Could the world finally be catching on to the distillate glut problem? (Despite the Daily Mail getting completely the wrong end of the stick on the story).
We note even the normally media-shy physical trader Trafigura warned about the matter via Reuters on Thursday:
SINGAPORE (Reuters) – European oil trader Trafigura Beheer BV said on Thursday the worst of the credit crisis was over, but cautioned that the oil market was still grappling with severe oversupply and current prices were too high.
“As far as we can see, liquidity is back, and there’s a lot of appetite from existing banks and new banks. As they reposition their portfolios, commodities continue to feature quite highly on their agenda,” Trafigura’s Chief Financial Officer Pierre Lorinet told Reuters in an interview.
But he warned that given the ballooning stockpiles of oil products stored on ships, the current crude price of $80 a barrel was not justified. “The level today seems too high compared to the pure fundamentals. But it goes back to how oil is trading today, and oil is trading like a financial asset.” The severe oversupply would keep the market’s contango structure in place “for a while,” he added.
That, of course, follows near-term downside warnings from the likes of Goldman Sachs, Stephen Schork and BNP Paribas already.
But, we feel it’s Olivier Jakob at Petromatrix who really expressed the matter best on Friday. As he wrote (emphasis FT Alphaville’s):
As per our Tuesday ad hoc note on floating stocks; on a crude equivalent basis all of the OPEC and half of the IEA estimated oil demand growth for 2010 is already parked at anchor in floating stocks and these idled cargoes filled with oil are getting more and more attention.
By the end of the winter there is likely to be as much distillates afloat as in the total US at the end of winter 2007 and we expect that it will be more and more difficult for some of the Wall Street commodity banks to avoid mentioning the subject and to continue to hide the floating storage fill-up as “demand from emerging economies”.
The ICE Gasoil contango is currently widening and this will not work towards the reduction of these floating stocks. In an environment of spare refining capacity the only solver to the growing floating stocks of Distillates is a sharp reduction in OPEC supplies [ahem...Daily Mail], but only lower prices would trigger that.
The only answer that we see to GOD (Glut of Distillate) is a flat price correction sharp enough to force more OPEC supply cuts. Starting 2010 with WTI at 80+$/bbl and a contango in a low demand environment there will not be much returns to be expected from commodities by some of the largest financial institutions; hence with the evidence of the GOD being harder and harder to hide we would not be surprised if in a few weeks some of the Wall Street commodity banks start to change their tune and start to publicize the GOD. A flat price correction would anyway be needed in the first quarter to allow a repositioning from the large financial players at better entry levels.
Which, of course, doesn’t mean banks have been hoarding oil in a bid to drive the prices up. It means, if anything, they’ve been too slow to acknowledge the extent of the oversupply in the market and degree of muted demand, as well as depended too much on the idea that economic recovery will help spur demand by the year’s end.
Meanwhile, as Jakob states, the solution to the glut lies in Opec shut-ins — not more output .
Related links:
Oil, still fundamentally weak – FT Alphaville
Demand is in the toilet - FT Alphaville
Distillate hangover – FT Alphaville