Saturday Oil Report -- August 18, 2012

Inexplicably, oil prices rose again this week. Both Nymex WTI and Brent crude have increased about 5 dollars per barrel since my previous report on August 4, 2012.

Graphs courtesy of oil-price.net. When the price of oil fell 2 months ago, I actually thought the price would remain depressed for some time to come because of this global recession we're in. Silly me.

I see no reason to raise the alarm level, despite these rising prices.

Oil Alarm Level — Yellow

The Associated Press story Oil prices rise after government reports unexpectedly big drop in supplies; gas prices climb gives us the "best" explanation for recent price hikes. The rest of this post is rated "R" (restricted) due to strong language. Stop reading now if coarse language offends you.

Benchmark oil rose 90 cents to finish at $94.33 per barrel Wednesday in New York, its highest level since mid-May. The Energy Department said stockpiles fell 3.7 million barrels last week to 366.2 million barrels. Analysts had predicted a decline of 1.5 million barrels, according to Platts, the energy information arm of McGraw-Hill.

It marked the third consecutive large weekly decrease in oil supplies. Still, analysts point to production problems and seasonal factors more than increased demand for the declines. But with supplies still above normal for this time of year, any decrease tends to cause a rise in oil prices [???]

Inventories (stocks) are still well above their 5-year average range (blue shading) Source

Oil production has been affected by a number of issues this month, including some refinery and pipeline problems in the Midwest and California. Tropical storms have moved through the Gulf of Mexico, closing some oil rigs and slowing oil tankers destined for U.S. ports.

Why the fuck would these downstream problems affect the price of upstream crude oil? Is there enough supply to meet demand? That's what counts. There's more than enough.

In addition, refiners are selling off inventories to avoid a surplus when they switch to processing winter blends of fuel next month.

Ah! Now we know why inventories are declining a bit. It certainly isn't due to greater demand for oil. So much for those pipeline problems. So much for those slow oil tankers.

“The bigger question is, are these numbers [prices] sustainable once these refiners start to come back on line?” Price Futures Group oil analyst Phil Flynn asked.

Not sustainable? In so far as the price of crude is divorced from supply & demand fundamentals, why the fuck wouldn't these absurd prices be sustainable? Why the hell not? What are you assuming, Phil?

Brent crude, which is used to price international varieties of oil, gained $2.22 to end at $116.25 per barrel in London. The Brent contract expires on Thursday. Prices sometimes can be volatile the closer a contract gets to expiration.

Brent is up more than $13 per barrel this month on concerns about production outages in the North Sea. It’s also influenced more by developments in the Middle East. Saudi Arabia, the world’s biggest oil exporter, on Wednesday ordered its citizens to leave Lebanon over kidnapping fears.

Ah, Brent. Back on Saturday July 30, 2011, I discussed the Brent benchmark at some length. I pointed out, as some others have, that Brent is a flawed benchmark because it directly depends on North Sea production, which is often shaky, and has been in decline for many years now. Thus if there is are technical problems in the North Sea, no matter how insignificant to world oil production, Brent prices go up. And that's what has happened here. Surely you don't think the Brent increase was justified because Saudi Arabia told its citizens to evacuate Lebanon?

In short, the Brent benchmark is shit.

And by the way, in case you were wondering, what's going on with OPEC and Iran? Bloomberg reports—

Iraq pumped 3.08 million barrels a day in July, 115,000 barrels more than the previous month, OPEC’s Vienna-based secretariat said today in its Monthly Oil Market Report. The Persian Gulf state for a second month outpaced Iran, where output dropped by 173,000 barrels to 2.82 million. Iraq last produced more than 3 million barrels in February 2002, OPEC said after revising its April estimate.

The reduction from Iran came as full sanctions by the European Union started July 1, which led to the third monthly decline in the group’s output. OPEC, which supplies 40 percent of the world’s oil, produced 31.2 million barrels a day last month, versus 31.35 million in June, according to the data, which cites secondary sources.

OPEC production has been reduced by a whopping 150,000 barrels-per-day. No help there if you're trying to explain these price increases.

But enough of this beating around the bush. The oil markets are broken, probably irrevocably so. God only knows what really happens in the trading pits. Those paper traders—these sick gamblers are often trading for the big banks—are completely out of control. These assholes do a big bump, buy a bunch of paper oil contracts, start sweating when the bump wears off, and then do another fat line to keep Reality at bay for another half-hour or so.

I recommend that position limits be established and margin calls increased, with no exceptions for Goldman Sachs, etc., cocaine and all other stimulants should be banned, and all oil traders should be immediately evaluated to assess their psychological health. I would implement these reforms immediately

I should call this the Saturday Mickey Mouse Report.

Well, there is some consolation for me in this debacle. At least I'm not a fucking economist.

Here's the mouse.

Comments

[Wanooski]

Well Jeez Dave, without the coke and amphetamines what reason will they have to show up in the morning?

[Gretchen]

all oil traders should be immediately evaluated to assess their psychological health.

AMEN!

[Ben]

A lot of stock traders take Ritalin, Adderall, and Provogil, in addition to a variety of illicit drugs as well. I've been around these assholes my whole life, and I can say with strong conviction that at least 70% of them are know-nothing, weak clowns.

[Bill Hicks]

"The oil markets are broken, probably irrevocably so."

I would say that is true about EVERY market these days. There is no reflection of real value anymore, just endless game playing by central governments and banks. We now have a true zombie economy, and I see no reason why that may not continue for years to come.

[adam]

Dave, even if the market is divorced from reality to some extent, I don't think it's totally divorced. The traders may be irrational but there doesn't seem to be anything too wildly crazy happening. Not that it never occurs, but what we're seeing here does not look like a price spike to me. If anything, it seems to me like prices are fairly stable, just drifting between $100 and $120 for Brent, and about $80-$100 for WTI.

This stability may be unnatural, but it certainly doesn't look like a market that is under the sway of people trying to radically push the price up either. In a way it looks a bit like the stock market; higher than any reasonable assesment would allow, but not moving up or down in any shocking way.