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Oil Pricing

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  • gerryagnew
    A couple of weeks ago the backwardation between the front month/next month was a few cents. Today we see front/next at 1.20 backwardation. This indicates a
    Message 1 of 5 , Mar 11 12:16 PM
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      A couple of weeks ago the backwardation between the front month/next
      month was a few cents. Today we see front/next at 1.20 backwardation.

      This indicates a real shortage and would explain why it is that the
      price of crude seems to have little resistance as it plows higher.

      It may also explain why it is that Cheney is supposedly on his way to
      the Middle East to beg for greater production. The shortage must be
      pretty bad for Cheney to rush over there.

      All of this should say something. My sense is that if there is no
      announcement of increased Saudi production (apart from "a little
      something" to give Cheney some face), we are seeing a de facto
      annoucement that the Saudis cannot produce anymore, in other words a
      between-the-lines admission of Peak Oil?

      Gerry

      *************************************************
    • brent ns
      ... Hi Gerry, I ve never agreed with the interpretation that backwardation between front and next month indicates a shortage in the sense that seems to be
      Message 2 of 5 , Mar 12 1:21 AM
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        > To: energyresources@yahoogroups.com
        > From: gaea@...
        > Date: Tue, 11 Mar 2008 19:16:47 +0000
        > Subject: [energyresources] Oil Pricing
        >
        > A couple of weeks ago the backwardation between the front month/next
        > month was a few cents. Today we see front/next at 1.20 backwardation.
        >
        > This indicates a real shortage and would explain why it is that the
        > price of crude seems to have little resistance as it plows higher.
        >

        Hi Gerry,

        I've never agreed with the interpretation that backwardation between front and next month indicates a "shortage" in the sense that seems to be implied here.

        People should IMO not over interpret "paper prices" as some unique indicator of physical supply

        If one wants to see what is going on, look at real physical metrics

        Crude Inventory is fine as seen at TWIP
        http://tonto.eia.doe.gov/oog/info/twip/crstusm.gif
        http://tonto.eia.doe.gov/oog/info/twip/twip_crude.html

        Mogas Inventory is HIGH
        http://tonto.eia.doe.gov/oog/info/twip/gtstusm.gif

        Heat inventory is OK
        http://tonto.eia.doe.gov/oog/info/twip/disstusm.gif



        Most of the time I was in the industry, backwardation was the rule. Easy to understand when one considers that Supply at the margin was controlled via a "cartel" . Since historically there was plenty of spare crude capacity, at any time they could open the taps a bit more and tank the price.
        Everyone would know this in the industry, so why would anyone want to carry extra inventory.

        The Lowest risk position for physical players (refiners), was IMO to operate about as low in inventory as one could subject to maintaining reliable supply.
        (I.E. minimize days supply)

        That's what I'd still do.


        > It may also explain why it is that Cheney is supposedly on his way to
        > the Middle East to beg for greater production. The shortage must be
        > pretty bad for Cheney to rush over there.
        >

        The US Inventory numbers don't indicate any physical shortage in the short term.


        > All of this should say something. My sense is that if there is no
        > announcement of increased Saudi production (apart from "a little
        > something" to give Cheney some face), we are seeing a de facto
        > annoucement that the Saudis cannot produce anymore, in other words a
        > between-the-lines admission of Peak Oil?
        >
        > Gerry
        >


        No.. I don't think so.(whether or not we are about at Peak.. I don't think one can tell from the current situation). What I think you're seeing is that there a lot of factors other than physical supply driving "paper price" in the short term EG USD exchange rates

        All that needs to happen is a bit of a rebound in USD, and oil price retracts

        With the type of volatility we see, as a refiner I'd still just stick to operating at min operable inventories (as measured by days supply).

        If the US/Cheney wanted to deleverage the crude prices somewhat.. They could boost margin considerably at the Nymex.

        If they don't do that.. i draw the obvious conclusion that it's because they don't want to do that.. (It is however a tool at their disposal.)

        If I were the Saudis, I'd tell them the physicals do not justify more supply.
        Looks to me like OPEC/Saudis are correct about this

        I would think Cheney biggest issues would be maintaining oil pricing in USDs... and convincing the Petrodollar countries to bail out the US Banks

        Wasn't there a story a couple months ago, about Paulson trying to convince the Chinese of the great investment opportunities in the US housing market ? ::))

        The Chinese have lots of USD to consider where to invest, and similarly the Mideast has lots of Petrocurrency that the US would like recycled back into the US..

        I'd guess those might be some of the biggest items on Cheney's agenda.

        cheers
        brent








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      • brent_ns
        ... front month/next ... backwardation. ... it is that the ... plows higher. ... backwardation between front and next month indicates a shortage in the sense
        Message 3 of 5 , Mar 13 11:00 AM
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          --- In energyresources@yahoogroups.com, brent ns
          <brent_ns@...> wrote:
          >
          >
          >
          >
          > > To: energyresources@yahoogroups.com
          > > From: gaea@...
          > > Date: Tue, 11 Mar 2008 19:16:47 +0000
          > > Subject: [energyresources] Oil Pricing
          > >
          > > A couple of weeks ago the backwardation between the
          front month/next
          > > month was a few cents. Today we see front/next at 1.20
          backwardation.
          > >
          > > This indicates a real shortage and would explain why
          it is that the
          > > price of crude seems to have little resistance as it
          plows higher.
          > >
          >
          > Hi Gerry,
          >
          > I've never agreed with the interpretation that
          backwardation between front and next month indicates a
          "shortage" in the sense that seems to be implied here.
          >
          > People should IMO not over interpret "paper prices" as
          some unique indicator of physical supply
          >
          > If one wants to see what is going on, look at real
          physical metrics
          >
          > Crude Inventory is fine as seen at TWIP
          > http://tonto.eia.doe.gov/oog/info/twip/crstusm.gif
          > http://tonto.eia.doe.gov/oog/info/twip/twip_crude.html
          >
          > Mogas Inventory is HIGH
          > http://tonto.eia.doe.gov/oog/info/twip/gtstusm.gif
          >
          > Heat inventory is OK
          > http://tonto.eia.doe.gov/oog/info/twip/disstusm.gif
          >
          >

          Hi Gerry,

          Looking at the inventory picture, I think a more reasonable
          interpretation is that crude runs have been set to meet
          (winter) #2oil demands, and crude runs set at that level
          have resulted in being long mogas.
          Refiners can can vary mogas/distillate ratios somewhat
          however only within certain limits dictated by the
          characteristics of the particular crude oils they are
          running, refinery process configuration and seasonal
          product specs.
          With mogas a little long, this suggests a reduction (cet
          paribus) in crude processing later on,( compared to that
          which would pertain were mogas not in surplus currently),
          as demand for middle distillate declines in the spring

          cheers
          brent
        • Gerry Agnew
          Just having a look at this as I do quite frequently. As you may have guessed, I have been examining oil backwardation pricing on the CME contracts which run
          Message 4 of 5 , Jul 19, 2014
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            Just having a look at this as I do quite frequently. As you may have guessed, I have been examining oil backwardation pricing on the CME contracts which run from the front (initial) month of August 2014 to as far out as December 2022.
             
            This is what I have found, from Friday's close.
             
            August 2014 = $ 102.88
            December 2014 = $ 98.74
            December 2015 = $ 92.51
            December 2017 = $ 87.32
            December 2022 = $ 85.35
             
            With all of the worry in the Ukraine and so forth (think Natural Gas here) the backwardation from August 2014 to December 2014 is a high $ 4.14. On average it is over $ 1 a month which is high in my book. This indicates worry and traders are loading up ahead of the end of this year (a war cycle year I hasten to add).
             
            We go past to 2015 and see December 2015 at $ 6.23 cheaper than December 2014. This is a sharply reduced backwardation of about $ 0.50 a month
            Looking out at December 2017, we see a move of $ 2.19 or only $ 0.09 a month.
             
            Finally, five years on from this we see just about a $ 2 fall only or about a negligible $ 0.03 a month or some such.
             
            What does this say? It either means that a LOT of oil is forecast to come onto the market in the next few years and that the grave shortages I am so worried about have all gone bye-bye.
             
            Does this mean that shale oil  is going to flood the world for years to come? Does it mean that the US is going to enter a sharp recession which is going to last for a very long time (ie recession means less oil required).
             
            Something is going on which is very significant.
             
            Gerry
            ************************************************
          • Eric Pfeiffer
            Best thing to do is save these data points and see if indeed that pricing does develop as these dates roll across. Checking the validity of the CME pricing
            Message 5 of 5 , Jul 20, 2014
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              Best thing to do is save these data points and see if indeed that pricing does
              develop as these dates roll across. Checking the validity of the CME pricing
              mechanism is a good place to start before drawing any conclusions about
              future oil supply.
                 Dec of this year will see a WTI price of 98 dollars about
                 Dec of 2015 will see a WTI price of about 92 dollars.

                  I have entered those numbers on Excel and will post on energy resources what
              the actual price is as those dates arrive.  I like a good longitudinal study.
                 Electric autos certainly won't be driver of lower prices.
              EP


              On Saturday, July 19, 2014 7:34 PM, "'Gerry Agnew' gaea@... [energyresources]" <energyresources@yahoogroups.com> wrote:


               
              Just having a look at this as I do quite frequently. As you may have guessed, I have been examining oil backwardation pricing on the CME contracts which run from the front (initial) month of August 2014 to as far out as December 2022.
               
              This is what I have found, from Friday's close.
               
              August 2014 = $ 102.88
              December 2014 = $ 98.74
              December 2015 = $ 92.51
              December 2017 = $ 87.32
              December 2022 = $ 85.35
               
              With all of the worry in the Ukraine and so forth (think Natural Gas here) the backwardation from August 2014 to December 2014 is a high $ 4.14. On average it is over $ 1 a month which is high in my book. This indicates worry and traders are loading up ahead of the end of this year (a war cycle year I hasten to add).
               
              We go past to 2015 and see December 2015 at $ 6.23 cheaper than December 2014. This is a sharply reduced backwardation of about $ 0.50 a month
              Looking out at December 2017, we see a move of $ 2.19 or only $ 0.09 a month.
               
              Finally, five years on from this we see just about a $ 2 fall only or abouta negligible $ 0.03 a month or some such.
               
              What does this say? It either means that a LOT of oil is forecast to come onto the market in the next few years and that the grave shortages I am so worried about have all gone bye-bye.
               
              Does this mean that shale oil  is going to flood the world for years to come? Does it mean that the US is going to enter a sharp recession which is going to last for a very long time (ie recession means less oil required).
               
              Something is going on which is very significant.
               
              Gerry
              ************************************************


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