Thursday, January 8, 2009

Spot Life CL Feb 09

Well, I got to this a bit later than I would have liked, but below you will find the reported causes table for the first twelve days of CL Feb 09's spot life.

The big stories have been Gaza and the potential for a new Arab oil embargo ... and a sharp crescendo (from nearly zip) in the drums for war with Iran. OPEC may in fact actually abide by its new production quotas, though Iran does appear to be cheating so far. Considerable tension between Pakistan and India following the Mumbai terror attacks, though both have gone some ways to reassure the world that they do not want war. 26 or so VLCCs have been chartered for storage to capture profits from the giant contango, and as many as 10 more are being negotiated for. And Gazprom makes the New Year's resolution that it will be paid the market rate for its natural gas from Ukraine, sending a nice belated Christmas gift to Eastern Europe as winter temperatures fall below 0ºF. India's oil workers effectively cripple the countries state-owned refining business, taking four of IOC's seven refineries offline and cutting BPCLs production (at its two refineries) in half. Premiums for diesel in Europe spark cross-Atlantic arbitrage, with traders seeing as much as 3.6 million barrels being booked from the US.

That would seem enough to put a lift in oil's life, no?

No. Because there was more dismal, plus tons of abysmal, data about the world's economies--most especially the US, where banks have been recapitalized to lend to credit-worthy debtors, but there just are not that many credit-worthy debtors to lend to and China, which is hoping to export it's way out of this mess, but to whom, exactly, given that everyone that buys is broke and everyone who sells wants to export out of this mess?

But the politics do seem to have provided some resistance to the downward slide.

The giant contango of 2008 has continued apace, but now the differential between the front and second month contracts has widened considerably to $4.81/b at the close of trading January 8 or 11.5% of the front month price. The differential between Feb 09 and Jun 09 is $11.13/b or 26.7% of the front month price. The differential between Feb 09 and Feb 10 is $18.28/b or 43.8% of front month. The differential between Feb 09 and Dec 16--nearly at the end of the curve--is $35.54/b or 85.2% of front month. As you can see from the graph below, the differential seemed to be in the process of narrowing some from Christmas eve to January 6, after which is promptly stretched right back out.

On January 7 the EIA report showed that crude stocks were full well beyond the historical range for this time period and had grown by a whopping 6.7 million barrels--meaning that there are not a lot of places you can put oil if you want to store it. Thus, it has become difficult to take advantage of the future price unless you can either afford to rent a supertanker or happen to have one of your own. Thus many speculators cannot, well, speculate (even though profiting off the contango isn't speculation so much as simple arbitrage.) Hence the steepling of the contango.

Crude doesn't seem to be following the euro dollar exchange rate, nor does the euro appear to be following crude. (I've always thought this was a bit of correlation causation confusion myself, but just to keep track the euro lost 3.8% against the dollar at interbank rates for the period considered--December 22-January 8--and crude gained 4.5% during that time.)

Substitutable product differentials are below. As you can see for a moment on Christmas eve natural gas was trading at near parity to crude oil on a Btu basis--but it didn't last for long. The heating oil (which is pretty much interchangeable with diesel) contract shows a healthy spread over crude. The Russo-Ukraine dispute and Gaza conflict probably gave it a bit of a boost after January 1, but if the storage tanks for diesel are to the brim in Europe and the Russo-Ukraine dispute is resolved, then it might well narrow again. (Heating oil is a substitute for natural gas.) Gasoline was less expensive than crude until the New Year's too, and probably got a boost for similar reasons as diesel, though it's still hard to see how you could make a profit off of making gasoline from sweet light crude in the US at these prices.

And the CFTC commitment of traders report would, as far as I can tell, be bullish, given that commercials are hedging against a fall in the price of oil and non-commercials are betting it will go up. 5.54% of traders were net long or short for the December 30 reporting date, and we have seen similar shares in the last two commitment of traders reports as well. I have been led to understand that this is especially unusual, and that the only other times we've really seen that sustained in the past is early this year and late April - early May.

I took another look at price volatility and had to amend my graph slightly, but the conclusion remains the same. In terms of the number of days where you have seen the price of oil go up or down five or more percent 2008 was not unprecedented. 1986 and 1990 were both years with a similar number of spikes and troughs in price. In fact, on average price volatility for crude oil was significantly greater than it had been in the past from 1996 on--which I suppose means that the "great moderation" never took place in terms of oil derivatives.

However, in absolute terms we haven't seen fluctuations like this since 1984. I plotted out price volatility in terms of average $/b change in both nominal and in 2008 dollars and found that 2008 had twice as much $/b change as any year previous. (I'd like to check this against the great oil shocks of 1967, 1973, and 1979, but I don't have access to daily spot prices going back that far.)

You can see that from this graph, courtesy of Wikipedia, derived from the BP data for average yearly price going back to 1861 in 2007 dollars and nominal dollars that there is some reason to want to test this claim.

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