Despite talk of oil shortages, the reality is a glut. Rising crude supplies have prompted Saudi Arabia to cut production. Higher energy prices have also damped demand. Last year, U.S. oil consumption fell for the first time. China's growing appetite for oil has also slowed.
Geopolitical risks can't explain the current oil price. The probability of an interruption to Middle East supplies justifies about an additional $11 to the oil price, according to Goldman Sachs. Adding that to Mr. Miller's pessimistic forecast would suggest a reasonable price for oil of about $50.
It seems that demand from investors is largely responsible for today's inflated oil price. Flows into commodity indices, which are weighted heavily in oil, have surged eightfold over the past three years. This has pushed up the price of oil futures, making it profitable for traders to sell the futures and take physical delivery of oil, which they pay to store.
Back in the real world, oil supply is outstripping demand. If production continues at its current pace, the world will run out of storage space within six months, says research firm Sanford Bernstein. If that happens, the cost of storing oil would soar. Traders would no longer make money by hoarding the stuff. Without their demand, both the oil price and energy stocks could tumble.This was from an article in the WSJ about Bill Miller.
2 comments:
Thanks for the post (and your reader's tip): Always a good idea to see the other side of the case if only to avoid confirmatory bias and/or talking oneself into something extreme.
I've got a lot of respect for Bill Miller although he, or his funds at least, have struggled somewhat the past couple years. Regardless I take his description of the game traders are playing WRT storage of 'excess' crude seriously.
OTOH there are a lot of different grades of crude, some of them quite expensive to process, so a crude oil glut may not be a market glut (other than for traders) if you see what I mean; e.g., there is still not a high level of refinery capacity for lower grade crudes, the G-S risk premium seems too low (cf, http://tinyurl.com/h2u8q ), in comparable oil grades the price of North Sea Brent doesn't seem to be falling as fast as US sweet crude, and then there is this tidbit at http://tinyurl.com/s2nak from former oil analyst Jeff Matthews.
I’m not sure where people get their information from. I would like to know where these traders privately store oil! Perhaps there is a secret storage depot on the moon.
Here is a link to U.S. crude stocks from the beginning of the year.
http://tonto.eia.doe.gov/dnav/pet/pet_stoc_cu_s1_m.htm
Going through the official site (EIA) you will notice how the number of days/supply on hand is decreasing! From the site you learn that historically U.S. crude inventories fluctuate between 280 and 360 Mb. 2006 has been averaging at 320 to 340, not 440!
U.S. storage capacity utilization has not increased in the first 6 months of 2006 and – please - read the notes…SRI has not been adding to reserves for a while now. Normally that would give a 1 Mb per day cushion that doesn’t exist now.
rw-
Exxon Mobil (XOM) is the largest refiner of low grades in the U.S. and is running at 91% capacity. I can not take Bill Miller’s thoughts seriously as they negate the facts.
Disclosure: This comment was written by a CrossProfit analyst and may not reflect the opinion of CrossProfit.com.
http://www.crossprofit.com
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