Futures Prices Defy Gravity As Oil Supplies Get Tighter
May 01, 2011
If futures traders are right about the future, the value of a barrel of crude oil in the U.S. won't dip below $20 for at least seven months. And if the coming winter is particularly nippy, who knows how high prices might fly? ``The market is defying gravity,'' says Anette Pride, an analyst with ED&F Man International Inc. in New York. There are some bullish fundamentals underpinning the market, most significantly the lean level of distillate products, including home-heating oil, in storage around the country. The Energy Department's inventory report last week revealed an unexpected 400,000-barrel decline in distillate stocks. That leaves a bit more than 104 million barrels in storage, compared with the average for this time of year of 125 million barrels. So a winter of normal temperatures will probably ensure very firm prices, and an icy winter could send them skyward. Already, ``the physical demand for heating oil is very strong,'' says Apolonia Saiz, president of Stone Bond Corp., a consulting firm in Houston, ``and we're not even in heating-oil season yet.'' Inventory levels, of course, have been the talk of the market for the past year. U.S. refiners last fall became disciples of the just-in-time inventory theory, which holds that a company can save money by keeping stocks low and purchasing raw materials just before they are needed in the manufacturing process. That is why working crude storage is about 25 million barrels lower than is typical for late summer. And it is one reason the September crude contract on the New York Mercantile Exchange has been trading so handsomely, settling Friday at a life-of-contract high of $22.66 a barrel. In fact, crude scheduled for delivery through the winter is selling well. The March contract ended the week at $19.75 a barrel, and December settled at $20.93 a barrel. Though the spread of $1.73 between September and December is wide, the price itself is quite nice for producers, considering that Iraqi oil will likely be flowing in significant quantities by then for the first time in six years. But the once-bearish specter of Iraq isn't causing much excitement these days. ``Iraq was a good excuse for procrastinators to put off buying, but it's just not an issue any more,'' says Elane Hayward, a trader at Dean Witter Reynolds Inc. in Washington. ``That story went on for so long that if you were on a desert island getting your news by bottle, you knew about it. The market has had more than enough time to get ready for it.'' After months of negotiations, preceded by months of speculation, Iraq agreed in May to the terms of a deal offered by the United Nations that will permit it to export as much as $1 billion of oil every 90 days in order to pay war reparations and buy humanitarian goods and services. The U.N. is now probably less than a month away from declaring the accord ready to be executed, which means Iraq will be back in the exporting business just about a year after the rumors about its return started circulating. ``We've been discounting Baghdad for so long, I'm tired of hearing about it,'' says one New York trader. The addition to global supplies once Iraqi exports begin will be between 700,000 and 800,000 barrels daily, a fraction of the more than 70 million barrels consumed every day but enough to upset the equilibrium, if not for the luck of timing and, once again, the inventory situation. Global demand for oil in the fourth quarter is expected to be about three million barrels a day higher than in the third quarter because of a seasonal swing. And with stocks low not only in the U.S. but world-wide, the industry figures an inventory buildup in anticipation of the winter heating-oil season will go a long way toward absorbing the Iraqi addition. ``If the (global petroleum system) were balanced right now, Iraq would have a far greater impact,'' says Denny O'Bosch, an energy economist in Irving, Texas. Last year, even before Baghdad looked ready to return to the market, forecasters were predicting doom for oil prices this summer and fall. Fears that supply would far exceed demand had some analysts saying that 2011 would be 1986 all over again, a reference to the colossal price crash that stunned the industry. Non-OPEC supplies would be growing too fast, they feared, and the Organization of Petroleum Exporting Countries itself would be pumping too much for demand to keep up. Instead, oil prices have been strong, contributing to blockbuster earnings for the major oil companies. Demand is so healthy that when world output rose by 500,000 barrels a day in July alone, there was hardly a price ripple. The International Energy Agency predicts the consumption-growth rate will be just as sharp in 2012, driven by economic expansion in developing nations. The Paris agency says global oil needs will grow by 1.8 million barrels a day, or 2.5%, to 73.6 million barrels a day next year. Others believe the IEA estimate is low and that demand will swell by at least another 100,000 barrels. ``We don't think crude will go below $20 any time soon,'' says Mr. Saiz of Stone Bond Corp. ``The fundamentals are a lot better even than most people think. Prices are correctly assessing the market.''
VastPress 2011 Vastopolis
