Oil Under $40; More Oil Stored on Ships at Sea Than at Any Time in The Last twenty Years
December 18th, 2008WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
Oil is decoupling from the dollar now, to the downside.
Gold is up sharply, the dollar is down sharply, oil is down sharply.
I don’t think there was any doubt about it before, but people are definitely moving their paper based wealth into gold in larger numbers than at any point in recent memory. To me, anyway, oil and the dollar declining together, with gold rising, indicates that we are entering a new phase of collapse. I’m sure that someone can/will point to historical stats about when this has happened in the past, but taken together with everything else that’s happening, my guess is that this decoupling is different and a pretty significant event in terms of signaling a profound slowdown in economic activity.
I thought that oil would bounce in the $45 to $50 zone and continue to move opposite to the dollar, as it usually does. I was wrong, at lease over the last few days. The demand destruction caused by the economic collapse is overwhelming longs here, despite the wreckage on the dollar.
But that might not be it!
There have been some rumors floating around (literally) that oil producers have been storing oil on the ships at sea, waiting for a bounce in crude prices… Maybe this is true, maybe the speculators know it and maybe they’re bringing their boots down upon the necks of the oil producers. I mean, how much oil can be stored on ships until it doesn’t make economic sense anymore and they have to begin releasing it into the marketplace???
When I initially read that tanker theory, I thought, “What a pile of steaming BS.” Well… Oil was much higher then.
[UPDATE] I went back to find the original source of this tanker-storage information, but I couldn’t. In the process of searching, though, it turns out that there’s a Bloomberg story from yesterday about it. Get this: Right now, more oil is being stored on ships at sea than at any time in the last twenty years! From Bloomberg:
Oil companies booked 25 supertankers to store crude, enough to supply France for almost a month, as OPEC discusses output cuts to shore up prices that have plunged 69 percent in five months.
The supertankers, equal to about 5 percent of the global fleet, can carry as much as 50 million barrels. The ships may not all be fully loaded, Jens Martin Jensen, interim chief executive officer of Frontline Ltd.’s management unit, said by phone today. The Bermuda-based company is the biggest supertanker owner.
…
Storage costs on tankers remain at about 90 cents a barrel a month depending on the length of the contract, Charlie Fowle, a director at London-based shipbroker Galbraith’s Ltd., said in an e-mailed note today. Twenty-five tankers used for storage would probably be the largest number for at least 20 years, Fowle said.
I’m definitely NOT saying that this is going to occur, because I have no possible way of knowing, but if some kind of attack or incident happens that suddenly gaps the price of oil back up, make sure that you have this post bookmarked.
Via: Bloomberg:
Oil fell below $40 a barrel for the first time in more than four years as OPEC failed to convince traders that the glut in crude will diminish and the U.S. government said supplies climbed for the 11th time in 12 weeks.
The Organization of Petroleum Exporting Countries agreed that the group’s 11 members with quotas will trim current production by 2.46 million barrels a day to 24.845 million barrels a day, OPEC president Chakib Khelil said in Oran, Algeria. OPEC has held four meetings in as many months in an attempt to stem the slide in prices.
“It’s less than meets the eye,” said Lawrence Eagles, global head of commodities research at JPMorgan Chase & Co. in New York. “This may stem the bloating in stocks but isn’t enough to get rid of the surplus.”
Crude oil for January delivery declined $3.54, or 8.1 percent, to $40.06 a barrel at 2:47 p.m. on the New York Mercantile Exchange, the lowest settlement since July 13, 2004. Futures touched $39.88 during trading today. Prices have tumbled 73 percent from a record $147.27 on July 11.
Inventories rose 525,000 barrels to 321.3 million barrels last week, the U.S. Energy Department said today in a weekly report. Supplies have climbed 11 percent since Sept. 19.
“They are facing the distinct possibility of oil falling to $30 a barrel and even lower,” said Addison Armstrong, director of market research for Tradition Energy in Stamford, Connecticut. “They have to bring supply down further because they aren’t getting any help on the demand front until the second half of next year at the earliest.”
The cut is larger than a 2 million-barrel reduction indicated yesterday by Saudi Arabian Oil Minister Ali al-Naimi.
OPEC’s Compliance
OPEC’s rate of compliance with a previous output cut is more than 85 percent, al-Naimi told reporters today before the ministerial meeting that decided production targets.
“The market gave every signal that there had to be an additional cut of at least 2.5 million barrels if OPEC expected to bolster prices,” Armstrong said. “There is such a lack of trust when it comes to compliance that it was impossible to agree to what was needed. This lack of trust gives members every incentive to cheat on quotas.”
Russia cut oil exports by 350,000 barrels a day last month and may reduce supply a further 320,000 barrels a day next year, in collaboration with OPEC, if prices remain weak, Russian Deputy Prime Minister Igor Sechin told OPEC ministers during opening speeches at today’s meeting. Other non-OPEC producers, including Kazakhstan, may trim production as well, Sechin said.
Other Producers
Azerbaijan may lower production as much as 300,000 barrels a day, Energy Minister Natig Aliyev said in Oran. BP Plc and partners shut two platforms at the Central and West Azeri fields in the Caspian Sea following a gas leak on Sept. 17.
“Russia will be offering the 300,000-to-400,000-barrel cut that’s already under way,” Eagles said. It may be a sign that disruptions in Azerbaijan are “going to last a bit longer than they previously thought.”
OPEC will next meet on March 15 in Vienna and has chosen Angolan Oil Minister Jose Maris Botelho de Vasconcelos as its president for 2009.
“I think the jury should still be out,” said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts. “We will have to see their compliance. If they come close to their objective, we believe they will forestall a further decline in prices.”
Brent crude oil for February settlement declined $1.12, or 2.4 percent, to close at $45.53 a barrel on London’s ICE Futures Europe exchange.
U.S. gasoline inventories rose 1.3 million barrels to 204 million barrels in the week ended Dec. 12, the Energy Department report showed. Supplies of distillate fuel, a category that includes heating oil and diesel, climbed 2.94 million barrels to 133.5 million barrels, the highest since November 2007.
‘Nothing Bullish’
“There is nothing bullish in these numbers,” said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. “The OPEC announcement looks big on first glance but really isn’t. They are playing with smoke and mirrors.”
Inventories have gained because the oil market is in contango, where crude for future delivery is more expensive than near-month prices, encouraging stockpile increases.
Supplies at Cushing, Oklahoma, where oil that’s traded in New York is stored, climbed 21 percent to 27.5 million barrels, the highest since May 2007.
“The big build at Cushing shows that in a contango market everyone who can is taking delivery, which makes it much more difficult for OPEC to hold it together,” Barakat said.
Tumbling Demand
U.S. fuel demand in November dropped 7.4 percent from a year earlier to the lowest for the month since 1998, the industry- funded American Petroleum Institute said in a report today.
Volume in electronic trading on the exchange was 578,537 contracts, as of 2:57 p.m. in New York. Volume totaled 593,607 contracts yesterday, up 17 percent from the average over the past 3 months. Open interest yesterday was 1.17 million contracts. The exchange has a one-day delay in reporting open interest and full volume data.
What indicators do you look at to signal when the reflation effect will spill out from gold to other commodities?
Or do you think the divergence from oil and the dollar signals that we might be in for deflation? I still buy the iTulip thesis, maybe this is an abberation until China trades t-bills for oil.