Tuesday, December 2, 2008

Spot Life CL Jan 09

Below find the reported causes for the changes in price of oil for the first 7 days that CL Jan 09 has been the front month contract. The story is mostly the economy and plenty of news that the downturn in China will be worse than expected. (Including from the Chinese themselves.) US consumer spending down 1%. Everywhere manufacturing is contracting. Contango continues. 7.3 million barrel build in commercial stocks in the US ... refiners are taking out tankers to store the stuff. The rest is OPEC, it's decision not to cut production allocations and the loud determination to cut soon. They ask Russia to join. (Ever get the feeling that they're yelling: "Oh don't throw me in that briar patch! After all, much of OPEC's competition in the form of marginal production is taking much worse a bath than they.)

NYMEX light sweet versus the euro:

Oil is still in an incredibly steep contango ("super contango") all along the curve and has even widened some. The differential between the front month (CL Jan 09) and last month (CL Dec 2016) contracts is $37.04/b or 78.9% of the front month price! The differential between the front month and a contract one year out (CL Jan 10) is $13.20/b or 28.1% of the front month price!

The Commitment of Traders Report as of November 25 doesn't indicate market direction. Open interest (the number of futures--and options--contracts on the market) is pretty much unchanged from the week prior.

I decided to take a look at the differential between heavy sours and sweet light to see if that would give us a better sense of the market's direction. I looked at the differential between the average spot price of WTI at Cushing for each week minus the average price each week for three heavy sour crudes as determined by the EIA.

(WTI is a sweet light crude, which is easy to refine into profitable products. Heavy sour crudes require sophisticated refineries in order to yield enough profitable products at specification. A specification is the legal requirement for any petroleum product--driven by performance or environmental concerns--in any given country. Light sweet curdes therefore typically sell at a premium to heavy crudes.)

The spike in the differential at September is from Hurricane Ike, which eliminated more than 2 mb/d in US demand. But, if you look at the differentials versus the price of WTI, you'll notice that at the price peak, they were much smaller percentages of the cost of light sweet than they are now. Khafji, which is produced in the Persian Gulf with API 28 and 2.85%wtS (% weight sulfur), had a differential of $6.50/b for the week's prices ending July 4 and a $4.24/b differential for the week ending November 21. That translates into a 4.6% differential in July and an 8.1% differential in November.

But the real story looks to be the differential between WTI and Maya, a major Mexican crude stream with an API of 22 and 3.3%wtS. The differential at July 4 was an average of 13.2% and an average of 31.1% for the week of November 21. In absolute terms they are not so different, moreover. Production is down in Mexico, but it seems that there are not many alternative lifters to the US. This suggests to me that there is very little demand out there, which is what everyone has been saying of course, but is another data point to draw from.

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