Where Will Oil Prices Go?
So, let's look at the fundamentals for oil. While a large part of
this week's rise in oil was short covering (you can tell that from open
positions), the supply of oil was down 7% from last year, even with
demand beginning to fall. But there is an interesting footnote to that
statistic, which we will visit later. Look at the chart below from www.economy.com:
Notice that supplies turned down sharply this last month, while the
momentum of falling supply had been dropping since January. That is to
say, the change in crude oil stocks was a negative 10% in January and
was a little over -4% a month ago, falling to -7% today. But this is in
the face of demand slowing. Today we learned that gasoline usage was
down 4.2%, as prices are finally changing American driving behavior.
Jakab Spencer noted in his always interesting Dow Jones column that
there is a disconnect between the New York Stock Exchange and the New
York Mercantile Exchange, just one mile apart. The NYSE is pricing in
$75 oil in oil stocks, while the futures market is surging over $135,
and there are calls for near-term $150-a-barrel oil. The stock market
is telling us that oil, at least in futures terms, is in a bubble.
And frankly, if you listened to their testimony, and more
importantly pay attention to their actions, oil company executives
simply do not believe that the price of oil is going to be $135 a
barrel for the next few years. If they did, they would be punching more
holes in the ground in places where it might be expensive to get the
oil to market - but at $135 a barrel it would be profitable.
And then there is an odd circumstance in the oil picture that I
think may suggest that we could see a break, and perhaps a violent one,
in the near term for the price of oil.
Where Are All the Tankers?
For a few weeks now, observers have noticed that Iran is leasing
tankers and storing oil in them. At about $140,000 a week or so, that
is expensive storage. At first, conspiracy theorists were wondering if
they were preparing for some kind of war or attack. But more
conventionally, it may be they are having problems selling their oil.
Their oil is not very high-quality, and there are only a few places
that can take it and refine it. India, China, and the US are among the
countries with refineries that can take Iranian oil. (And yes, George
Friedman of Stratfor tells me some of it does end up in the US from
time to time.)
India's refiners are telling Iran they no longer want their oil,
preferring the higher-quality oil that is readily available in the
area. So Iran has to decide whether to send it to China or "repackage"
it so that it can end up in the US, while they try to get refiners in
India to change their minds. Thus, they are leasing tankers to store
the oil they are pumping.
I called George about six this evening and asked him about the
Iranian situation, as that is a lot of oil that could come on the
market at some point, as well as a possible reason that oil supplies
are down. George has analysts on top of this situation.
He told me, "John, it's more interesting than that. It is not just
Iran. Today we started checking on how many tankers Iran had, and soon
discovered that there is a serious tanker shortage. Lease prices have
soared in the past few weeks. It is clear there are a lot of
speculators betting that oil is going to rise to $150 or so and are
willing to pay very high prices for keeping the oil on the seas waiting
for higher prices. It is a speculative boom."
He then told me about flying into New York in the early '80s.
Outside the harbor were 30 or so tankers just sitting, waiting for
prices to continue to increase as they had been doing for some time.
When they did not, they all tried to get into the harbor at the same
time, and of course they couldn't. It was the top of the market. Prices
dropped, and the owners of the oil had to go to the futures market to
hedge what they could. I had heard that story, but George saw it with
his own eyes.
Almost everyone (except the stock market) is convinced oil is going
higher in the near term. As I noted above, this week's rally was
partially due to short covering by large institutions and companies
which had sold production far into the future at much lower prices.
They finally threw in the towel and took off their hedges.