As we alluded to earlier, there is a battle taking place in the oil markets at the moment.
On one side there are conventional oil producers like Opec members desperate to stop oil prices from following the declining trajectory of the wider commodity complex. On the other side there are the new US shale oil producers, who — due to the US export ban — are unable to capture the full earnings potential of their production (on account of an inability to tap foreign bids directly).
The problem for Opec types is that the break-even rates they seek to defend are now too high to prevent the new class of producer from being incentivised to keep producing. This despite the fact that the export bottleneck only ends up transferring much of the profitability to the refining sector instead of the US producer. Read more
From JBC Energy on Monday:
As the analysts note, the North Dakota production surge — which was under appreciated by the industry even as recently as this time last year — is beginning to have “profound” effects on the oil markets: Read more
A picture, they say, is worth a thousand words. The same applies to some charts.
From the IEA’s latest market report on Wednesday:
The WTI-Brent spread is at a record wide of almost $20 per barrel. This isn’t, of course, what was supposed to happen.
As JBC Energy wrote on Thursday: Read more
Oil prices continue to decline, with WTI currently leading the charge:
There are three things that must be remembered when it comes to banks, trading houses and warehousing plays.
But even then, it only pays to store for as long as the commodity returns beat money-market returns. And that means, it only pays to store for as long as someone in the market is prepared to pay a premium for delivery of the commodity tomorrow rather than today. Read more
The fixed income team at Credit Suisse have a good note talking about what’s really driving WTI backwardation. Small hint, they don’t think it’s much to do with Egypt.
They put the backwardation down to three things. Read more
A while back we talked about the anomaly of backwardated curves amid a veritable abundance of US and global inventory.
Or more specifically, the irony that prices were falling even as curves were implying backwardation (usually a bullish signal reflective of tight supply). Read more
Lots of commentary is linking the mini-surge in WTI overnight, and subsequent WTI-Brent compression, to events in Egypt.
But it’s probably much more related to a shift in interest-rate expectations than anything to do with Middle Eastern tensions. Read more
… and it’s all because, the lady loves shale oil.
Well, what we mean is that finally, the surplus stock of crude trapped in America is having a price effect beyond borders because logistical constraints have been removed and storage incentives have started to disappear. Also, because graphs like these can no longer be ignored.
The result: a major narrowing in the WTI-Brent spread. Read more
Home of oil sands, maple syrup, ice hockey, singing astronauts, William Shatner, the Bank of England’s governor-to-be and (rather poignantly) a lot of bears… Read more
It’s been our mantra at FT Alphaville for a while, but finally someone from the ‘serious’ analyst space seems to agree with our hypothesis that commodity collateralisation — incentivised by low rates and excess liquidity — is having a larger impact on inventories and commodity prices than most people appreciate.
Here’s an extract from one of oil market veteran Philip K. Verleger’s recent articles on the relationship between interest rates and inventories (our emphasis): Read more
WTI crude prices are on the rise, but only at the expense of Brent’s premium. The spread between the two crude grades shrank below $8 this week, its lowest since January 2011.
But what’s really striking is the rise in US crude output, which has risen 57,000 barrels a day to 7.37m — its highest level since February 1992.
If one chart speaks a thousand words in this regard, it’s the following one from the American Enterprise Institute’s Carpe Diem’s blog, charting data from the US Department of Energy:
The number of cargoes that go towards determining the Dated Brent price is rising.
As Reuters reported on Thursday:
At least nine May cargoes have moved up the North Sea Forties crude programme after stronger-than-expected output from Britain’s Buzzard oilfield, the biggest contributor to the Forties stream.
According to the EIA, the definition of “spot market” is:
The price for a one-time open market transaction for immediate delivery of a specific quantity of product at a specific location where the commodity is purchased “on the spot” at current market rates. Read more
An excellent observation from John Kemp over at Reuters on Tuesday regarding the spot/forward disconnect we’ve been talking about:
The increasingly close linkage between hedge funds and spot prices since 2010 has also coincided with a sharp reduction in the correlation between front-month and far-forward prices. Correlation between spot month and forward prices, generally above 90 percent until 2010, is now often less than 50 percent (Charts 5-6). Read more
Nymex WTI futures trade experienced somewhat of a wobble on Wednesday.
As Stephen Schork highlights in his chart of the day: Read more
This is a follow up to Thursday’s post about Rosneft’s 500 million barrel collateralised financing (to raise money for its purchase of BNP-TNK) and how the market managed to absorb it almost without any price impact.
Most of the previous post was based on the observations of Philip. K. Verleger, who believed the latter point represented a triumph for the futures markets, which had reached a whole new level of maturity.
And yet, as we have been reporting, it’s always more important to look to the curve. Spot price, or “flat price” as traders like to call it, is almost irrelevant. What’s happening in so-called time-spreads is usually much more critical. (And yes, nobody usually takes unhedged positions on flat price.) Read more
Some excellent market commentary from Olivier Jakob at Petromatrix on Friday morning regarding the current state of oil market (dis)equilibrium and the potentially precarious position of Saudi Arabia. Read more
Did anyone notice how the Brent slump seemed to come to a dramatic halt around June?
Late last Friday afternoon, WTI crude futures experienced one of their sharpest price increases since the Libya crisis of last year:
We appreciate that this will not be news for anyone who’s been watching oil markets closely.
However, we still think it’s a valuable recap. Read more
From John Kemp at Reuters on Monday (our emphasis):
Hedge funds and other money managers reduced their long position in U.S. crude by the equivalent of nearly 54 million barrels of oil, the largest one-week decline since at least June 2006, according to data released by the U.S. Commodity Futures Trading Commission (CFTC) on Friday. The long liquidation was three times greater than in the “flash crash”, almost exactly a year ago on May 5, 2011, when speculative longs were cut by a little under 19 million barrels.—– Read more
Back in early 2011, a very intriguing thing happened in the oil markets.
As if by magic — (well, over the period of about a couple of months) — the market collectively and spontaneously moved from using WTI as its primary benchmark for pricing product spreads over to the Brent contract. The era of the “Brent crack” was born. Read more
Last week we wrote about John Kemp’s column pointing out that CFTC data suggests hedgers — those who are exposed to physical prices through their business operations — fuel resellers and others hedge against their operational exposure to oil prices — collectively had the smallest net short position in six years in late April.
We advanced a few possible explanations of our own, including the idea they’d mainly popped over to the Brent market. Read more
From oil to copper, something strange is going on with commodity inventories.
Official stocks are rising across numerous commodities, but analysts and traders swear fundamentals remain tight, while prices stay supported: Read more
Something of a strange one this. Every analyst and his dog has for the longest while been preaching that demand for crude post-crisis has really been all about emerging market demand… that the US, by and large, has become increasingly irrelevant when it comes to global supply and demand.
Yet, from Reuters last week, we had this: Read more
The following chart comes via John Kemp at Reuters. And as he notes this one kind of speaks for itself:
Courtesy of Olivier Jakob at Petromatrix, FT Alphaville presents the price of front-month Brent oil futures expressed in euro terms:
John Kemp at Thomson Reuters is a big fan of commodity curves — backwardation, contango and all the principles that come with it.
As he often notes, one of the key theories affecting the area is the idea of a convenience yield, initially popularised by John Maynard Keynes. Read more