Spot Life CL Mar 09 pt 2 (entire)

The fundamental reported causes for price were almost all dire for demand, as nation after nation reported dismal economic performance. The news came both from the developed world--which consumes about half of the world's oil requirement--and from the developing world, which was where nearly all the additional incremental demand had been coming from in the last five or so years. This was most especially true of China, where the China Electricity Council announced that power consumption grew by 5.23% in 2008, after growing by 14.8% in 2007. (5.23% seems considerable, but analysts appear especially dubious of the numbers coming out of Beijing, and apparently all of that demand was added in the household consumption sector, as opposed to industry.) The Chinese Producers Manufacturing Index (PMI) rose slightly to 42.2 in January from 41.2 in December, which is, of course, still indicative of a contraction and may well be the result of New Year's celebrations activities. Chinese exports fell by an annualized rate of 17.5% in January while imports fell by 43.1%. This was on the back of similarly dismal export numbers from Taiwan, Japan, and South Korea. The news was so grim that OPEC went further than the IEA--which had forecast demand growth in China slowing to 0.7% in 2009--and predicted that the Asia Pacific in general, and China in particular, would experience demand destruction in 2009. OPEC is in a really good place to know, given that its Middle Eastern members provide the region with the vast majority of their imports. Temasek Holdings, Singapore's sovereign wealth fund, reported that it had lost 31% of its value between March and November of 2008.

The news from Europe was also especially grim, with many analysts beginning to fear a redoubling of the financial firestorm precipitated by hard currency loans made to Eastern Europe of as much as $1.7 trillion which have likely gone bad as the debtor nation currencies have gone south. The OECD released its leading indicators report indicating a "strong slowdown" in China, the US, the eurozone, Canada, France, Japan, Germany, Italy, UK, India, and Russia. Industrial production numbers from eastern Europe were staggeringly bad--double digits bad--as was the decline reported for Spain in December of 19.6%. Ukraine's GDP, for example, fell at an annualized rate of 20% or fully one fifth in January. Unsurprisingly, Naftogaz recently announced that it might have trouble staying current with its payments to Gazprom for its gas deliveries, potentially reigniting the European gas crisis via a new shutting off of supply (though that is fairly unlikely, I would guess.) The most recent flash eurozone PMI readings for manufacturing fell to a record low 33.6 in February, the service PMI fell to a record low 38.9, and the composite index fell to 36.2 (where any number below 50 indicates a contraction.)

The numbers from the US were bad as well, with natural gas prices falling to $4/MMBtu on the back of declining industrial demand--GM alone closed most of its 22 plants last month. Unemployment data continued to be grim and reportedly employment law firms expect as many as 3 million layoffs in the first quarter. The port of Long Beach reported a 23% decline in container traffic in January from the year before. Stocks of crude continued to build, and build, and build some more on the back of the giant contango of 2008 which is, remarkably, still with us. Indeed, there is more oil in storage in Cushing, Oklahoma, than there is known storage space. The stocks situation has depressed the price of WTI (CL) to numbers far below what it traditionally trades versus other crudes which has caused a minor uproar (again) in the oil community, which complains that the landlocked Cushing prevents CL from being a useful global price benchmark for oil.



The last report from the EIA on stocks disposition for the week ended February 6 was 350.6 million barrels, well above the historical average range for the last five years, but still below the last peak seen in July 2007 of 352.6 million barrels. The giant contango continues apace, helped along, arguably, by the throughput limitations of pipelines out of Cushing, Oklahoma. Either way, the full curve contango (ending with the December 2016 contract) got steeper, at close of trading Friday with oil for delivery in December 2016 trading at a $33.64/b premium to the March 09 contract. The differential between oil for delivery in March 2010 and March 09 closed at nearly the exact same differential (a $12.08/b premium) as it saw when March 09 became spot on January 21st of $12.06/b premium. That said, the spread deepened dramatically from February 5 to February 12 before it recovered, and on February 12 you could have bought March 09 oil for $21.97/b less than the price of sweet light oil to be delivered in March 2010.



Crude and the euro both fell against the dollar during the course of CL Mar 09's spot life, with crude losing 10.6% of its value against the dollar and the Euro losing 2.7%.



Below you will find the substitutable product differentials. As you can see, spreads on March delivery heating oil and RBOB gasoline spiked to February 12, after which they fell just a bit below where they were when CL Mar 09 became spot. This is an indication that the furor over WTI price relationship to Brent is just a bit out of place. CL/WTI was never designed as a global price benchmark--after all, it is illegal to export crude oil from the US (except for some small very heavy sours from California which earned an exception in the export control statutes). The reason it is a global benchmark is because the US consumes a quarter of the world's oil--and it is a benchmark for US oil prices. In fact, most international term contracts are priced to Brent, or more particularly BWAVE (an average of Brent prices over time.) But contracts of oil imported to the US are often linked to CL, which is why it serves as an idea of global prices. The more meaningful complaint is that CL is trading at ahistorical differentials to other US crudes, but since there is no daily open source data on other US crudes, I will have to leave it at that.



At expiry, forward month substitutable product differentials are still healthy, though not as healthy for heating oil (which is nearly identical to diesel) as it was. Gasoline seems to have a relatively healthy premium to CL through September, when the driving season ends. Natural gas, which was trading at near parity to CL not so long ago, closed at at least a $15/b discount to CL on a Btu basis all the way through December 2011 delivery. (It traditionally trades at a pretty steep discount, so the differential itself is not evidence of a drop in industrial demand.)



The commitment of traders report for the February 17 suggests that the market is bullish, given that commercials are hedging against price declines and non commercials are net long. The percentage of traders net long or short has receded from the highs seen at the year's end to numbers much more typical historically, however.

Spot Life CL Mar 09

The story of the CL March 09 contract's first eight trading days as front month, or spot, remains dominated by gloomy economic news. The data from Japan and South Korea were especially grim and the most recent US GDP and housing data only contributed to the sense that things are only going to get worse in the near term. Germany saw a much higher increase in unemployment than was expected. The British media spoke darkly of a "disorderly fall" in Sterling. That said, there has been some evidence that the collapse in trade volumes has bottomed out and there have been some reports that the credit markets have begun to function again, if barely. (The Baltic Dry Index seems to have bottomed, tight bunker fuel supplies in Hong Kong, and a growing spread between 10 year TIPS and 10 year Treasuries.) The FOMC maintained rates at 0-.25% and a $800 billion stimulus plan was passed.

Initial reports on OPEC compliance with the new quotas suggest that, for the most part, the cartel's members have met the stated supply cuts and Riyadh appears ready to cut beyond the quota as it stands. There have been some rumblings from members about whether there would be much point cutting further, as from Nigeria and Ecuador, but most members are telegraphing further efforts. Tehran has been especially anxious to convince non-OPEC members to join in supply cuts, though I haven't seen any evidence yet that Iran is keeping faith with its own quota. Moscow, which had indicated some interest in cooperating in cuts, along with Azerbaijan and Kazakhstan, has not yet seen fit to join in--despite its apparent difficulty of seeing eye to eye with continental Europe and the United States. CGES suggested that cuts so far are sufficient to stabilize price around $45/b, but warned that further cut allocations would probably undermine gains in price as it would likely result in further demand destruction. Moamar Ghaddafi simultaneously offered his plan for peace in the Middle East--Isratine--and warned that he--as well other producing countries--is considering nationalizing the assets of majors in Libya.

On the general political front, the Gazprom Naftogaz dispute was put to rest, for the time being, and Israel ended its operation in Gaza--with a large discovery of natural gas off its northern coast. President Barrack Obama was inaugurated and most governments seemed to sigh a sigh of relief and talk of resolving disputes. Davos of course took place, though it is hard to see what the point of it was, exactly.

Other news which directly affects supply included the oil rig count in North America dropping by nearly 23%. (I am guessing that a lot of stripper wells have come off line also.) Rigs came offline in Venezuela due to non-payment. Nigeria suggested that prices below $40/b meant that offshore drilling was no longer viable economically, and PENGASSAN threatened on the 30th to shut down all the oil export terminals if a suspect government contract wasn't canceled. Valero--one of the largest refiners in the US--has announced that it will take its Texas City refinery offline (225 kb/d) and that it will be reducing throughput given slack demand in the product market. Petrobras decided not to seek financing from the credit markets for their offshore development plans, saying that the cost of money was too high to justify the move. Oh, and French transport, port and energy workers joined in a strike to bring activity there to a halt on Thursday. (See what that Czech artist meant by Grève!?)

And the giant contango of 2008 didn't budge.



The EIA reported that crude in storage amounted to 338.9 million barrels, the most seen since July 2007 of 352.6 million barrels. (These storage numbers are still less than what was seen in the last super contango in 1998.) That said, some VLCCs being used for storage lifted anchor, presumably so as to deliver their cargoes, leaving one to wonder whether some storage tanks are being kept off the market. As you can see from the graph below, the spread between CL Mar 09 and Apr 09 delivery grew to $4.45/b as of January 30th, or ~10.7%. The spread between Cl Mar 09 and Mar 10 grew to $14.70/b, or ~ 35.3% of front month. The spread between front month and Dec 16 delivery (I will not use Dec 17 until I see more open interest and activity in it) was $30.41/b or ~ 73% of front month. (Extraordinary, but not the largest spread we've seen in the last few months.)



Below is the chart of CL versus the dollar euro interbank exchange rate. It doesn't look to me like the two are moving in concert, and now the analysts are saying that they have "decoupled." I am interested in whether the correlation was causal or not. I doubt it ... and suspect if anything crude was the driving force in any exchange movements, but I am not a monetary economist, so it is mostly just my suspicious nature speaking I guess. At interbank exchange rates, the euro gained $0.0107 or 0.8% from January 21, CL lost $1.87/b or ~4.3% during that same period.



Below is a graph of the interbank exchange rate of the euro, sterling, yen, Norwegian kroner, Brunei dollar, ruble, and Canadian dollar to the dollar as a percent change from the rate as of January 1, 2000 against the price of CL on NYMEX expressed as a percent change from that date. You can see that the Norwegian kroner and euro do seem to mirror each other, though the kroner seems to have decoupled as of late November or so. A quick internet search reveals that oil exports accounted for about 17% of GDP in 2004--so perhaps it accounted for as much as 30-35% in 2007 and 2008. In 2004 oil exports accounted for 40% of total Norwegian exports, I imagine that share must have been at least 50% in 2007-2008. It would make sense that its exchange value to the dollar would rise as the price of oil rose, but the euro? It now seems to be mirroring the Canadian dollar. The ruble appears to have lost much more value relative to the dollar than it presumably gained as a result of strength in the commodities complex. That said, I think the graph shows pretty clearly that there is no simple relationship between the cost of oil and the exchange rate of the dollar and any of these currencies. (During this time period, by the way, the renminbi has risen a little more than 21%, suggesting that the tempered rise was an indirect tax on consumption in China.)



As you can see from the graph below, RBOB has recovered from the lows of December and now appears to provide a reasonable profit on a per barrel basis versus crude. Heating oil, which is nearly identical to diesel, still seems to provide the largest profits. Natural gas is selling at a comfortable discount to crude on a Btu basis after skirting near parity last month.



At close on January 30, the same month delivery differentials of forward same month contracts for gasoline over crude on a per barrel basis seem to show that the gasoline market does not expect crude to fetch the price the crude contracts are going for. That said, the same month differentials of heating oil over crude seem to suggest the opposite. (The end of the curve shows the anticipation of the cyclical growth in demand for gasoline in the Summer and for heating oil in the Winter. Note that natural gas anticipates that the increased demand for heating generation will be more than offset by additional heating oil supply, presumably not at the prices the December contracts are going for now however.)



The commitment of traders report of January 27 still seems to suggest that the market expects the price to rise, given that commercials are hedging against a fall in price and non-commercials are long.