Oil's Artieries Getting Clogged

(Big warning: Wheeww... this went far further than originally envisioned, but it's worth it. Grab some potent caffeine or relax with some fine wine, sit back and learn.)

Demand is down, supplies are bloated but price seems to defy conventional wisdom. This blog has been adamant of an inevitable price drop. Perhaps some think Brewskie's a crazy fool: "That coot has no idea what he's talking about!" Be as it may, the law of ECON 101 is this: an entity or entities - be it government authority or manipulative market speculators - can defy "supply and demand" fundementals for a while, but in the end, fundementals always comes back to bit you.

Here's several articles predicting a looming drop.

OPEC is beginning to think the supply waves are making the rats sea sick:

The Organization of Petroleum Exporting Countries is bracing for a sharp drop in crude prices in coming weeks, as huge reserves of oil-based fuels continue to pile up and the space to store them runs out.

Stockpiles of fuels such as diesel and heating oil are at a 24-year high in the U.S. because of tepid demand from industries and consumers hammered by the global economic downturn. Conditions in the futures market have also made it very profitable for traders to store these fuels, known as distillates.

So far OPEC has been able to head off a sustained collapse in oil prices through big production cuts, and U.S. oil prices have shrugged off the excess supply, taking their cue from rising stock markets and investors' expectations of an economic recovery.

But if the anticipated economic turnaround doesn't materialize to soak up the growing distillate glut, as some OPEC officials fear, supplies will grow even larger, dragging down oil prices despite the cartel's efforts.

[...]

This concern is prompting some at OPEC, whose 12 members pump about four of every 10 barrels of oil consumed around the world every day, to consider further output reductions. The OPEC official wouldn't rule out an agreement to cut production at the group's next policy meeting Sept. 9.

But any further announced cuts may not have much market credibility. Some OPEC members, including Angola, Iran and Venezuela, are already selling more barrels than they agreed to in order to capture more revenue. Some members, like Saudi Arabia, may have no appetite for more reductions when other OPEC nations are shirking their commitments.

[...]

Although refiners have been running their plants well below last year's levels for some time, the cuts haven't been enough to offset dismal demand for diesel and other fuels. Last week, distillate demand dropped 15% from the same period in 2008.

Futures prices have also contributed to the build-up in U.S. fuel supplies. Prices for heating-oil deliveries farther out into the future have been sharply higher than prices for near-term contracts. The wide difference in prices, plus low interest rates, has encouraged traders to buy distillates, store them and enter into contracts to sell them in the future for a higher price.

"They've got huge forward premiums," said Jim Ritterbusch, who runs an oil-trading advisory firm in Galena, Ill.

As a result, distillate stocks surged to 160.5 million barrels last week, 25% higher than during the same period last year and the highest level since 1985.

Here's another blip of OPEC getting jittery:

Well, OPEC is not relaxing. This summer, the oil cartel is concerned about a substantial drop in the price of oil in the weeks ahead. That's correct: OPEC is concerned about prices plummeting.

The price of oil has risen 20 percent in two weeks to over $68 per barrel. It shows no sign of a sustained easing, despite the global recession, and yet producers of 40 percent of the world's oil are fearing a price collapse. Is OPEC disconnected from reality or are they on to something?

U.S. inventories of key fuels such as diesel and heating oil are at 24-year highs, according to data compiled by the U.S. Energy Information Agency. Meanwhile gasoline demand remains flat to barely rising, on a year-over-year basis. Demand for all of the above has been hurt by the recession, and OPEC fears if demand soon doesn't materialize to use the record-high stored oil, a major price break to the downside will ensue.

OPEC is predicting it will be at least four years before oil demand recovers to 2008 levels:

OPEC says that demand for its crude has fallen so sharply because of the
world recession that it will take another four years to recover to 2008 levels.

The forecast is one of several in OPEC annual report on oil supply and demand outlook to 2030 that reflects how the global recession has crimped the world's appetite for energy.

The report says the world will need 87.9 million barrels of crude a day by 2013 — nearly 6 million barrels less than previously expected. OPEC would need to produce 31 million barrels a day for its share compared to a daily 31.2 million barrels last year.

Let's not forget University of Calgary professor Phillip Verleger's latest bet that oil is set to crater:

A crude surplus of 100 million barrels will accumulate by the end of the year, training global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.

“The economic situation is not getting better,” Verleger, 64, a professor at the niversity of Calgary and head of consultant PKVerleger LLC, said in a telephone nterview yesterday. “Global refinery runs are going to be much lower in the fall. If the recession continues and it’s a warm winter, it’s going to be devastating.”

Getting sick of dirty speculation? So is Washington:

Federal regulators moved closer on Tuesday to issuing new rules to limit oil speculation, addressing concerns that Wall Street firms may have manipulated
the price of oil through financial trading.

The Commodity Futures Trading Commission held the first of three hearings to explore ways to keep financial firms from amassing such large positions in energy markets that they have outsized power to affect prices.

[...]

Concerns that speculators were influencing oil prices bubbled up last summer when the price of a barrel of oil spiked to an all-time high. At the time, the CFTC leadership was not interested in pursuing new regulations to limit speculation. And the agency issued a controversial report suggesting that the rising oil prices were the result of natural factors of supply and demand.

Gensler, who became chairman in May, has said he thinks speculators
have helped to boost the price of oil. In the interview, he said he hopes that his agency could officially propose new rules in the fall to govern energy speculation. The price of oil has increased by about 50 percent this year.

One factor that may play into the debate is a report the CFTC is scheduled to release next month about the types of firms, such as banks and hedge funds, that hold big positions in energy investments. CFTC officials said the report, which will be updated periodically, is not expected to cast judgment on whether speculation is influencing oil prices. If, however, it shows that few players dominate the market, the information could be used by those who support curbs on oil speculation.

[...]

Testifying at Tuesday's CFTC hearing were several key market participants,
including the Petroleum Marketers Association of America, which represents companies that buy fuel. The association endorsed new limits.

"It is abundantly clear that large-scale, institutional investors speculating in the energy markets continue to act as the driving force behind energy prices," said Sean Cota, treasurer of the association.

Just how big of finks are the rats?

This time, Wall Street speculators — some of them recipients of billions of dollars in taxpayers' bailout money — may be to blame.

Big Wall Street banks such as Goldman Sachs & Co., Morgan Stanley and others are able to sidestep the regulations that limit investments in commodities such as oil, and they're investing on behalf of pension funds, endowments, hedge funds and other big institutional investors, in part as a hedge against rising inflation.

These investors now far outnumber big fuel consumers such as airlines and trucking companies, which try to protect themselves against price swings, and they're betting that the economy eventually will rebound, that the Obama administration's spending policies and Federal Reserve actions will trigger inflation — or both — and that oil prices will rise.

I posted this 60 Minutes clip about last year's speculative-fueled oil price climb several times; here's some noteworthy words...

"Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions," Gilligan explained.

Gilligan said these investors don't actually take delivery of the oil. "All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery."

"They're trying to make money on the market for oil?" Kroft asked."Absolutely," Gilligan replied. "On the volatility that exists in the market. They make it going up and down."

Here's an article from last year that describes how active Morgan Stanley is in oil speculation ALONE:

Morgan Stanley is now a major provider to wholesalers of heating oil in the Northeastern U.S. It has custody of a quarter of America's strategic reserve of
home heating oil. And it is the second-most-active U.S. seller of electric power, ahead of scores of utilities, according to Federal Energy Regulatory Commission rankings.

Here's an article I found off of Peak Oil Debunked. Isn't this a coincidence? Major Wall Street banks started getting into the oil game around 2004!

A LARGE WAREHOUSE in Amsterdam may seem an unusual place to attract the City’s top traders and hedge funds. But, in the past few months, Morgan Stanley has been accumulating warehouse space in the Netherlands to store its hottest new property — oil.

[...]

Morgan Stanley may be among the most advanced of the new breed of oil speculators, but, over the past year, many banks and hedge funds have joined the
“black gold rush”. With the stock market proving lacklustre, the oil market has been a godsend for the banks, which describe it as the “new Nasdaq”.

Speculators have helped to drive oil prices to near record levels — peaking at almost $50 a barrel last month. Oil is the talk of the City with many millions of pounds being made every day, and oil traders are among the most sought-after employees.

[...]

However, this traditional equilibrium has been rocked by short-term speculators dipping in and out of the futures market. This has led to sharp rises in the price and far more volatility. Meanwhile, banks such as Morgan Stanley are also beginning to move into the physical market to buy oil — or even entire oilfields.

Morgan Stanley recently won the contract to supply fuel to United Airlines, and Goldman Sachs recently bought 10m barrels of oil.

A senior oil company executive said: “Even within this firm, the mechanics of the market are not widely understood. When oil prices go up, everyone talks about fundamentals and geopolitics, but the role of speculators and banks is now very significant.”

Brewskie thought: Again, it will be made very clear that oil's recent price climb has had nadda bearing on my life. In fact, as I've posted in the past, the $100+ bs of last year was something barely noticed in my budget, so I could care less if oil sits in the $60-$70 price-range; it can sit here permanently for all I care. In fact, if you look on the bright side, higher energy prices increase people's interest and motivation in energy, in alternative energy. Let's not forget what happened last fall when oil dropped below $100 per barrel: people thought it was a bargain. So is $60-$70 oil expensive? Hardly, please.

In the end, I'm simply making a logical argument that, oil's recent price has been tied to manipulative market speculation, not true supply and demand fundamentals; thus, it's in my strongest belief oil's price will inevitably drop.

Thanks for your distracted attention!

- Brewskie

Gensler Wants to Kill the Rats

Oil's 45 cents above $60 at this writing. Regardless, it's been demonstrated that oil speculators, not peak oil, will be humanity's thorn in the future. The masses are fed up with a relative handful of fat rats who pillage humanity's wallet: purchase up paper contracts of oil, without buying the actual asset, and eating their cheese while the working blobs pay up.

The previous Bush administration was clueless with commodities; will the Obama administration fare better? The former Goldman Sachs (one of the biggest beneficiaries of last year's oil drive up) and Treasure Department amigo, Gary Gensler, says he's game:

With the public clamouring for more market regulation, Mr. Gensler was seen as a bad choice to become chairman of the Commodity Futures Trading Commission (CTFC), given his years with Goldman Sachs and at the U.S. Department of the Treasury, where he helped deregulate energy trading.

Mr. Gensler spent five months convincing senators he was up to the challenge and he was finally confirmed in late May. On Tuesday, he backed up his promises by announcing plans for a sweeping crackdown on speculation in energy trading.

The CFTC chairman said he will hold public hearings on whether the CFTC should impose strict limits on the number of contracts energy traders can hold.

The change would radically transform the trading of crude oil, heating oil, natural gas, gasoline and other energy products.

[...]

Mr. Gensler's willingness to look at limiting traders' contracts marks a dramatic shift for the CFTC, which for years had insisted there was no hard evidence that speculators were affecting the price of oil.

Former chairman Walter Lukken, a Republican, had long rejected such suggestions and the CFTC released a report last fall showing that index traders and swap dealers had not significantly influenced the price of oil.

Mr. Gensler has taken the opposite view. He told senators earlier this year that excessive speculation can cause “sudden or unreasonable fluctuations” in commodity prices and he promised a “fresh look at the role of speculation in commodity futures markets.”

He has already launched a review of natural gas trading on the Intercontinental Exchange, or ICE, which operates out of London and is largely unregulated by the CFTC. Meanwhile, Congress is considering legislation that would go even further and tighten regulation of virtually all commodity trading, including swaps, over-the-counter trades and financial products such as credit default swaps.

The CFTC already has broad powers to set so-called position limits in order to prevent price manipulation through corners or squeezes. For example, no trader can own more than 5,000 wheat contracts that expire in the same month.

However, the CFTC has permitted numerous exemptions over the years that have watered down the rules and allowed institutional investors and index funds to hold unlimited amounts. A recent report by a Senate subcommittee concluded that index funds owned up to half of all wheat contracts that traded on the Chicago-based CME Group. That concentration, the report said, was one of the major causes of unwarranted price changes.

The CFTC has also allowed exchanges to set their own limits for energy trading. These so called “accountability levels” have also loosened up over time. For example, the New York Mercantile Exchange officially restricts traders to owning up to 10,000 light sweet crude oil contracts for any one delivery month and no more than 20,000 for all months. But because of numerous exemptions handed out by the exchange, some traders hold more than 300,000 contracts at a time. Since 2006, Nymex has granted 117 exemptions from its levels to index funds, swap traders and others.

Perhaps this will work, perhaps not. Thomas Jefferson said (and I can't remember the exact quote right now) something in the effect that government should not be viewed with adulation, but rather, with a mark of skepticism. Although Obama will no doubt surpass his predecessor (a dog could do that), his approach to tightening the leash on Wall Street's nefarious behavior has been somewhat of a disappointment.

- Brewskie

Efforts to Smoke Out the Rats

A Huffington Post article about efforts in Congress and by the Obama administration to clamp down on speculative manipulation in the energy markets.

But now, as a comprehensive climate bill wends its way through the House of epresentatives, some of these aggressive commodities practices have come under crutiny. New legislati proposed by Rep. Waxman (D-Calif.) and Rep. Markey (D-ass.) would create a system of carbon allowance permits that the government would sell to companies that want to circumvent new emissions requirements. These permits could end up spurring as much as $2 trillion in new carbon-based "derivatives." In this ase, these new derivatives, so-called because they derive their value from omething else, would be traded on the commodities markets, and without proper regulation, critics worry their prices could be manipulated much in the way that traders influence the price of oil.

With the combination of the upcoming climate bill that that could create a
major new commodity derivatives market, in addition to a new focus from the Obama administration on derivatives, experts are hoping that regulation will be strengthened. Experts and legislators say these two forces have created a
perfect storm, and that the opportunity is ripe to take a broader look at the
overall commodities market rather than be limited to reforming only derivatives.

President Obama last week called for the overhaul Wall Street, and as part of his proposal, he zeroed in on regulating over-the-counter (OTC) derivatives, or those instruments that are bought and sold via verbal contracts. Because they are not traded on an exchange, OTC derivatives leave no paper trail and lack transparency. At this time, it seems probable that the pollution derivatives would be traded over the counter.

[...]

Sanders is one of a five legislators who has proposed legislation in recent weeks that would change the freewheeling Chicago market by strengthening regulations and, in some cases, bolstering the oversight powers of the Commodities Futures Trading Commission (CFTC). Sanders is hoping to compel the CFTC to invoke its emergency powers to stop traders from participating in excessive oil speculation.

Other legislation related to reforming the commodities markets includes an amendment in the climate bill sponsored by Rep. Bart Stupak (D-Mich.) to close several commodity market loopholes; a proposal by Sen. Tom Harkin (D-Iowa) to
put all commodities trades on transparent exchanges, and a bill by Rep. Collin Peters (D-Minn.) that originally called for expansive changes for commodities but that was substantially weakened after going through committee.

One of the most pressing issues addressed by much of this new legislation is the role of large bank holding companies like Goldman Sachs and Morgan Stanley. The firms earn billions of dollars in revenue by buying and selling commodities that they trade for proprietary accounts. At the same time, they own thousands of miles of oil and gas pipelines and vast warehouses, and use this infrastructure to gather non-public information to help them develop strategies to maximize profits. While they are not supposed to use this inside information to manipulate prices, they often do, say the experts.

[...]

Other legislation related to reforming the commodities markets includes an amndment in the climate bill sponsored by Rep. Bart Stupak (D-Mich.) to close several commodity market loopholes; a proposal by Sen. Tom Harkin (D-Iowa) to
put all commodities trades on transparent exchanges, and a bill by Rep. Collin Peters (D-Minn.) that originally called for expansive changes for commodities but that was substantially weakened after going through committee.

One of the most pressing issues addressed by much of this new legislation is the role of large bank holding companies like Goldman Sachs and Morgan Stanley. The firms earn billions of dollars in revenue by buying and selling commodities that they trade for proprietary accounts. At the same time, they own thousands of miles of oil and gas pipelines and vast warehouses, and use this infrastructure to gather non-public information to help them develop strategies to maximize profits. While they are not supposed to use this inside information to manipulate prices, they often do, say the experts.

[...]

While numbers are hard to come by, Morgan Stanley said in its November 2008 SEC filing, that it held $18.7 billion in commodity futures, options and swaps. In its annual report, the company said that commodity revenues had jumped 62 percent. The bank also reported to the SEC that it had committed $452 million solely to lease petroleum storage facilities in 2009.

As for Goldman, 17 percent of if its $22 billion in revenue in 2008 came from fixed income, currency and commodities, which includes all of its energy trading business. Meanwhile, Citigroup's trading division, Phibro, reported the total value of its commodity derivatives increased to $214.5 billion in 2008, a 384 percent increase from 2004. Bank of America held $58.6 billion in these derivatives as of September 2008.

- Brewskie