"Speculators"

I'm still flummoxed by pundits who are confused with the definition of "to speculate" after seeing the list of companies bidding for oil from the US Strategic Petroleum Reserve and how much they are willing to pay for it.

After the announcement that oil would be released from strategic petroleum reserves around the world, there were pundits who expected the price of oil to fall (and it did for the next 24 hours or so). When the price of oil stabilized and then rose again, going above the price before the announcement, there were pundits who said that it was speculators driving the price back up.

But looking at the list, these were all refiners (or oil companies with refineries) looking for SPR oil.

With three exceptions: Barclays, JPMorgan, and Trafigura.

With those exceptions, I just don't include refiners buying oil from the SPR as speculators. If one does, then one must agree that anyone trading in oil are "speculators."

As for me, I don't use the word "speculator" to describe folks buying and selling commodities. In fact, I'm not even sure when I would use the word "speculator" -- it's all in the eye of the beholder.

Here are the generally accepted definitions of "to speculate":

• to engage in thought or reflection; meditate (often followed by on, upon,  or a clause);  
• to indulge in conjectural thought; and,
• to engage in any business transaction involving considerable risk or the chance of large gains, especially to buy and sell commodities, stocks, etc., in the expectation of a quick or very large profit.

I just don't see bidding for oil at $107 when it was trading on the open market for $97 as "considerable risk" or even the chance of large gains. I just don't see oil spiking to $107 before these refiners take delivery of the oil they are bidding on. In fact, one could argue, based on the pundits who say there is no shortfall, that they are taking a huge risk on the downside.

So, I am flummoxed, again, by the pundits who are confused with the definition of "to speculate" when it comes to oil.

IEA Reports On Status of Oil Markets Following Release of SPR -- Rigzone

Link here.

A long article quoting the IEA's rationale for the release and how things stand now, about three weeks later.

If I read the IEA statement correctly, it appears that the IEA is stating strongly that the release was not due to the escalating price of oil, but rather due to refiners demand for more crude oil. In fact, the IEA notes that the price of crude was falling when they made their decision to release oil from the emergency stockpiles.

Having said that, the IEA consistently refers back to the price of oil without one mentioning the amount of crude oil that the refiners actually needed. The IEA provided lots of "dollar numbers" but no "crude oil numbers."

One quote from the long report:

Early-year industry stocks looked comfortable back in March, and there was a presumption then that other OPEC producers would immediately step in to boost supply to replace Libyan outages. In contrast, the absence up until June of major OPEC increases implied a real possibility that commercial stocks could fall to the bottom of their seasonal range, risking a renewed, damaging and sustained surge in international prices in 3Q11. The IEA therefore decided to act to address this supply-side issue, even though prices were then trending lower."

I have long maintained that OPEC does not have the spare capacity required to meet increased demand. I found this quote at the end of the article consistent with that view:

Veteran OPEC-watcher Bhushan Bahree, senior director of global oil for IHS CERA, told Rigzone in a telephone interview: "Oil supplies are ramping up." Bahree added, "There was very little incentive for the other OPEC nations to agree to increase production. They have little or no spare capacity."

Oil Imports in May -- Huge -- Explains Tapping the SPR? -- Full Tanks at Cushing

I don't get it.

US economy slowing down? Horrendous job reports? Oil tanks at Cushing full? Record levels of oil stored in US?

And then this: huge imports of oil into US in May, 2011.

The U.S. trade deficit surged in May to the highest level in more than two and a half years, driven upward by a big increase in oil imports.

The Commerce Department said Tuesday that the deficit increased 15.1 percent to $50.2 billion in May. That's the largest imbalance since October 2008.

Exports declined 0.5 percent to $174.9 billion. Imports rose 2.6 percent to $225.1 billion. Oil prices have fallen since May, so the effect of higher prices should ease some in the coming months.

Something tells me that helps explain the decision to release oil from the SPR.

US Announces "WINNERS" of Oil Released From Strategic Petroleum Reserves -- This Is Absolutely Crazy -- But I'll Play Along

Link here.

The vast majority of the oil released from the US strategic petroelum reserve goes into off-shore storage vessels, or perhaps will be sent to Europe, making the US an exporter of light oil. Who woulda thought? About 80 percent will be moved to off-shore vessels. So, now, instead of the US government storing it, private companies are storing it. Something tells me they are not storing it for altruistic purposes. Average price paid: $107/bbl. This is absolutely crazy.

For all those who thought Barclays was an inappropriate bidder, they immediately put their oil into the pipeline. You could have done the same.

It looks like refiners were happy to get the oil (something tells me they did not pay a premium).

And it looks like everyone who bid, got their bid. Interesting.

Here are some highlights of the article:

 

Fifteen energy trading companies received contracts for crude oil from 

U.S. emergency stockpiles, the Department of Energy said on Monday.

The bids total 30.64 million barrels of oil, with the average bid at 

$107.20 per barrel.

About 80 percent of the offers for a drawdown of the 

Strategic Petroleum Reserve crude were based on moving the oil by vessel.

Valero Energy Corp            6.90 mln  105.62-109.76   Pipeline: 3.85
Vessel:   3.05 
 
Vitol Inc                     4.00 mln         108.05   Vessel 
 
Shell Trading USA             3.65 mln  105.70-108.88   Vessel:   3.0
Pipeline: 500,000
Barge:    150,000 
 
ConocoPhillips                2.10 mln  106.29-107.88   Vessel
Plains Marketing              2.08 mln  106.78-107.78   Vessel
Hess Corp                     2.00 mln  105.01-107.54   Vessel
Marathon                      2.00 mln  105.80-107.80   Vessel
ExxonMobil Corp               1.51 mln  107.34-108.94   Pipeline: 930,000
Vessel:   580,000 
 
JPMorgan                      1.50 mln         105.33   Vessel
Sunoco                        1.40 mln         106.78   Vessel
Tesoro                        1.20 mln         107.08   Vessel
Trafigura                     1.10 mln  105.20-107.20   Vessel
Murphy Oil                    500,000          106.73   Vessel
BP PLC                        500,000          105.04   Vessel
Barclays                      200,000          104.98   Pipeline 

SPR Release May Not Be Enough to Offset Libyan Loss of Oil

Link here (Forbes.com).

This is a most interesting story. Buried near the bottom of the story:

At the same time, rising hostilities between oil producer’s cartel OPEC and IEA, the west’s oil watchdog, have made the market nervous, according to Nomura.  While IEA announced they were releasing 60 million barrels of oil from strategic reserves (mainly from the U.S.) at a rate of 2 million barrels a day, “the market is now concerned if IEA can continue its release of strategic oil reserves to substitute the lost Libyan crude in the longer run.”

I posted the same thing some days ago, questioning whether if the release will even be adequate if hostilities in Libya continue into the autumn.

Some Believe IEA Could Dip Into Strategic Petroleum Reserves Periodically to Stem Price Increases

Link here.

I opined that the IEA would do exactly that -- dip into reserves periodically to try to stem prices. Now that the IEA has done it once, it becomes easier to do it again, except for a few inconvenient truths:

[One analyst] believes the IEA and U.S. Department of Energy could dip back into reserves to try to control rising prices. The IEA said the initial release was to make up for lost Libyan production. But [one pundit] said the criticism against the move was significant enough to crimp further actions.

"It would be like intervention in he currency markets in the 1980s. The intended purpose was to psychologically drive down prices and every time they intervened it almost expressed their desperation...it would be like putting gasoline on a burning fire," said [one analyst].

But a few inconvenient truths haven't stopped folks from doing crazy things in the past. 

SPR Release -- Bids -- Companies and Average Price -- $107/BBL

I think folks will find this surprising: folks are willing to pay $107/bbl of oil from the American strategic petroleum reserve, and then pay for storing it in tankers off shore. Still wanna bet that oil under $95 is the price we will see by Labor Day?

Link here.

Note that a bank (Barclays) is bidding on 200,000 bbls; JPMorgan is bidding on 1.5 million. Since I don't recognize either as traditional oil companies, perhaps Barclays and JPMorgan are two of those "speculators" everyone complains about:

The bids total 30.64 million barrels of oil, with the average bid of 

$107.20 per barrel.

COMPANY                    VOLUME (barrels)     BID ($/barrel)
Valero Energy Corp            6.90 mln           105.62-109.76
Vitol Inc                     4.00 mln                  108.05
Shell Trading USA             3.65 mln           105.70-108.88
ConocoPhillips                2.10 mln           106.29-107.88
Plains Marketing              2.08 mln           106.78-107.78
Hess Corp                     2.00 mln           105.01-107.54
Marathon                      2.00 mln           105.80-107.80
ExxonMobil Corp               1.51 mln           107.34-108.94
JPMorgan                      1.50 mln                  105.33
Sunoco                        1.40 mln                  106.78
Tesoro                        1.20 mln                  107.08
Trafigura                     1.10 mln           105.20-107.20
Murphy Oil                    500,000                   106.73
BP PLC                        500,000                   105.04
Barclays                      200,000                   104.98

I assume the oil companies are bidding on this oil for their refineries, which if true, a) they expect to pay more than $107/bbl in the future; and/or, b) they know they will be short that amount of light oil in the near future.

If they thought they would be paying more than $107/bbl in the future, I would assume they would be bidding for more, unless storage costs were a limiting factor. Thus, my hunch is that refinery managers anticipate a light oil shortfall in the near future. I'm curious how others read this.


Call me old-fashioned but I just don't see folks willing to pay $107 for a barrel of oil, and then storing it in off-shore tankers until used, if they thought oil was going to be selling for $96 in a month. But then, maybe I'm missing something. 


From their website, Trafigura:

Established in 1993 as a private company, Trafigura is the world’s third largest independent oil trader and the second largest independent trader in the non-ferrous concentrates market. It has access to approximately US$24 billion in credit facilities, with investments in industrial assets around the world of more than US$1.9 billion.

Trafigura handles every element involved in the sourcing and trading of crude oil, petroleum products, renewable energies, metals, metal ores, coal and concentrates for industrial consumers.

Some might call Trafigura a "speculator" but their bid is actually at the low end of those on the list. Hmmm.



Casablanca

New Data Points Regarding the SPR Release -- Represented Only 11 Hours of Global Consumption

All updates regarding the SPR release will be found here: SPR Tapped, which for now is linked at the sidebar at the right. It won't stay there forever.

The AP story today has a number of data points, some of which I "predicted" earlier. (Note: I may have misinterpreted the story. From the story "IEA will actually release only about two-thirds of what was originally promised." I take this to be only about two-thirds of 60 million barrels, but I may be wrong on this. If this is clarified, I will correct the post. It won't change the crux of the story.)

1. This blog has consistently maintained that Saudi can't scale up to meet growing demand. From the AP story today:

Independent oil analysts say prices still could head lower this year. But some think IEA's announcement speaks volumes about its expectations for world oil supplies.

"I think it's an admission from them that Saudi Arabia might not be able to produce enough oil on its own" to meet increased world demand, analyst Stephen Schork said.

2. I posted that I doubted the full amount allowed to be released would actually be released.

Goldman Sachs also pointed out late last week that IEA will actually release only about two-thirds of what was originally promised.

Goldman analyst David Greely said about one-third of the 60 million barrels will come from limiting the amount that countries are required to keep in emergency supplies. 

I was right, but for the wrong reason. With American storage tanks full, I did not think that the American SPR would be tapped to full extent allowed. I never thought that folks would actually take SPR oil to store in off-shore tankers betting on higher prices by the end of the year.

3. I posted that I doubted countries around the world had enough oil in their SPRs to release as much as they were allowed (again, I interpret the story this way, but I could be wrong).

To repeat: Goldman analyst David Greely said about one-third of the 60 million barrels will come from limiting the amount that countries are required to keep in emergency supplies. 

4. With 60 million barrels representing 17 hours of global consumption, I posted that the release should have negligible effect on the price of oil.

Since the oil industry tends to keep much more on hand than what's required, Greely said that the new limits will have an "almost negligible impact on oil prices."

5. I found this interesting:

Barclays sees China, India, Saudi Arabia and Brazil as the main sources for demand growth.

Everyone knows that China and India will increase oil consumption. My hunch is that most folks are not aware that Saudi Arabia's demand has also increased, but this has been reported for the past couple of years (if not longer). Brazil is a bit of a surprise to me. I see Brazil as a country with a growing economy, but not to the extent that it would be put in the China/India equation. Further, with Brazil developing its own oil resources, I thought their demand/supply would be a wash.

6. But the opening paragraph of this story is completely ludicrous:

Some major investment banks are still betting that oil prices will grow next year despite an emergency injection of crude on world markets from the U.S. and other countries.

The emergency injection represents 17 hours of global consumption. If spread out over time, one could get sixty days of additional supply (one million bbls for next sixty days), and if the world only needed a half million bbls/day, "they" could stretch it out 120 days, but even that barely gets us to the new year.

By the way, that "17 hours of global consumption" was based on the full 60 million bbls being released. As noted in the story above, it is estimated that only two-thirds of the 60 million will be released, about 40 million barrels, about 11 hours of global consumption.

News, Updates, and Comments on the SPR

Update

July 22, 2011: I guess I was wrong. It wasn't about the price at all. Oil is hitting $100 today, and IEA says it won't release more oil from the global strategic reserves. CNBC talking head says regardless of what IEA does, price of oil will come down: Brent oil will drop back to $85 by the end of the year (due to sluggish demand and skittishness caused by debt crisis in the euro-zone, and a stronger dollar).

July 21, 2011: Price of oil will come close to hitting $100 today.

July 15, 2011: IEA releases statement on the status of oil markets post-release, and rationale for the release.

July 5, 2011: Bidders and bids for oil to be released from the US SPR. Data available on July 1, 2011; I did not see it until today. It appears refiners need the light oil, and two banks are "speculating," as well as the world's largest private commodity trader. Wow, it must gall some folks to see these "speculators" buying up oil that was meant to be held for emergencies. Quoting a famous line in Casablanca: I'm shocked! I'm shocked!" Elsewhere others suggest the IEA could dip into emergency reserves periodically in an attempt to stem price increases.

July 5, 2011: New data points on the SPR release, as well as comments. At 4:18 EDT, I see oil was up $2.08 from the previous close. This is the first trading day of the second week following the announcement of the SPR release.

July 5, 2011: Now it's an AP story -- "Oil Climbs Above $97."

Some major investment banks are still betting that oil prices will grow next year despite an emergency injection of crude on world markets from the U.S. and other countries.

Benchmark crude rose as high as $97.48 per barrel Tuesday after Barclays Capital raised its price forecast for 2012. And Goldman Sachs said the International Energy Agency's decision at the end of June to release 60 million barrels of oil from its reserves won't cool off prices as much as originally thought.

Independent oil analysts say prices still could head lower this year. But some think IEA's announcement speaks volumes about its expectations for world oil supplies.

"I think it's an admission from them that Saudi Arabia might not be able to produce enough oil on its own" to meet increased world demand, analyst Stephen Schork said.

July 5, 2011: Price of WTI oil continues to rise, almost up another $2.00 today; up to $96.78 (up $1.84). Last week, folks suggested the price of oil would come down as the released SPR oil made its way through the system. I assume this has to do with two things: a) Barron's article over the weekend that suggested oil at $150 by next spring; and, b) the front page story in the LA Times suggesting no easy end to the Libyan "event.' Back on March 18, the president said "Libya" would last days, not weeks. Well, now we are into months.

June 29, 2011: Dayton, Ohio -- gasoline up 20 cents in one day. Isn't Ohio one of those important presidential election states? Fortunately we opened the strategic reserve last week.  

June 29, 2011: AP -- "Oil Rebound Weakens Effect of Oil Release" -- will, doh!

The sway that non-OPEC governments had over oil and gasoline prices petered out in less than a week.

Benchmark crude hit $95.21 per barrel Wednesday on the New York Mercantile Exchange. Over two days, oil has recovered the loss from last Thursday when the U.S. and other oil-importing countries said they'd dump emergency oil supplies onto the market.

Brent crude, which is used to price many international oil varieties, also rebounded. Although at $111.95 per barrel, it's still about 2 percent below where it was last week.

The swift rebound in oil means that motorists won't see as big of a discount at the gas pump as expected. By Wednesday afternoon, gasoline futures recovered about 20 of the 26 cents per gallon that were lost after the International Energy Agency, which includes the U.S., said it would make 60 million barrels of crude and other fuels available this summer.

My hunch: this is just the beginning of the releases from the strategic petroleum reserves -- anything to disrupt the oil industry. 

June 29, 2011: Of course, this link will change -- it is a dynamic site -- but the Drudge Report headline and graph, with oil up almost $5.00 in past two days: "Superspike: Oil Soars Despite Obama Release of Reserves."

Timeline: Price of Oil Higher Than Before The Announcement

Lest we forget:

• June 23, 2011, moments before the announcement: $94.30
• June 23, 2011, low: $89.90
• June 24, 2011, close: $90.85
• Weekend
• June 27, 2011, close: $90.89
• June 28, 2011, high: $93.35
• June 29, 2011, high: $95.63
• July 2 - 4, 2011, holiday weekend
• July 5, 2011, first day of second week since announcement: up $2.08 to $96.98 (high for the day?)
• July 7, 2011, bulls run: up over $2.00 hitting an intra-day high of $99.27 
• July 15, 2011: some volatility; up $1.44 today; $97.13 
• July 19, 2011: oil up 2%; near $98
• July 21, 2011: spike again; intra-day high - $100.19
• July 26, 2011: firmly above $100
  

Most memorable comment sent to me on June 24, 2011: this will move the speculators to the sideline and oil will fall below $80. And it still might.

Original Post

Coming just days after the announcement that 17 hours worth of global oil consumption will be released from strategic petroleum reserves around the world, the price of oil is almost back to where it was before the announcement.

Who woulda thought?

Up $1.76 to about $95 at 7:55 PDT, June 29, 2011.

And that's on top of the $2.00 pop yesterday.

Where is Saudi on this?

I know this has nothing to do with supply and demand; it all has to do with the strength (or weakness) of the dollar. But having said that, one wonders if folks suddenly realized that yes, 60 million barrels represents only 17 hours of global consumption. By the way, I've seen no stories yet that suggest any American oil company or refinery has requested any light oil from "our" strategic petroleum reserve.

My hunch is that 17 hours won't be enough to meet European summer driving demand and non-US governments will silently release even more, assuming they have more to release.  Unless, of course, everything's back to normal in Libya by this time next week.

Oil From US Strategic Petroleum Reserve Will Be Flowing to Europe, If Anywhere

The story is starting to make sense. This is the real reason the IEA needed to release oil from the strategic petroleum reserves worldwide:

The initial disruption to oil output in Libya happened at a "fortuitous" time for European oil refiners as many were closed for maintenance.

"Now we're going into the summer driving season, those refineries which have returned to operation are about to ramp up their production."

Jones said the market was facing a possible shortfall of 1.8 million barrels per day for the remainder of June and 1.7 million for the next quarter.

American refiners switched to summer blends about 1.5 to 2.0 months ago. American refiners are well past the switch to summer blends. American storage tanks are at their fullest in years.

Storage tanks used by oil producers at the crude-trading hub in Cushing, Oklahoma, held 38 million barrels as of June 17, 41 percent above the five-year average for this time of year, according to Energy Department figures. Stockpiles at Cushing reached 41.9 million barrels in April, 2011, the highest point since at least 2004, when the Energy Department began tracking the figures.

The Europeans generally take their vacations in August, and their refiners are just beginning to switch to summer blends and getting ready for August driving and increased air traffic.

If any oil is released from American strategic petroleum reserves, it won't be going to American refineries; it will be going to European refineries.

If finally makes sense. It made no sense for the release of oil from the US strategic petroleum reserve if one simply looked at the American situation.

By the way, at the right price, this could also help provide American with a better balance of payments this quarter. 

(Reminder: American oil -- particularly the Bakken is light oil, the kind the European refineries use and were getting from Libya -- particularly the Italian refineries. Saudi oil is heavy oil and not "wanted" by Europe.)

Even Carpe Diem Confused About Tapping the Strategic Petroleum Reserve

Link here.

Gasoline prices have been dropping steadily for the last six weeks, and the current price of $3.62 per gallon (national average) is the lowest in three months and almost 8% below the recent peak of close to $4 per gallon in early May (see chart above).  America's  stock of crude oil for the week ending June 17 was at the highest level (1.065 billion barrels) in more than four month since early February.  So what's the administration's "solution" to the "non-problems" of rising oil supplies and falling oil and gas prices?

Tap into America's "Strategic Petroleum Reserve" for 30 million barrels of oil, enough for about 36 hours of domestic consumption, while at the same time opposing any legislation that would allow greater access to domestic oil supplies.

It looks like everyone is confused. 

IEA, Bloomberg, Others: Saudi Not Able to Make Up Shortfall

Earlier today, in response to the news that 60 million bbls of oil was going to be released from worldwide strategic reserves, I wrote that that world was awash in oil. That was earlier to day.

Now, I see there is an article from Bloomberg that confirms what I wrote:

The supply addition comes at a time when refiners in the world’s biggest economy have more crude on hand and are importing less as demand for fuels such as gasoline and diesel is slipping, according to Energy Department figures. The National Petrochemical and Refiner’s Association criticized the decision to tap the strategic reserve as a political move that “makes no sense” and “will do nothing to benefit consumers.” 

The story continues:

“This is kind of a head-scratcher because we’re just not in a situation in the U.S. where we physically need more barrels to meet demand,” Blake Fernandez, an energy analyst at Howard Weil, said in a telephone interview. “This looks more like a perception move by the U.S. government and the Europeans to alleviate high crude prices.”

Earlier today:

The U.S. and 27 other nations pledged today to tap government-controlled oil inventories after civil war in Libya disrupted crude shipments and Saudi Arabia failed to persuade fellow members of the Organization of Petroleum Exporting Countries to plug the gap with increased output.

In other words, Saudi is NOT able to make up the shortfall, something I have said more than once in the past year.

This is the third release from strategic reserves. The first two were more like "real" emergencies.

IEA members have conducted coordinated releases of emergency stockpiles on two other occasions since the group was founded in 1974. The first was during the 1991 Persian Gulf War; the second was in the aftermath of Hurricane Katrina which slammed into U.S. refineries and offshore oil platforms in 2005.

It Doesn't Quit: The Announcement to Release Oil From Global Reserves Continues to Reverberate

It looks like oil closed at around $92 today, after it appeared to be in free fall after the announcement of global release of reserves.

"Anonymous" posted some time ago that if the Saudis say they could make up the shortfall, and then it turned out they couldn't, the price of oil would spike to new highs.

Well, when I see an announcement in the morning that oil from global reserves will be released, and then I see that oil, in the big scheme of things, held its own, it's a very, very bullish sign for the oil industry.

And this comes at a time when folks say the global economy is slowing. If the price of oil reverses direction and heads higher after the announcement to release global reserves, "Katie, bar the door."