Tag: demand

80 million barrels of oil floating in the ocean, owners betting and hoping for higher prices

Just to warn you, this post will be a bit lengthy, but may be incredibly insightful for some. First off, it looks like Ed has predicted a hike to $1.99. We’ll see if he’s right on… if you can get gas for around $1.80, fill up like I did tonight just in case. I’m not completely sold on a price hike, but we will see what happens.

Now to explain my post title. Was there a ship leak or some accident? No. There ARE 80 million barrels of oil floating on the sea protected by a thin layer of steel, sitting in huge supertankers. According to Bloomberg, Frontline Ltd., the world’s biggest owner of said tankers has made this claim. It would be the most oil stored at sea in 20 years, as traders seek to cash in on higher prices later in the year.

This is an idea that carries a good amount of risk if you ask me… but you don’t make money without risk. Oil prices haven’t really started a good climb yet this year, and prices have largely given up most of their gains they made the last two weeks. These supertankers are huge ships that cost large amounts of money to lease but some can hold well over a million barrels of oil. If prices jump $10/bbl, there’s a large amount to be gained. However, with oil supplies in Cushing, Oklahoma nearly at capacity (the delivery point for contracts traded on the NYMEX), what’s going to happen? We’re already awash in oil, sitting nearly 40 million barrels above where we were JUST LAST YEAR! Crude oil in storage this week, as reported by the DOE, was 326.6 million barrels. Like I said, storage in Cushing, OK, was at 33 million barrels, with capacity of 34 million barrels. This represents a 20% GAIN in oil inventories there in just 4 WEEKS! How are these traders betting on higher prices in a few months when we’re lush with oil in a recession?

Figuring those 80 million barrels could go anywhere in the world, let’s figure half goes to the U.S., the world’s leading consumer of oil. If that 40 million barrels (which is doing nothing) would eventually end up at U.S. ports in a few weeks, we could have the most oil in storage since September 21, 1990!
Even WITHOUT the 40 million barrels, we’re already at our highest level of storage for a January since 1999, when demand was strong and the economy was surging ahead… remember the .com era? So many startup companies… and to see us at the same level of oil now with a much different outlook?

Let’s throw a name out here… a banking company that used to actively trade oil contracts (and bet on higher prices). Remember Goldman Sachs? The company whose analysts predicted $150 oil? What ever happened to them? They seem to have gotten out of the oil trading business. Goldman is now forecasting oil prices in the $30’s for quite some time. Do they have any obvious interests in oil now? Not that I can see- and crazy enough they’re actually making some sense with their seemingly non-biased oil price forecasts!

What’s this all got to do with gas prices?

Lets think it over. I’ll even format it so it’s easy to read:

  • U.S. January oil inventories highest since 1999 and economic outlook is much worse than that of 1999
  • 80 million barrels of crude oil haven’t even hit the market, owners betting on higher prices
  • Gasoline inventories healthy
  • Excluding 2006 and two weeks in 2007, oil inventories (including SPR) are at their highest levels EVER
  • Gasoline demand down 3-4%
  • Diesel demand down 4-5%
  • Jet fuel demand down 12-15%
  • OPEC countries need to pump more to generate revenues
  • Refinery utilization at just 85% and we’re still putting plenty of gasoline into storage

Point is-with such great news on the shape of oil inventories, how can oil and/or gasoline make a spring run-up in prices? Ed’s bet that we’d see $2 gas before we saw $1 gas is nearly the OFFICIAL winner, but I still think prices have more room to fall.

My short-term bet on oil (the next two months) is that prices fluctuate between $30-$45, but we may briefly break the $30 barrier. A gasoline prediction? I’ve already had that bet with Ed. Once he wins, MAYBE I’ll make another prediction.

Patrick

OPEC’s threat- the market answers!

Threatened with sagging oil prices, OPEC held a meeting today to decide if any additional production cuts should be made. This would be their third (?) meeting outside of their normal meetings in the last few months as oil prices have lost all their gains made in the last four years.

While OPEC tried the "shock and awe" approach, the stock market was busy preparing for a response. OPEC went first and decided to cut 2.2million barrels per DAY of oil production, its biggest reduction EVER.

"I hope we surprised you," OPEC President Chekib Khelil said when asked whether the size of the cut would shock moribund oil markets into an upward trend. "If you’re not surprised we need to do something about it."

Crude oil immediately dropped to $40.20 a barrel after the announcement was made in a "in your face" attitude.

I’m convinced the more OPEC tries to prop up prices, the more it will harm their own interests. OPEC is helpless in this market, as we saw today. However, what OPEC is doing is setting themselves up for destruction. They’re obviously hurting for revenue, but this cut will make prices spike eventually when global markets do recover, leading to another potential disaster. OPEC is in a huge bind- they need revenue, but are doing a TERRIBLE job at trying to increase demand for oil (which SHOULD be their largest interest for long term viability).

OPEC is doing things that only benefit in the short term (and look- its not even helping!). The long term outlook for OPEC is failure.

So OPEC, how about announcing another production cut tomorrow so that oil will take another nose dive?

I don’t see a hike this week, but we’re closely monitoring that situation here. If prices become widespread under $1.55, look for a hike.

In the mean time, in your face OPEC!

What I never thought possible again may come true…

First off, let me address the differences in opinion between Ed and I. I’ve heard from some users (and rightfully so) that it seems Ed and I have opinions that recently have varied quite a bit. Let me address that. First off, we’re both obviously trying to adapt to this new market, and secondly- we’re two different people. Just like anyone else, our opinions aren’t always 100% identical. I think that will help us look at each others point-of-view and may help us learn more from each other. I don’t wish to contradict what Ed says, I simply offer another way of thinking about things.

Having said that, I’m sure you’re intrigued by my subject line of this post. Last year I would have guaranteed you that we’d never see gasoline <$2, just like I guaranteed that we wouldn’t see $5 gas in 2008. It was getting close, but I wasn’t exactly sweating either- just look at the damage $4 gas caused! Even in 2007, I never could have expected for new record highs in gasoline. It is my firm belief that we are rewriting history books. There is no good answer here for what lies ahead as there has never been a "perfect storm" that has rapidly changed the oil markets since mid-2008.

The last few days I’ve been doing more and more research about this new market, and I’ve come to a few conclusions. First, my "predictions" of gasoline price hikes will not have the consistency they had just months ago as a result of this changing market. I’m trying to adapt quickly, but in a period of sustained price drops, it is VERY difficult to predict the first "major" price hike. Secondly, it is my belief that we may not see a rapid increase in gasoline prices like we have in years past. I’ve not come to this conclusion until lately. The Spring run-up in prices may temporarily end as we know it, replaced by a very odd and difficult to predict pattern of falling and rising gas prices, just like the stock market has been- unpredictable. Third, this period will change record books and be noted years from now as the spectacular oil crash of 2008. We’ve hit an ALL-TIME high in oil and a 4+ year low. Crude has lost over $105/bbl of value in places.

Bottom line is this- I’m not sure where things will go, but I have a few opinions. First, I would say that we will not see a spring run up in prices like we have in years past. Second, I believe odds are greatly increasing that we may see gasoline under $1 in the next few months. I don’t think the economy has gotten as bad as it will, and I think gasoline will follow it lower on its way to a level not seen in many years. Third- demand destruction is rampant. Oil companies will begin canceling refinery projects, stop finding new oil, and halt other infrastructure upgrades until oil prices climb- which may not happen until 2010.

I will work hard at bringing you realistic information and opinion. I’m not here to profit off what I say, the bottom line is the consumer, and to us I say "It’s about time".

I look forward to the day that I see this sign back at Speedway:

Also, public congratulations to Bill Steffen for NAILING his West Michigan early-Winter forecast. I have the fortune of knowing exactly how it feels (referring to a likely collapse of oil prices in 2008, Nov. 2007). Way to go Bill!

We’re rounding the corner… Chinese Economic Stimulus to cause higher prices

I’m getting quite close to announcing a price hike in Grand Rapids and other Michigan areas as wholesale prices rise this morning, due to news of a Chinese Stimulus program to help their economy. This is not good news for consumers, as we’ve benefited from lower Chinese demand in the form of less competition for oil and falling prices.

I’m expecting that the current gasoline prices in the area (some as low as $1.95) will perhaps be the lowest we see this winter (HOWEVER, this all is based on our economy making a “quick” recovery). I would definitely take the chance to fill up all your gas cans, vehicles, etc. as soon as possible as prices should begin their journey northward for Spring.

If nothing changes in wholesale prices today, I expect to see $2.19-$2.29 here rather soon. Wholesale markets were up a healthy amount overnight and have kept that going this morning.

FILL UP!

Will we get under $2 before wholesale prices force a price hike?

I don’t like to be bearer of bad news, but I believe we are approaching the lowest gasoline prices we’ll see for a while. While gasoline prices usually "bottom out" in late November and early December, I believe with the dramatic fall in prices and negative profit outlooks for refining gasoline, it will result in higher prices.

(Image taken by TheWalt)

Along with OPEC’s massive production cuts, we’ll be seeing inventories stay steady and not build like they should heading into peak oil season (winter).

Wholesale prices rose earlier this week on worries about demand coming back as well as lower production from OPEC and local gas stations are getting close to the 0-cent price margin. Today’s cost to stations is under $2.10, so we have a little room to fall yet, but stations under $1.99 (Admiral in Plainwell comes to mind) are losing money and will need to raise prices.

The question is, will we ever see $1.99 like parts of Michigan has before prices start to head up? It’ll be a darn close call!

In the meanwhile, if you see gas prices like below, make sure to fill up all your gas tanks- vehicle, portable, etc!

A hike for West Michigan is NOT yet imminent, but it won’t be too far off!

In other news, you might have noticed- we hit 300,000 visitors to the site on November 5! Thanks to all who keep coming back! If you recall, we posted about having hit 200,000 this past June, so to already hit 300,000 is amazing! THANK YOU FOLKS!

Patrick
 

 

 

OPEC slashes production 1.5mb/day, but will it stop oil’s skid?

WRITTEN THIS MORNING (OCT 24, 7AM)

This morning OPEC convened and arrived at a decision to cut 1.5 million barrels of oil per day. Many of you are likely asking what we can now expect and what will happen. Let me try to shed some light for you.

It will be an interesting day on the market, that is for sure. Traders will have to fight it out- some traders will likely view this as a sign that OPEC is deeply worried about a world recession and that cutting production is an “endorsement” by OPEC that demand has fallen significantly, along with many countries only major source of cash… oil. Unexpectedly, Venezuela was NOT the OPEC member seeking the biggest cut in production, as I would have expected with their attitude towards the U.S.

The cut is one of the largest cuts I’ve seen from OPEC who usually cuts under 1 million barrels/day. You can see the worry that these countries have as some simply can’t operate now with “normal” oil prices. I’m hoping the Saudi’s will not follow their quota and keep pumping oil. World inventories are ALREADY too low in my opinion, and this cut worries me enormously. Whenever the world decides to come out of recession, this cut COULD likely mean RECORD oil prices- but that will definitely depend on how long we have this economic slowdown.

Today, we have 311,380 million barrels of oil (excluding the SPR) in U.S. inventories. That compares with an all-time high of 391,907 million barrels on July 27, 1990, and a low of 263,666 million barrels on January 23, 2004. We’re still trying to recover from that low. Just this past January (2008), we had 282,841 million barrels in storage. We really need to have inventories at 350,000 million barrels but OPEC doesn’t want to keep pumping.

Demand of gasoline has fallen and stayed under 9.0mb/day, and I expect that EVEN WITH this announcement, it will take some time for oil to reverse its course.

NOTE: Wholesale prices today in GR are $2.46. We have a ways to drop yet.

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