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Wednesday, January 14, 2009

Why Oil Should Go Lower

I think oil will go lower from here. I was supposed to go on FOX Business to talk about it but got pre-empted by endless videos of Bernie Madoff going to and from court. So, here is the case I was going to make … My current oil target is $33.

Oil for delivery in future months usually costs a few dollars more than near-term delivery. That’s called Contango. A barrel of oil that costs you $36.72 today is priced at $52.35 in July. That’s over a $15 difference -- “super-contango.”

This is why so much oil is in storage. People are taking delivery, storing it and selling it later.

Obviously, oil producers could do this by just pumping less now (and “storing” oil in the ground). Instead, many OPEC countries continue to pump near flat-out.
I believe this shows that OPEC producers are desperate for cash. This should keep downward pressure on oil prices.

Other points:
  1. The US Energy Information Administration lowered its 2009 World Oil Demand Forecast. The EIA says world oil demand will drop by 810,000 barrels per day in 2009 compared with last year, down 200,000 bpd from its estimate in December.
  2. Crude oil, gasoline and distillate inventories continue to rise. Today, crude inventories at Cushing, Okla., the delivery point for crude futures traded on the New York Mercantile Exchange, rose 2.5% (1.2 million barrels) to 33 million barrels, up 20% in four weeks. While this is less than estimates, the inventories level is approaching Cushing’s operable storage capacity of about 34 million barrels, as estimated by Platts.
  3. The last four week running average net import number was 11.5 million barrels per day (mbpd). This was 700,000 bpd below the annual average number for 2007, and 400,000 bpd below the net import number for second week of January, 2007 and January, 2008 (all four week running averages). But it’s not enough to raise prices! It’s pretty clear that the decline in demand is outpacing the long term decline in net oil exports.
And that should keep downward pressure on prices. But it also gives us potential signal as to when the downward spiral will end. We’ll probably see the super-contango end before prices go higher again.


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