Two weeks ago I predicted little change in the Nymex price, which was $91.47 per barrel at that time. Today the front month contract is selling for $89.49 but briefly dipped into the mid-80s earlier this week. (The Saturday Oil Report is biweekly.) However, there's a geopolitical crisis in Egypt which may lead to a brief closure of the Suez Canal and the Sumed pipeline. This possibility has made traders "nervous" according to the Wall Street Journal, so the price jumped three dollars yesterday.
Predictably, the upheaval in Egypt has caused some to call for the End Of The World—it's time to go out and buy some firearms. I'm a bit more conservative If I predict the end of the world as you have known it sometime in the future, it's a pretty good bet the end is coming. On the other hand, if you make your living calling for TEOTWAWKI, if you are in the end of the world business, everything that happens is a signal that the end has arrived. Crying wolf is not a good strategy in life if you care about your credibility, and I do. So I'm not going to raise the oil alarm level just yet.
Oil Alarm Level — Orange
The big news in the oil markets is the huge spread between Brent (North Sea) crude and the Nymex. Brent is selling at $99.42/barrel, and if I thought that price was the "actual" price of oil, I would raise the alarm level. Nobody really knows why the spread is so large. Here's a quote from The Gaping Gap Between the Price of Nymex and Brent. Which is Right?
The yawning chasm between the two most widely quoted prices proves the power of a small Midwestern town on the global oil market. Nymex futures are reflecting steadily rising inventories in Cushing, Oklahoma, the oil storage hub where anyone holding a contract when it expires must either purchase or deliver real barrels of crude each month.
The trouble starts when too much Canadian oil heads into Cushing’s web of pipelines, crowding out tank space theoretically set aside for Nymex-related deliveries. In the next couple months, a new TransCanada pipeline promises to bring yet more Canadian oil to Cushing.
Brent represents oil produced in the North Sea, a long way from the glut developing in Oklahoma. It’s also cash settled, meaning no oil needs to change hands. The two contracts usually trade within $2 of one another.
So which contract reflects the “real” cost of oil?
For now, the market’s going with Brent. On the U.S. Gulf Coast, home to some of the country’s biggest oil refineries, Light Louisiana Sweet, a locally produced oil, also trades at $12 a barrel above Nymex–not a coincidence.
Crude stocks from the EIA's This Week In Petroleum
That sounds bad, but consider this from the same article—
But the Nymex oil contract can’t be counted out yet. The benchmark was supposedly “broken” in February 2009, when it traded at a then-record discount to Brent of more than $10. The gap was down to 63 cents two weeks later.
The Nymex price fell this week because of the storage issue. Note that crude stocks have been running above the average range for about 8 months now, and now they're rising again due to the influx of Canadian (tar sands) crude. Still, the differential between the good (light, sweet) stuff and Canadian crap is worrisome.
What does the future hold? As usual, there's a lot of uncertainty. On the one hand, you've got this—
Seventeen of 37 analysts, or 46 percent, forecast crude oil will drop through Feb. 4. Fourteen respondents, or 38 percent, predicted prices will climb and six estimated little change. Last week, 58 percent said futures would decrease.
"Crude should be down near $80 a barrel given that world out there is awash with oil," said Jonathan Barratt, managing director of Commodity Broking Services Pty in Sydney. "Given that we don't see anything adverse happening out there in the world that would see the need for a build in premium, then I can suggest it'll remain pretty soft."
On the other hand, you've got this from the Journal linked in above—
More worrisome than disruptions to Egypt's oil production is the prospect that the unrest spreads to other hard-line states in the region, such as Libya and Algeria, both members of the Organization of Petroleum Exporting Countries. Other countries in the region, including Tunisia and Yemen, have been wracked by antigovernment protests in recent weeks, though neither is a major oil producer.
"If this thing spreads across the North African continent, gets into Libya, Algeria, then you've got trouble," said Stephen Schork, editor of the Schork Report energy newsletter.
My call? Nymex crude will be trading in the $86-$88 range after the Egyptian situation calms down.
Here are some background posts I recommend you read:
I would bet you're right, but I hope you're wrong. Oil shooting back up to the $150 range and staying there seems to be the ONLY way Americans will get the message that their way is life IS negotiable, or rather that it is REALITY that is non-negotiable.
Oil settling back to its previous levels lets us return to sleepwalking as we continue to speed head first towards the brick wall.
Posted by: Bill Hicks | 01/29/2011 at 11:36 AM