Next Week's OPEC Meeting "Looney Tunes" and the Contango "High Step"

There we go again. Accepting OPEC proclamations as though it was received wisdom from the "Mount." In anticipation of Wednesday's OPEC gathering, we are told by Saudi Oil Minister Al-Naimi that as an example of commitment to its OPEC brethren and their previously prescribed OPEC quotas the Saudi's, last month, pumped 8.49 million barrels a day (thank you Saudi Arabia) "absolutely" in line with its OPEC mandate. The ever obliging industry commentators and talking heads are falling all over themselves complimenting the Saudis for their seriousness in abiding by its OPEC allocation. As Bloomberg reported yesterday "The Saudis might have been impatient with market's skepticism so they decided some transparency is needed," or "This may encourage others to behave similarly to end the free fall in prices".

Really? Could it be, just could it be that providentially for the OPEC chorus there was no need for more than 8.49mm barrels/day from the Saudis in November. You see the world is awash in oil. Storage is virtually unavailable and many of the traders who in another time might have taken positions on spot deliveries are out of the game because the banks will no longer finance their inventories of wet barrels.

All that brings us to another oil patch fiction. The brilliance ascribed to those producers or major refiners playing the contango spread i.e. buying at today's prices, storing the oil wherever they can including VLCC tankers, and selling contracts for December 2009 delivery or beyond at significant premiums exceeding current cost of product, storage costs and financing. A good deal if you can organize it (but only available to the major major players because bank financing is now otherwise unavailable). And then to bask in the glory of the press and talking heads visiting praise and commendation on the acumen of the players of the contango game.

A thought. Imagine you are a producer of oil. It is in your interest to keep the price of oil as high as possible, and to keep the psychology of the oil market conducive to high oil prices (bless those $147/bbl days). And then, suddenly the market becomes skeptical of all it has heard about oil from the oil industry flacks and pliant "experts" these many years. Then in addition economic realities bring about a crash in oil consumption. Suddenly the world is awash in oil to the point where there is virtually no storage. Oil production is not exactly a tap that can easily be turned off and on without ancillary costs and damage. And if you continue to produce to the point where your storage and virtually all other land storage brimming over, you are reduced to the last option available, you charter tankers, fill them up with your production or inventory for which you have no current use, and anchor them at sea. And if it were clearly understood that you are loading up tankers because the world is awash with oil and no longer any place to store it on land, what would that do to the psychology of the marketplace, and how to deal with it?

Ah, here comes Contango playing its soulful tune, turning a market disaster into a brilliant marketing ploy. Remember with future delivery you are dealing with paper barrels determined on commodity exchanges representing projected prices of oil at some point in the near or distant future. And the more distant in the future the thinner the market becomes. And therefore, poof! If you can push those futures prices to a significant premium above cost, interest and storage costs your current market disaster becomes a brilliant trading ploy. Are markets being manipulated? It has been the contention of these posts that as they are currently constituted, the futures trading of oil lends itself to manipulation and speculation. And oil is not alone. Only yesterday the omnipresent Jim Cramer in his nightly TV segment on CNBC appropriately entitled "The Game is Rigged" would tell his viewers, referring to the stock market, "You have every reason to distrust everything the market throws at you". Can we really expect anything different from the commodities (read oil) trading markets?

Comments

[Christian]

Keep them coming Ray, you're the man! You inform us in a way we can understand and that is important. Thanks

[cylindar]

Oil is a cheap commodity but speculators, especially those in the US have made an interesting game of it. Why they even have you thinking that OPEC has something to do with it. When it is so easy to fool people like that it goes without saying that it is easy to rob., cheat, and steal. If you were to concentrate your efforts on your next door neighbors you would see that your enemy waves to you every morning. That's one of the reasons Enron was able to get away with what they did, because people like you are looking for the train from the east when in fact it is coming from the west and is about to run you over.

[KillTheMessenger]

Oil was a cheap commodity at $150/barrel when measured by what it can do. But just because something is objectively cheap does not mean that people perceive it subjectively as cheap, too.

In essence your perception that oil had gotten expensive was more of a problem than anything else. Well, next time when oil goes towards that limit, your perception will most likely be adjusted and you won't feel like that any more.

[KillTheMessenger]

Sounds all very cool until we look at inventories:

http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/txt/wpsr.txt

Oil inventories are in the lower half of the average range, gasoline inventories are low. Refinery utilization is an abysmal 87.4%. What does that tell me? Absolutely nobody in the US is dancing on the table. It's not even clear if the band is playing a Contango or a Charlstrott.

OK, people, back to reality. Nothing to see here.

[pflickner]

Perhaps I missed something, but it appeared that Learsy was saying that OPEC as a whole (or the Saudis in particular) is storing the oil, not us. You are pointing to data specifically for the US and what we store and take in. We are not the only nation in the world that produces or imports crude, so to use US data to argue the point qualifies this as an invalid argument with no logical basis. I am not interested in doing all the research that Learsy has (which is why I choose to read his blogs instead) but it seems to me that you should ask Learsy from where he derives his information and proceed to do the research yourself before dismissing the information.

[KillTheMessenger]

OPEC as a whole does not have to store oil because the best and cheapest way to store oil is not to produce it to begin with. They can throttle their valves and reduce the stress on their oil fields, which is a win-win, because a field that can be produced slower yields more in total.

"You are pointing to data specifically for the US..."

Indeed, because the only place where such a buy/sell strategy works is here. As I said, producers have better ways to extract value from the market than storage.

"We are not the only nation in the world ..."

In which case YOU are free to show US data from other parts of the world which does qualify in your opinion. I put my cards on the table, time to see yours.

"I am not interested in doing all the research..."

Well, if you wish to make a quantitative argument, you will have to do the work. That's the ground rules in arguments like these. If you wish to ask Mr. Learsy for his numbers, be my guest.

"but it seems to me that you should ask Learsy..."

With all due respect, I believe he is experienced enough to know how to do that without me having to ask.

"before dismissing the information."

I showed you why it is inconsistent with reality. If you have beef with my demonstration, please come back with your own quantitative analysis.

[JohnnyBoyyy]

Mr. Learsey, you sound PI**ed Off! And YOU should know how this works, based on your credentials.

Starting January 20th, the people in this country MUST express our outrage, like the PI**ed Off workers in Chicago and hold our ifluence peddling, arrogant, overfed, greedy ELECTED officials feet to the fire.

OIL NEEDS TO BE USED ONLY AS A LUBRICANT! And only if a proper synthetic lubricant is not appropriate.

We all have a hella lotta responsibility the next few years to help change this country or see America fall like ancient Rome. AND, that can happen, as we can see from how things are going. Who woulda thunk it!

Barack Hussein Obama II
President-Elect
United States of America

[pflickner]

...and JohnnyBoyy, he will be using his full name when he is sworn in as the 44th President of the United States of America. "I, Barrack Hussein Obama II, do solemnly swear that I will faithfully execute the office of President of the United States, and will to the best of my ability, preserve, protect and defend the Constitution of the United States."

[metalpipe]

Unless you have a handy replacement for the plastics we use virtually everywhere, I think we need to spare a little of your oil rant for that industry.

[Christian]

Oil will be dirt cheap when we stop running our cars on it. All the plastic production in the world won't create a high demand like cars have.