Crude futures are racing higher on Wednesday. The ascent has much to do with a continuing slide in the dollar, unexpectedly large crude draws in the last week according to figures from the American Petroleum Institute on Tuesday night, and numerous reports of consumer ‘panic’ buying, chiefly among big hedgers like airlines.
Starting with the API figures, as Reuters reports:
The API said domestic crude stocks fell 6.0 million barrels to 357.9 million barrels last week, citing a big drop in imports. [API/S] The drawdown dwarfed the forecast in a Reuters poll of analyst for just a 400,000-barrel decline.
Accordingly, the industry may be adjusting its view of what to expect out of today’s weekly government inventory figures, last seen drawing by at least 700m barrels.
The interesting fact to point out about last night’s figures, however, is that US crude imports appear to have fallen back — suggesting some part of the floating storage unwind may have abated, and that traders were busy restocking in anticipation of a re-intensifcation of the contango having taken sizeable profits on their contango trades thus far.
Certainly, if reports of airline’s buying up 2010 paper is true, then a steepening of the curve at the mid range could well be expected. Here’s a chart of the forward curve and how it has changed in the last four weeks. Certainly a pronounced budge higher around the 2010 Q1 mark can be observed:
Nevertheless it still comes in the context of a very pronounced flattening of the July/August differential in the last few sessions, on Wednesday seen at some $0.60.
Of course, while the current ascent higher may look very impressive on a dollar basis, it’s worth considering the price recovery based on some different units in a bid to wipe out the dollar noise. Energy blogger Gregor Macdonald points us in the direction of a much more unusual unitisation: the Big Mac. It appears as follows:
As he explains:
What you are seeing here is the average annual price of NYMEX oil starting in the year 2001 through 2009, in terms of Big Macs. In 2001, a barrel of oil cost you 10 Big Macs. At the highs in 2008, oil cost you 27 Big Macs. Currently, oil will set you back about 19 Big Macs. And yes it’s true. I got the idea to measure Oil in Big Macs from the Economist Magazine, which cleverly started measuring the purchasing power of currencies via the Big Mac over a decade ago.
And the key point is (our emphasis):
Two aspects of this chart surprised me. First, even as oil began to take off in 2004 there was still a trailing stability in its relationship to the Big Mac. A barrel of oil could still be purchased for less than 15 Big Macs throughout much of 2004. The second insight I gleaned from this chart is that despite the advance in the price of the Big Mac since 2001, and equally despite the spectacular price crash of oil from the highs of 2008, a barrel of oil still costs nearly 20 Big Macs. In some sense, therefore, we can think of Oil as having moved from a previous pricing era of 10 Big Macs, to a new era of 20 Big Macs.
And yes, Wednesday’s high of $71.65 per barrel is roughly equivalent to the price of 20 UK Big Macs according to the most recent Economist index price of £2.29 and today’s dollar-sterling exchange rates.
Which means, yes; we are potentially embarking on a new era of 20-Big Mac oil pricing. For those interested in pricing in more liquid currencies, however, looking at the euro rate tells a relatively similar story: a new average of about €30/40 per barrel versus €20 in the early naughties (click chart to enlarge):
Oil in Big Macs – Gregor
WTI crude futures settle above $70 per barrel – FT Alphaville
A dollar-oil signal? – FT Alphaville
So who says there’s no oil/dollar correlation? – FT Alphaville
The coming oil-equity disconnect or the end of efficient markets theory? – FT Alphaville
Oil, the great inflation hedge – FT Alphaville