Thursday, December 11, 2008

Spot Life CL Jan 09 pt 2

The Table of Reported Causes is below. For the last seven trading days, the story has mostly been bad news, and then some more bad news, about the global economic situation. China reported that its exports contracted in November. Import growth did as well, and inflation slowed down considerably. The jobs data from the US was awful. Stimulus programs were embarked upon everywhere, although several of them seem to be the regifting and repackaging of spending already budgeted. Moreover, some economists suggest that demand is much weaker than the major data agencies have indicated and that, moreover, stocks are much higher than they have indicated, so much so that they doubt that any conceivable OPEC cut would have a sustained upward effect on price.

But the end of the period saw serious geopolitical changes, most especially Russia may decide to coordinate cuts with OPEC in their meeting next Wednesday in Oran, Algeria. Iraq is facing serious centrifugal forces as the occupying forces begin to contemplate leaving--the Kurds are upset about the al-Maliki administration's efforts to establish a praetorian guard and Basra, the only littoral province in Iraq with a considerable portion of the nation's oil and gas resources, is now in the process of determining whether to have a referendum about autonomy from Baghdad. Moreover, Saudi Arabia says that it has met the production cut it agreed to in October.

The chart for the price of the interbank exchange rate of dollars for euros versus the price of CL Jan 09 is below. The euro rose 3.5% during the period from the 3rd to today. Press reports suggest that the size of the stimulus packages bandied about by Congress, the Administration and the incoming Administration as compared to the reluctance to coordinate stimulus programs in Berlin. Some have suggested that the process of deleveraging is winding down. The price of oil has dropped 4% during the time period considered.

Oil is still in "super contango," but it has narrowed some along the entire curve in the last seven trading days from 78.9% of the front month price on December 2 to 64.8% of the front month price today. (I am still using December 2016 as the last month contract as Jun and Dec 2017 contracts are not, as of yet, trading.) The differential between Jan 09 and Dec 16 is $31.09/b, which is still huge.

However, as you can see form the graph below, the differential between months closer to front has widened some, for example the differential between Jan and Feb 09 delivery widened from $1.47/b to $2.89/b, or 96.6%. If there is no storage left--or people are unable to find financing--this differential could continue to widen because of downward pressure on the front month price. If there is storage out there that people can put their oil in, this should put upward pressure on the front month price. The differential has widened the most inbetween the front month and second month contract, and is beginning to narrow at the December 09 contract. Nearly everyone trying to capture contango profits by buying front and sell futures will be working with the four months out past front. It looks, therefore, like the market is bumping up against either storage or financing limitations.

The EIA data for the week ending December 5 showed a crude stock build by 400 kb, for the week ending November 28 a 400 kb draw, and a 7.3 million barrel build for the week ending November 21. The 7.3 million barrel build brought the crude stocks numbers nearly to the top of the five year historical average of stocks. If we see another draw for the data for stocks ending this week, that may well mean that the contango is now being driven by storage limitations, though it has been up til the week ending November 21 driven mostly by financing difficulties, or so I infer.

The differential between Jan 09 and Jan 10 is today $12.68/b or 26.4% of the Jan 09 price, down from 28.1% on December 2. The height of the giant contango of 2008 so far took place on December 5, when the differential between Dec 2016 and Jan 09 was $41.02/b, or 100.5% of the Jan 09 price at close.

I decided to take a look at how the gasoline futures market was behaving versus the crude futures market, and the results are pretty weird as you can see below. (For each contract month I took the gasoline contract and subtracted from it that month's contract for crude.) For the first three months RBOB gasoline is selling at a discount to light sweet crude, is probably due to the surplus entering the market from Europe. However, there is hardly any margin for the contract months up to October, which may suggest (this is not something I've paid attention to in the past) that the market is expecting a glut of gasoline to continue through 2009 (or that the gasoline futures market is just decoupled from the crude futures market, which would be odd, no?)

I decided to take a look at price volatility on the premise that the more volatile a market is, the more difficult it is to get financing for anything involved in it, and the more difficult it is to finance purchases, the more volatile the market becomes, and so on. Since 1984 there have been two years with more price volatility than what we have seen so far in 2008, 1986 and 1990. 1990 is easy to explain, as it is the year the first Gulf War started. However, the average front month price for sweet light on NYMEX didn't change all that radically in that year. There was a spike, which subsided. 1986 has by far the most volatile days, perhaps because there was particularly fierce fighting in the Iran-Iraq War that year and perhaps because the price of oil was so low that a fairly small change in price would mean for a relatively large percentage change. Either way, if you compare price volatility to average price of front month per year, you can see that while it may be having an effect upon financing storage or purchases now, it does not seem to have made much of an effect on the market in general since 1984. (And "the Great Moderation" does not appear to apply to the oil markets.)

The Commitment of Traders report for December 2 doesn't indicate any particular market direction. Open interest (the number of sweet light crude contracts being traded on NYMEX) grew slightly.

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