Sunday, June 26, 2016

Oil Futures, Pricing -- June 26, 2016; Fossil Fuel Center Of Gravity Clearly Shifted From Mideast, Russia To North America

The price of oil will be affected by the plummeting pound (London, sterling) and the surging dollar following Brexit. For us on the sidelines it will be interesting to watch. For Prince Salman, it has huge implications. Just when he saw the price of oil rising, it dropped on Brexit. I assume the price of oil will drop due to anxiety about Brexit (short term) and the surging dollar (short to medium term).

Swing Producer

The following was put together in an ad hoc manner, but reading through it, one starts to see tectonic changes occurring in the oil market. Clearly, things are changing; the center of gravity for fossil fuel has clearly moved from the Mideast and Russia to North America. 

From an earlier post:
  • October, 2015: Saudi's inventory at record levels; have since fallen almost 40 million bbls
  • over same period, US crude oil inventories have increased by slightly over 60 million bbls
Saudi policy appears to be to continue inventory drawdowns for the foreseeable future.

Saudi says they won't increase production -- note, they said they won't increase production. They said nothing about exports. For newbies: Saudi's domestic use of oil surges in July and August to provide electricity for air conditioning. Saudi imports to the US won't decrease: most of their US imports are to supply their Gulf Coast refinery and they won't cut that).

The price of oil is determined by the value of the last bbl produced or sitting in storage -- if that makes sense.

Which brings us to storage. First this article from February, 2016:
US crude oil inventories are at an 80-year high at this time of the year. Crude oil storage capacities have been increased due to rising crude oil inventories and long-term oversupply concerns. So, limited crude oil storage facilities caused crude oil storage costs to rise to $0.90 per barrel on February 9, 2016—compared to $0.10 per barrel in August 2015. Crude oil storage costs rose nine times in six months. The costs are even more than the long-term storage costs in the Gulf Coast.

The Louisiana Offshore Oil Port (LOOP) and Matrix launched the first innovative ETF contract based on the crude oil storage capacity at the LOOP Clovelly Hub in the CME Globex. The first trading started on March 30, 2015. The first listed and delivery month was May 2015. The trading floor would be NYMEX. The electronic platform would be CME Globex. This crude oil storage contract will help consumers store crude oil for 1–12 months. Also, it provides transparency for crude oil storage costs over the short term. The contracts provide access to storage at Gulf Coast facilities. Each crude oil storage contract gives the buyer the right to store 1,000 barrels of LOOP sour crude at the LOOP Clovelly Hub for any calendar month.
So, where do crude oil futures stand now? For August, 2016: 45 cents (if I'm reading the chart correctly).

See recent post on increasing storage capacity in the US, and increasing utilization of that storage. 

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