Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

The Two Real Reasons Crude Oil Prices Are Currently Slipping

Commodities / Crude Oil Sep 26, 2015 - 04:36 PM GMT

By: ...

Commodities

Dr. Kent Moors writes: The Energy Information Administration just released its latest report on oil. And although I’m no conspiracy theorist, what’s going on in oil pricing has all the earmarks of a setup.

Each week, the report tells us what the crude oil and oil product markets looked like as of the previous Friday. It is usually the yardstick by which analysts appraise everything from oil supply through refinery utilization to the markets for processed products such as gasoline, diesel fuel, and low sulfur content heating oil.


This week’s report showed criteria that would normally signal upward pressure on prices: a drawdown in oil supply, tighter refinery usage, and a widening spread between crude oil and oil product prices.

Now, this last criterion may be the most important for assessing pricing across the board. It involves the relationship between crude raw material pricing and supply on the one hand and similar considerations for gasoline and heating oil on the other (heating oil serves as a surrogate for diesel in these calculations since both distillates come from the same refinery cut).

Simply put, prices should not decline when the spread is rising.

So why are oil prices heading downward?

Distortion currently occurring in the market.

Here are the culprits behind this price manipulation… as well as how we can profit from these artificial moves…

A Drawdown Should Push Prices Up

In the past few weeks, the drawdown on supply has been greater than anticipated, in some cases by a significant margin. That spread is improving, which usually contributes to an overall rise in price for the underlying raw material.

Yet the pundits continue to grasp at straws in their attempt to explain the resistance to a rise in crude oil and oil product prices.

This time around the “spin” involves claiming a decline in gasoline demand has offset the upward pressure of an expanding drawdown on the storage side. For the past two weeks this has been shaping up as a pronounced cycle.

For one thing, the overall drawdown has been multiples of what the American Petroleum Institute had recently forecast. This week, it was no less than six times the industry estimate.

For another, the drawdown at Cushing, Oklahoma, is even more important than the figure as a whole. Cushing is where the West Texas Intermediate (WTI) daily pricing peg is set for crude futures contracts trading in New York using the WTI benchmark. Consecutive weeks of reductions here have had a direct impact on the spread.

Not only are the concerns about gasoline demand missing the point, but they are themselves quite misleading when taken alone. Gasoline demand usually decreases this time of year, since refineries are already well into the cycle of switching from primary output in high-octane gasoline to heating fuel. A deeper warm trend in the fall, for example, almost always results in a spike in gas prices as usage extends longer than expected into what is supposed to be the cooler season.

Also, we have just experienced a tick up in gasoline usage in August and through Labor Day beyond what had been expected. This is at best a non-issue for this time of year.

So what gives?

Here’s Why Prices Are Depressed…

There are two matters of import at play here, both reflecting indirect paper moves having little to do with the actual underlying dynamics of the market:

  1. another round of shorts by those who know no other way to make money from commodities; and
  2. a widening usage of derivatives based on what are called “crack spreads.”

Regarding the first, the recent OPEC “opinion” that we will not see $100 a barrel oil until about 2040 has to be read with more than a grain of salt.

As we have revealed here in Oil & Energy Investor, major OPEC sovereign wealth funds have been shorting oil. It remains in their best interest to keep prices low to defend market share. In pursing this objective, they are shorting their own product. Therefore, statements about reduced prices in the future merely support another objective entirely – one that has little to do with improving their revenues for the sales of oil!

As to the second, derivatives, some explanation is necessary. Crack spreads allow an investor to play the difference between both WTI and Brent (the London-set benchmark) and the market price of gasoline and heating fuel. Of course, the investments here are very big. This is not an approach any retail investor could make.  But it is a recourse of hedge funds and their ilk that are intent on turbo-charging short plays.

The combination of the two strategies are producing the latest myopic way to generate profits… as long as its adherents can persuade investors that depressed prices are ongoing.

Now to be realistic, we have a number of factors contributing to that persuasion – from an Iranian accord, through OPEC increased production, to a constriction in the U.S. shale-tight oil patch.

And then there is the other culprit: Goldman Sachs. The investment firm is continually talking down the price of oil and now suggests that $20 a barrel is possible. This analysis is far from objective, given that Goldman is the largest shorter of oil in the market.

A decline that profits the short crack-spread players becomes an easier sale.

…And How We Can Profit

Given these dynamics that are distorting the market, we are likely to approach $70 a barrel only next year, with a further move to $80 sometime beyond that (a view, by the way, on which OPEC concurs). Even without the shorts and crack-spread derivatives we would still be coming in much lower than the triple digits of some 15 months ago.

But it is incorrect to assume that these machinations are merely reflecting, rather than dictating, what the market is telling us. There are plenty of other participants ready to continue external ways of distorting pricing.

By how much?

I have been beta testing an index of wet barrel (actual oil consignments) comparisons to paper barrels (futures contracts and derivatives) in an attempt to find out. Initial reads are telegraphing a widening effective impact. As of the end of August and the first full month of running the yardstick, it was coming in at $8 a barrel in New York and closer to $9 in London.

By the close of trade last Friday (September 18) it has both accelerated and converged, coming in at about $12 for both benchmarks.

Now, even pegging the actual price at $57, rather than $45, in New York still indicates a weak oil market. Nonetheless, as I fine-tune this tool, it will be telling us something else of greater importance to our purposes.

This approach should tell us when the curve is moving up before it appears in the market. And that will prove very useful in picking stock moves moving forward.

Source http://oilandenergyinvestor.com/2015/09/the-two-real-reasons-oil-prices-are-currently-slipping/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules