irrationally and in anger trying to manage oil prices with disastrous effect on the US economy. As explained in Oil 101, lines at the gas pump in the US during the 1970s were created by the government. If the government did nothing then oil prices would have been higher, but there would have been no shortages at US pumps.

Today we are facing a seismic fundamental shift in the physical oil market. A similar shift has never occurred in the 150 year history of the modern oil industry. When prices become more volatile and there is a lack of understanding of the fundamentals, a visceral reaction is to look for scapegoats to blame. The current scapegoats are speculators.

Blaming volatility on speculators is a face saving way of admitting that the blamer has no idea what is going on in physical oil markets. Physical oil supply and demand explain EVERY price move in oil. As mentioned previously, blaming speculators is not simply wrong, it is dangerous. It is dangerous because it falsely diagnoses the challenges global oil supply is facing.

There is absolutely no need to change US oil markets. Yet such change now seems likely. Politics is about to raise oil prices in the US and lower them for the rest of the world.

My estimate is that certain proposed restrictions in the US will add between 25 to 50 cents per gallon onto US pump prices in the short term (1-2 years) and much more later. US price increases will subsidize price falls in other countries. This is going to hurt US business and consumers to the advantage of other nations. Each US household will transfer up to an additional US$2,000 overseas each year. A woeful vengeance is being extracted by the uninformed. Preventing such a situation was the reason for writing Oil 101.

I was quoted by The Associated Press yesterday:

"If you start to restrict the market, it's hard to see what that achieves," said Morgan Downey..."People don't like to see the prices, but the market is working fine."

Oil Market Stuck in a Rut

The oil price rally stalled at the beginning of July in the low US$70s. Oil has since retreated down in the high $50s and low $60s, where it is regrouping in anticipation of an increased pace of global inventory destocking later in the summer. My models (I use floating storage as a leading indicator) are not showing the inventory situation tightening yet....but if its any consolation to oil bulls, global inventories appear to have stopped increasing.

The weekly US oil inventory numbers which come out each Tuesday evening and Wednesday morning were not really a surprise. Oil ticked higher today more due to an improved economic (and equity market) outlook rather than any singular oil data point. The Wall Street Journal quoted my scepticism that today's price rally of around $2 up to $61.54 was due to the weekly US inventory numbers:

"There's no demand number that you can point to ... it's just that (distillate) inventories didn't build as much as expected."

Note that in the quote I was referring to today's (Wednesday's) price action and not anything more long term. To put the long term in perspective, here is a chart of oil prices (NYMEX WTI crude) since 2001:

(click chart to enlarge)

Supply-Driven Oil Price Rally

Carl Etnier from the Rutland Herald wrote an interesting piece on why oil prices have been rising and to role of speculators. Carl mentioned an article to me that said the rally was due to speculators because oil demand is still weak. My response was:

"The thing that annoys me about those sorts of articles [blaming speculation] is that it says oil demand is down and so price should not be rising. Since the beginning of 2009 demand is down year on year by 2 million barrels per day but supply is down over 3.5 million barrels per day (due to OPEC cuts)."

US Inventories & Summer Doldrums

Chart: Crude Oil (NYMEX WTI) Prices Over the Past 8 Days

The oil market has been chopping sideways around $70 over the past few days. Weekly US oil inventory numbers are released by the DOE each Wednesday at 10:30am New York time. This week the data provided little impetus for any price move for the oil complex. Bear is mind that although US data is widely followed, it is the source of less than a quarter of the world's demand. Nonetheless, US data is viewed as a barometer of global supply and demand. I was quoted in the Wall Street Journal today:

The draw in crude stockpiles and the rise in gasoline "offset each other, and the effect on the market was neutral," said Morgan Downey (WSJ)

A Market Yen for Kiloliters

As mentioned in Oil 101, oil is traded in US dollars because it most efficient for everyone (consumers and producers) involved. Oil floats freely against the US dollar and all currencies. If the US dollar or other currencies weaken then oil prices rise in all those currencies. There is little economic reason for wholesale markets other than in US dollars.

Every once in while there is a suggestion to trade oil more often in Euro or other currencies. Trading oil in non-USD currencies makes comparing the price of oil across the world more difficult. If oil has risen by US$1 per barrel, how much should it have changed in Japanese Yen per kiloliter (the unit used on Japan's TOCOM exchange)? This may seem trivial but this causes an inefficiency which raises prices for Japanese consumers. The issue was discussed in the Wall Street Journal today:

"One of the reasons why oil around the world is traded not just in barrels, but in U.S. dollars per barrel, is because it allows the least amount of computation from one market to another," said Morgan Downey....author of 'Oil 101,' a book about the oil industry." (WSJ)

Crude above $70

Crude (NYMEX WTI) continues to make new highs for 2009 above $72 per barrel. I was quoted in the Wall Street Journal yesterday:

"Until OPEC increases production or consumers are reluctant to bear high prices we are going to see an increase in the crude price." (WSJ)

OPEC Meeting

OPEC oil ministers are meeting in Vienna tomorrow (Thursday May 28, 2009). Ahead of the meeting the Wall Street Journal quoted me:

"OPEC won't cut output as long as crude remains above $60 a barrel, said Morgan Downey...."They've taken more oil off the market than demand has fallen," he said. "It's just a matter of time before we see higher prices."

OPEC's Next Cut: Fake it?

OPEC members meet next on May 28, 2009. Although varied OPEC members create a lot of media noise, this is usually for consumption by their domestic news markets. OPEC decision making is effectively Saudi Arabian decision making. The Saudis speak softly but carry a big spigot.

Today's WTI price is around $50/bbl. Every day we spend below the Saudi's 2009 governement budget balancing number of around $60 per barrel the more likely an additional token cut of up to 1 million barrels per day will be announced with no intention of ever implimenting it.

Since Q4 2008, OPEC have taken more than enough oil (3.5 million barrels per day) from the market to clean up global inventories (2009 global demand is only expected to be down 1.5 to 2.5million barrels per day - my models are around the 1.75mark) and so this OPEC token cut would simply be to change sentiment.

The Wall Street Journal quoted my opinion a few days ago.

"If oil is not above $60 by May 28, OPEC will announce a one-million-barrel-a-day cut with no intention of implementing it," said Morgan Downey....."They're going to have to give the market a kick in the butt to get it positive again."

Oil as a Currency

Oil is a currency. It floats in relation to the US dollar and all other paper currencies. This is why it is ridiculous when some say that oil should be traded in other currencies or that the US government has an agenda to keep oil trading in dollars. As I describe in Oil 101 (page 323), the global oil market chooses to trade oil in dollars because it is most efficient that way. Nobody tells oil traders to use dollars, it is simply cheaper for everyone involved to do so.

When the dollar weakens, oil prices rally (all other things being equal). When the dollar strengthens, oil prices fall (all other things being equal).

This wasn't the case before the world moved to benchmark oil pricing. Oil prices used to be fixed in US dollar terms for very long periods of time and it was the the weakness of the dollar in the early 1970s that caused all sort of problems (page 13, Oil 101).

Anyhow, the US government (and by extension us, the people) have decided that we are going to devalue the dollar to reduce our dollar debt burden. Other countries are sure to follow. Inflation is the goal. Printing money ("quantitative easing") is the mechanism.

On Wednesday March 18, 2009, the US Fed announced they intend to release an additional sum of around US$1 trillion of new money supply . The money will be added via the mortgage market. The dollar weakened. Oil appreciated as a currency. Following are two stories I was mentioned in (WSJ - DJN).

Mentions ahead of the OPEC meeting

Ahead of the OPEC meeting on March 15, 2009 in Vienna, I was interviewed for a number of news articles. In summary, I said that OPEC do not need to and will not cut any further at this meeting. Apparently I held the minority view (less than 25% of those surveyed) heading into the meeting but in the end I was on the right side as OPEC didn't cut. Bloomberg TV also carried an interview.

"We have seen the lows in crude oil prices for this year" Morgan Downey...said in a Bloomberg Television interview.  "There will be a slow but steady increase in prices."  Oil, which traded around $43 a barrel in New York today will recover into "the low $60s" once seasonal demand for gasoline peaks after the second quarter and to $70 before the end of the year, Downey said.

Downey said the Organization of Petroleum Exporting Countries, supplier of 40 percent of the world's oil, is unlikely to announce further production cuts when it meets on March 15 as previous curbs have "been more than sufficient to remove excess supplies in the market."

Thirty-one of 41 analysts surveyed by Bloomberg last week said they expect OPEC to agree a new reduction at the gathering.." (source: Bloomberg TV, March 12, 2009)

Here is a short clip of the interview.

(source: Morgan Downey in New York - Bloomberg)

• OPEC Meeting and a Few Related Thoughts and Graphs from Readers (Mar 14, 2009 - theoildrum
• Opec back in the driving seat (Mar 11, 2009 - FT Alphaville)
• Oil Rises a Second Day Before OPEC Meets to Discuss Output Cut (Mar 13, 2009 - Bloomberg)
• Opec roundup: The Russians are coming (Mar 13, 2009 - FT Energy Source)
• Американская нефть подорожала на 11%, европейская — на 9% (Mar 13, 2009 - banki.ru)
• 测欧佩克减产，周四纽约油价暴涨11％ (Mar 13, 2009 - alibaba.com.cn)
• Downey Says Oil Set to Rebound Above $60 on OPEC Cuts: Video (Mar 12, 2009 – Bloomberg TV)
• Nymex Crude Higher As Market Braces For OPEC Mtg (Mar 12, 2009 - Dow Jones News)
• Opec round-up: Demand gloom, fail rate, Russian membership (Mar 11, 2009 - FT Energy Source)
• Petróleo avança 3% em Nova York, mas cai em Londres (Mar 9, 2009 - PortalExame)

Oil 101 mentioned in Reuters WTI Article

Reuters mentioned Oil 101 today in a discussion of WTI as a benchmark. I made the case that WTI is a great benchmark, with liquidity, large physical volumes (which makes it more difficult to squeeze), its location in a stable market with a history of free trade and little government interference. As you will know from reading Oil 101, there are well over 100 benchmark grades of oil around the world. All of these oil benchmarks trade as spreads to one another and to WTI. The inherent flexibility of these spreads means that any changes to a single benchmark can be compensated for.

Financial Times calls Oil 101 a "Must Read"

The Financial Times Alphaville Blog called Oil 101 a "must read" on Feb 25, 2009. They also published some of my charts on US oil inventories and demand.

First Post

Check out IBM featuring the book Oil 101 on the front of their global homepage this week (Feb 16-22, 2009). The oil industry is one of the world's biggest users of cutting edge technology.

Also, many thanks to the oil drum for reviewing Oil 101 on Monday (Feb 16, 2009). The oil drum is the leading global oil blog with a fantastic crew of experts.

I was quoted in Barron's last weekend in an article about the spread between heating oil and gasoline. Some have referred to the spread as the widow maker as many relative value traders foundered on it over the past year.

I called this blog 'Scarce Whales' as one of the many possible titles for Oil 101 was 'Scarce Whales and Dark Nights', which following visits to Nantucket, the 18th century Saudi Arabia, and reading about the whaleship Essex, I thought had a nice ring to it harking back to the the reason the modern oil industry sprang up (lack of inexpensive whales and a need for cheap lighting). The 'Dark Nights' part seemed a little too pessimistic and simply calling the book 'Scarce Whales' could have relegated it to the fisheries section of book shops.