Oil: so much that they're turning it away?

[mtzianos]

Quote from 5to12:

There is absolutely no shortage of crude in the world today; OECD stocks have been building for months while demand has slowed; China demand, unlike the steep 2003-04 rise, has been flat for the first three quarters of this year.

Thanks for your post, I've posted the same facts here in ET in the past (even during the Sep05 frenzy).

Yet, considering the "oil glut" I fail to understand why arbitrage fails to bring the futures market in equilibrium with NYMEX/IPE contracts.

The only explanation I can think of (since there are big players short crude right as we speak, who could reach over to the physical market) is that futures contracts physical characteristics is so narrowly defined that it makes it practically impossible to arb.

I would go ask at some of the oil forums, but they seem to be populated by PeakOil / TEOTWAWKI folks ...

 

[energytraderus]

Oil bears tend to be new to oil speculation. CL hasn't, until recently, traded on current US inventories for well over a year now. The reason is clear: OPEC is tapped out. With winter's arrival, world demand will exceed not just current supply but also current capacity. Experienced oil speculators didn't care about Q2 and Q3 2005 OECD stock builds, because experienced oil speculators know that world demand increases by about 2-3MM bbl/day during winter.

For those hoping for US demand destruction, US gasoline demand is now about 1% higher on year: clearly, American drivers think $2.20 gasoline is tolerable. For those hoping for Chinese demand destruction, Chinese oil imports increased in Sept, Oct, and Nov: clearly, the Chinese think $65 oil is tolerable.

Oil doesn't have to go up: the world could simply see ever-increasing US gasoline demand along with ever-increasing Chinese oil imports in the face of static oil capacity.

 

[mtzianos]

Quote from energytraderus:

The reason is clear: OPEC is tapped out. With winter's arrival, world demand will exceed not just current supply but also current capacity.

I've seen the arguments you mention several times, but what bothers me is that they are in direct conflict with OPEC's official line and with all factual data.

OPEC said, just 2 days ago, during their meeting that the offer for 2Mbpd of extra pumping they offered to the market back in Oct05 wasn't taken by anyone. In what way is then "OPEC tapped out"?

Also DOE and API numbers show oil inventories to be at the highest level of the last 5yr. This might have reached a "ceiling" (unless they build new storage facilities) which could explain why LOOP is turning oil away.

I'm sure you're an experienced oil speculator, but I'd still like to see some facts

 

[daddyeaux]

OPEC is not tapped out....they have convinced everyone else that they are................

the southestern part of the saudi penninsula (offen called the Yankee Quarter) hasn't been touched and it is believed that there are reserves there that rival the Ghawar Field....

why up production anyway, doesn't make sense...

why produce 2 million barrels @ $25 when you can produce 1 milllion barrels @ $50

they are good businessmen too....

 

[mtzianos]

Quote from daddyeaux:

OPEC is not tapped out....they have convinced everyone else that they are................

Not to defend OPEC, but they've been re-iterating the fact that they have spare capacity on every occasion.

Also, they've been talking about "paper barrels" since 2000:

22-Sep-2000
The secretary general of the Organisation of Petroleum Exporting Countries (Opec), Rilwanu Lukman, says the world oil market is held captive by the derivatives markets. The old rules of supply and demand have been distorted, he says, by the creation of what he calls "paper barrels" of oil.

Opec president Ali Rodriguez says that at least $8 of the oil price is due to speculation.
http://news.bbc.co.uk/1/hi/business/937007.stm

It seems that OPEC thinks: as long as the consuming nations don't object, why would we mind the windfall profits?

So, 5 YEARS later, oil price has TRIPLED.

And there are over 1.5 BILLION "paper barrels" -to use OPEC's lingo- (over twice the US Strategic Petroleum Reserve) just at NYMEX.

I am not against speculation, I'm just puzzled why arb doesn't seem to work!

 

[power_uptick]

OPEC is TAPPED OUT. They have been
saying they have 2Mbpd in extra capacity for the past 1 1/2 years. I'm
sure the Saudis were pumping as much as they could last year to help their
buddy Bush get reelected (it sure seemed like it from their constant press releases about how they were upping production every couple of weeks while
oil kept marching higher last year).
OPEC's credibility has been on the line
for the last two years, and I can't believe that they are holding anything
back at this point.
The Saudis have some sour crude capacity that no one can use. That's
why the LIGHT SWEET CRUDE contract
has not back off much.

Quote from mtzianos:

I've seen the arguments you mention several times, but what bothers me is that they are in direct conflict with OPEC's official line and with all factual data.

OPEC said, just 2 days ago, during their meeting that the offer for 2Mbpd of extra pumping they offered to the market back in Oct05 wasn't taken by anyone. In what way is then "OPEC tapped out"?

Also DOE and API numbers show oil inventories to be at the highest level of the last 5yr. This might have reached a "ceiling" (unless they build new storage facilities) which could explain why LOOP is turning oil away.

I'm sure you're an experienced oil speculator, but I'd still like to see some facts

 

[Raystonn]

The value of a crude contract is in its price. The price of crude contracts are measured in U.S. dollars. If the value of crude does not seem (to you) to be following supply and demand, then I suggest you look into the other side of the equation: the value of the U.S. dollar.

Since leaving behind the gold standard, oil has become the de facto standard for the U.S. dollar.

 

[energytraderus]

Experienced oil speculators know both the rules to oil and, also, that the rules have changed: Only Saudi statements have any meaning regarding the OPEC quota, Kuwait and UAE always acts with Saudi, ignore all other "oil ministers"; Saudi will usually pump enough to mollify the US regardless of the OPEC quota; the rules have changed since Saudi has reached capacity.

For those who believe Saudi has spare capacity answer: Katrina and Rita destroyed much US domestic oil production and refinery capacity yet Saudi production actually dropped in Sept and Oct; two years ago, Saudi stated $50 crude would destroy demand and turn consumers to alternative sources, and yet Saudi production over the last two years has stayed at 9.5 MM bbl/day. Clearly, had Saudi any spare capacity, we'd have seen it by now.

Saudi and OPEC pumped as much oil as possible at $30; that Saudi production stays at 9.5 MM bbls/day indicates that they can't pump more.

 

[power_uptick]

I am highly skeptical that OPEC has any
usable oil capacity left. Several industry experts such as Boone Pickens
and Matthew Simmons have questioned whether global production
can exceed 85 million barrels.
The Saudis themselves have talked about increasing their production to 12 millions barrels by 2009. So they are saying that it will take them three years
to increase production by 2.5 million barrels if they are to be believed. This
does not sound like they have much current spare capacity.

But let's assume that they do have 2Mbpd as they claim. That means that given current demand growth projections by the IEA, in one year, that
capacity will be used up. That brings us back to square one. So oil can be expected to soar in one year, since the price of any freely traded commodity is determined by the marginal buyer and there won't be any marginal capacity left.
This would incentivize anyone with crude inventories to store them for a year since the price is expected to go up in a year. This would decrease current oil supply, and Woila! The current spot price will increase although
there is enough supply for current demand.
What I am trying to say is that the whole curve is linked, and expectations
of the future price of oil will have a direct impact on the current spot price.

Quote from mtzianos:

I've seen the arguments you mention several times, but what bothers me is that they are in direct conflict with OPEC's official line and with all factual data.

OPEC said, just 2 days ago, during their meeting that the offer for 2Mbpd of extra pumping they offered to the market back in Oct05 wasn't taken by anyone. In what way is then "OPEC tapped out"?

Also DOE and API numbers show oil inventories to be at the highest level of the last 5yr. This might have reached a "ceiling" (unless they build new storage facilities) which could explain why LOOP is turning oil away.

I'm sure you're an experienced oil speculator, but I'd still like to see some facts

 

[mtzianos]

Quote from power_uptick:

I am highly skeptical that OPEC has any
usable oil capacity left.

But let's assume that they do have 2Mbpd as they claim. That means that given current demand growth projections by the IEA, in one year, that
capacity will be used up. That brings us back to square one. So oil can be expected to soar in one year, since the price of any freely traded commodity is determined by the marginal buyer and there won't be any marginal capacity left.

But... this would imply that no new capacity is coming online. On the contrary, 2005 was expected to be the year when most new capacity would come online:

Key findings of the Petroleum Review report are:

Between 2003 and early 2007 some 8 million barrels of new capacity is expected to come on stream. This should be more than sufficient to offset global production declines of about 3-4 million barrels a day over that period and projected demand growth of around 3 million barrels a day.

The peak year for new mega projects, predominantly offshore developments, will be 2005 when 18 projects with a potential peak capacity of 3 million barrels a day are due to come on stream.

The development pace will slow in 2006 with 11 new projects starting up. Their combined peak capacity will be around 2 million barrels a day.

Only three new mega projects are expected to come on stream in 2007 and a further three in 2008, adding less than 2 million barrels of potential new capacity at their peak.

From 2007, the volumes of new production will likely fall short of the combined need to replace lost capacity from depleting older fields and satisfy continued growth in world demand.