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Why Crude prices are improving

The bad news produces learned fear

The crude oil market is benefiting from the bad news and balancing itself out as the fear index increases.All failed attempts to lift the price of oil are bad news, but it helped to support the crude oil prices.How? What are thesebad news?

Bad news No1:The oil traders are now convinced that $45 per barrel is not the crude oil bottom price, it could get worse. This has put an end to (Contango), the quick restocking after each successive price fall.

Contango means Store more crude , and backwardation is “get rid of it”

Crude fff

The 2014 drop in crude oil prices to around $55, pushed the market into “Contango”, as refiners and investors believed that the crude prices have found the bottom, and the fall is temporary. This encouraged the investors to restock at the new low prices of $50-$55 (in anticipation of a price rebound). They couldn't be more wrong, as this led to a new inventory avalanche in 2015 which took the prices to a new low of $40 per barrel (see the graph). Again, the market believed that this time, the $40 is the real bottom and cannot go any lower. and they repeated the same mistake of 2014 fall by re-stocking faster than they de-stocked ( see graphs) ,which led to the crude oil avalanche of 20016, pulling down crude oil prices to $24. Here again:“ We did not expect the prices to fall this far” said the Fed Bank Chairwoman. This proved that production in the oil producing countries is not a function of cost of production but “is the social and the political cost of not producing”. “We will sell at any price” said Saudi prince Mohamed. At $45 per barrel the price could go in any direction,that puts and an end to all the fuss about “Contango” and “Backwardation” by restocking.

No storage Tanks, Thanks

The bad news from Doha was a good news for Nymex, and the “no tanks “ storage for crude oil inventories is capping crude oil production better than the Doha meeting and is giving support to crude oil prices

Crude oil

The Second Bad News: Looking around for crude oil storage tanks is now a daunting task, in spite of a surge in new tank buildings. The physical limit of “Storage Tanks” is capping the production levels. Oil tankers were practically going around aimlessly looking for storage, which has reached war time level, the highest in living memory (Petroleum inventories in the USA alone is more than 2 trillion barrels) in addition to production capacity of 9mb daily.

Recently the market has found a way to accommodate and contain the problem through:

A- Lowering refinery runs to around 88% and consuming the product inventories, plus the reduction of imports of petroleum products to make room for more distressed crude oil cargoes. This helped to improve the refinery margins (see below the 321 formula on refining WTI margin)

B- The recent sudden surge in building more “Operational” storage tanks, gave the refiners a cushion to absorb the market shocks..

C- The traders have increased Their “Speculative” storage tanks, In Cushing, for example, storages facilities have increased by 25 million barrels during the last three years, and there are similar growths, in Fujairah, India, china. This trend is normal because the volume of trade on the exchanges has increased which requires higher volume, but it also reduces volatility as the market becomes less marginal.

Now, market “glut” is not measured by absolute quantities of Stocks but rather by the availability of absolute storage facilities to accommodate the surpluses at less than 20 cents per month which should sponge the apparent glut . These new storage facilities are also reducing the cost of storage (storage cost is becoming part of the price structure ).

“The Prince”

Crude oil Crude oil In the past three years OPEC underestimated the impact of the Shale oil

( Read All is quiet on the Eastern Front!) In Washington on April 2014 , Mr.Naimi(the Saudia Arabia Oil Minister) commenting on shale gas and oil said:

Why is there so much talk about shale oil now, this is not the first time new sources of oil are discovered, don't forget history, he said. There was oil from the North Sea and Brazil, so why is there so much talk about shale oil now ? the matter is exagurated he said

While on other hand, the shale oil drillers (new oil barons) over-estimated the shale oil reserve and borrowed heavily to invest, based on wrong forecast for oil prices, and a little more than a back-of-the-envelope reserve estimates. The Monterey shale reserves in California were vastly overstatedat about 15.4 billion barrels. The revised estimate is a puny 600 million barrels of oil...

The “wait and see” attitude of OPEC and the drillers with alleviated hard beat each time OPEC declares “ no cut, we may freeze” led the market into “ Contango “ helped by many statements like "crude price falls are temporary", as Mr.Naimi said.

The traders ,the drillers and OPEC were all waiting for market rebound , or a sign of market revival from Doha meeting or the next Moscow meeting…

The third bad news now is :

the waiting is over with the arrival of the new ” Oil Prince “ telling the new oil barons, “ Low prices are not our problem… We sell at any price “.

This statement is strong enough to stop the heart of anyone who is waiting for an artificial dose of oil price stimuli”. In fact,it was a death-blow to the new oil barons on the eve of Doha meeting. The Oil Prince did at 30 years of age what a sixty six years old OPEC organisation failed to do. What the market needed is a clear message. Instead of “ Softlysoftly” approach practiced by all OPEC members:

"We have all developed an oil addiction in Saudi Arabia and this is dangerous and has hampered development in many sectors during past years," Prince Mohammed said after the government approved the plan

This is a blue print from the future King and not a political statement by a minister to the media trying to threaten the “frackers”. It is also a signal to the major oil consuming countries who are seeking energy independence and less reliance on imported energy, that “ the Major Oil Producers could also seek less reliance on oil revenue”.This puts an end to all speculation that Saudi Arabia is beginning to crack and soon they will give up.

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