Bubbling Crude Oil Update
It simply amazes me that hoards of people think the futures market reflects some sort of commodity pricing equilibrium. Sure, it's the best system that we have, but it's far from perfect. A flood of hot, speculative money chasing a "story" or returns can easily generate a bubble. This isn't rocket science, it's simply greed. Here's what has happened in the oil market over the past few years.
Strong demand from India and China combined with declining OPEC spare capacity and geopolitical tensions led to higher crude prices (and justifiably so). Stories started to emerge that demand from China would continue at a torrid pace forever and that the world was running out of oil (i.e. peak oil theory). This caused a mania in the energy markets and oil prices soared from $40 to $78. The high prices generated massive investment in non-OPEC oil rigs and related equipment causing supply production to increase contrary to the kooky peak oil theorists. Now, demand is running well below expectations but the oil bugs are either blind or think/hope it's a temporary phenomenon. As a result, the futures price curve is still upward sloping from $58 to about $64 while the traditional inventory/price model says prices should be around $40.
Look at what ISI's Mike Rothman had to say today:
"* Our estimate for end-January oil storage in the OECD countries shows a month-to-month draw of 5 million barrels, which is much smaller than expected given oil supply figures.
*Using our storage estimate, world oil demand for January may have been a million barrels per day BELOW our forecast - put another way, the year-over-year growth rate looks about 70% lower than we expected.
*While we already get a lot of push back on our non-OPEC supply forecast (largest annual gain in 30 years) we think the market is also not focused on prospects for a weak oil demand environment.
*In a related sense to the last point, with crude prices still in a steep contango the data for NYMEX open interest in crude suggests we have yet to see the "capitulation sell-off" in the oil market.
*Energy equities are still trading as if the drop in crude prices is a temporary phenomenon. A look at the XLE shows stocks trading above current oil prices levels on both an absolute and relative basis.
*Weather guidance for the US sees temperatures moderating significantly to a warmer than normal levels. Essentially, a return to unseasonable readings highlights prospects for natural gas storage to end the winter at high levels."
Fundamentals are poor yet prices are still massively inflated. If that's not a bubble I don't know what is.
Strong demand from India and China combined with declining OPEC spare capacity and geopolitical tensions led to higher crude prices (and justifiably so). Stories started to emerge that demand from China would continue at a torrid pace forever and that the world was running out of oil (i.e. peak oil theory). This caused a mania in the energy markets and oil prices soared from $40 to $78. The high prices generated massive investment in non-OPEC oil rigs and related equipment causing supply production to increase contrary to the kooky peak oil theorists. Now, demand is running well below expectations but the oil bugs are either blind or think/hope it's a temporary phenomenon. As a result, the futures price curve is still upward sloping from $58 to about $64 while the traditional inventory/price model says prices should be around $40.
Look at what ISI's Mike Rothman had to say today:
"* Our estimate for end-January oil storage in the OECD countries shows a month-to-month draw of 5 million barrels, which is much smaller than expected given oil supply figures.
*Using our storage estimate, world oil demand for January may have been a million barrels per day BELOW our forecast - put another way, the year-over-year growth rate looks about 70% lower than we expected.
*While we already get a lot of push back on our non-OPEC supply forecast (largest annual gain in 30 years) we think the market is also not focused on prospects for a weak oil demand environment.
*In a related sense to the last point, with crude prices still in a steep contango the data for NYMEX open interest in crude suggests we have yet to see the "capitulation sell-off" in the oil market.
*Energy equities are still trading as if the drop in crude prices is a temporary phenomenon. A look at the XLE shows stocks trading above current oil prices levels on both an absolute and relative basis.
*Weather guidance for the US sees temperatures moderating significantly to a warmer than normal levels. Essentially, a return to unseasonable readings highlights prospects for natural gas storage to end the winter at high levels."
Fundamentals are poor yet prices are still massively inflated. If that's not a bubble I don't know what is.
posted by Never-Limp at 7:35 AM
1 Comments:
i think futures stay this way because everyone just likes saying "contango"
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