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40 comments on Listening to the cacophony and trying to make some sense

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Bubba on December 8, 2005 - 10:05am Permalink | Subthread | Parent | Comments top
steverino,

Oil is priced in a worldwide market.  Crude stock in the US may be up, but the fact is that relative to worldwide supply, 1 million barrels a day (average) has been off production for the past 3 months.  That is a hell of a lot of crude.  If supply was tight before, where did the extra 1 MMBOPD come from?  It had to come from 1 of three places, - a drop in demand, extra supply elsewhere, or a loan from the SPR.  My question is what is happening to overall worldwide supply and demand.

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Sam Foucher on December 8, 2005 - 10:32am Permalink | Subthread | Parent | Comments top
If supply was tight before, where did the extra 1 MMBOPD come from?

That really a good question! but was the supply really tight before? or the current situation is more a consequence of strong demand and refinery bottlenecks. It's really hard to make sense of what's going on.
what we know from the supply side:
  • there is growing evidence that both conventional oil and light seet crude may have peaked last year.
  • The new supply is mainly coming from offshore, tar sands and heavy/sour crude supply.
  • from different studies (CERA, Koppelaar), new projects will come online in the next few years.
What we observed:
  • crude oil inventories are above the 5 years historical levels.
  • gasoline stocks were in the lower range
  • prices are up since 2003 and are still above their 200 days moving average (~$60).
Possible explanations:
  • the fraction of sour crude has increased in inventories
  • refineries in the US are mainly equipped to process light sweet crude
  • demand for oil is more elastic than previously thought
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Leanan on December 8, 2005 - 11:46am Permalink | Subthread | Parent | Comments top
My bet would be a drop in demand.  Everything from less used for driving now that summer's over to commercial users in the Gulf region shut down due to hurricanes to high prices pricing Third World customers right out of the market.
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LevinK on December 8, 2005 - 1:38pm Permalink | Subthread | Parent | Comments top
Absolutely.
I could add that IMO there was some sort of bubble in oil prices up until Katrina. There were rising fears for the future supply that boosted demand for futures so price rose quite above what would have rather been. What happens now is a normal "correction" of the markets like the ones we constantly see in Forex. Except that in a much less speculative market like the oil such "waves" have much higher time span.

In addition 1mln.bpd (somewhere I read that it is even less now) is a mere 1.2% of the world production. I can see a lot more of "fat" demand (and not just in the US) dropping to accommodate such shortages. Another important factor is the perception that these 1 mln.bpd. will come online sometime in the future, which stops speculators from being too bullish in the short to medium term.

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Bubba on December 8, 2005 - 10:33pm Permalink | Subthread | Parent | Comments top
1.2% of world supply is a huge amount when supply is already tight.  Moreover, much of this is relatively light oil that is desired by refiners. On top of that, some of this oil won't be back on stream until the next hurricane season.  Some of it will never come back on.

If you layer this on a 2% to 5% worldwide decline, and the fact that other projects (Thunderhorse for example) continue to be delayed, one starts to wonder where the extra supply is coming from.

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Dan Ur on December 9, 2005 - 8:26am Permalink | Subthread | Parent | Comments top
Thrid-world countries, and the reserves that were built just like the oil was over years.

 Give it another bad year and all bets are off, the demand destruction has to take center stage.

 Gvien that the Thrid-world will be almost as low as it can go, and the reserve Owners will not want to part with stocks, you will see demand distruction in the bigger countries.  The USA comes first, especially if price goes up too.

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40 comments on Listening to the cacophony and trying to make some sense

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