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Page added on January 15, 2016
Supply? Demand? Emotion? The Future Of Crude Oil Futures Volatility
Many crude oil market observers point to current global inventory levels to explain today’s low prices. The recent price decline is also attributed to concern about possible future decline in Chinese demand growth.
The problem with both of these explanations is that no one can describe with sufficient certainty the causal relationship between current crude oil inventories or future Chinese consumption and the future price of crude oil. To paraphrase economist Mohamed El-Erian the crude oil market may simply be “repricing to a new volatility paradigm.”
Relationship of Crude Oil Inventory and Future Prices; Theory of Storage Need Not Apply
As Reuters market Analyst John Kemp has written, in a perfect market with perfect information, there should be a relationship between changes in crude and products stocks and changes in prices, but no such relationship has been found in past market data.
According to the late Stanford professor Holbrook Working’s Theory of Storage, the level of commodity inventories should shape the forward price curve. When inventories are low, the market creates backwardation. When inventories are high, the market creates contango.
Historically the crude oil futures market has not seen significant correlation between inventory levels and its forward price curve.
More fundamentally, the market moves on survey and estimated inventory numbers that are subject to significant subsequent revisions. As David Pursell with Tudor, Pickering, & Holt has observed, “the observed OECD inventory builds in late 2014 and early 2015 showed a market that was oversupplied (inventory builds larger than normal) but much less oversupplied than published supply-and-demand numbers would suggest”.
Decline in Future Chinese Crude Demand Growth Speculative
While there is broad agreement that the recent slowdown in the growth of the Chinese economy has caused reduced iron ore and coal imports, China continues to import crude oil at record levels. China appears to be increasing the size of its strategic petroleum reserves by constructing underground caverns.
Although increasing the size of its strategic petroleum reserves may not immediately translate into long term sustainable demand growth, increased imports by teapot refiners and record vehicle sales indicate strong current demand growth that does not appear likely to diminish in the near future.
World’s Oil Market Now Biggest Ever, Demand Growth May Surprise to Upside
The fact remains that the world is consuming 94 million barrels of oil a day, the most ever. Given the record breaking sales of heavier vehicles in the US and China and the additional consumption usually induced by lower refined product prices, demand growth in 2016 could surprise to the upside.
What is Driving Crude Market Volatility?
Robert McNally, a fellow at Columbia University’s Center on Global Energy Policy and the founder of The Rapidan Growth, describes the “Crude Predicament” in his 12-17-2015 paper “Welcome Back to Boom-Bust Oil Prices”. He accurately describes how the capital intensive and unique geopolitical attributes of crude oil production contribute to a cyclical and volatile market. He states, “Oil’s short run demand and supply inelasticity portends prolonged boom-bust cycles. The absence of an effective short-term price stabilizer will increase investor uncertainty about longer-term prices that factor into major consumption, investment, and government planning decisions. … As we see daily now, global equity, bond, and currency markets are being roiled by violent oil prices moves; oil is the tail that is wagging several macroeconomic and financial dogs.”
Indeed the price of oil options has increased significantly in light of the level of implied volatility in recent weeks. Interestingly the market does not currently appear to price much if any geopolitical risk premium which implies that hedging expenses could increase significantly if a geopolitical event occurred that disrupted supply.
Effect of US Crude Oil Exports?
While market observers agree that few incremental barrels of physical crude will be exported due to the repeal of the 40 year old ban, the effect on the financial derivative market has been immediate and substantial as the West Texas Intermediate (WTI) and Brent Crude contracts reached parity on December 23, 2015. Because futures contracts are settled based on physical crude delivery at contracted locations, the theoretical ability to export US crude to any rule of law nation must be taken into account by market price forecasters.
Volatile May Be The New Normal
Given the inherent opaque nature of oil and gas supply and demand data, the foreign currency risk inextricably intertwined with the global hydrocarbon market, and the complex and shifting geopolitical landscape on which the petroleum infrastructure is built, the crude oil market is likely to see substantial swings in the near future.
20 Comments on "Supply? Demand? Emotion? The Future Of Crude Oil Futures Volatility"
makati1 on Fri, 15th Jan 2016 7:47 pm
Who gives a crap about ‘futures of any kind except the real one we will live in?
The Capitalist Stock Market Casino is going down. The ability to get rich without working is ending. With it will go the hopes and dreams of millions but NOT most of the world’s population. That is why it cannot happen too soon.
If you have mutual funds, 401ks or large savings accounts, drain them and invest in the real future. Prepare for the end of life as you know it, not the one the government wants you to believe will exist where the unicorns play under eternal rainbows and there is a pot of gold in every garage on the leather seat of an electric vehicle plugged into a new fusion powered electrical grid. LMAO
ennui2 on Fri, 15th Jan 2016 9:27 pm
“Prepare for the end of life as you know it”
http://pre10.deviantart.net/add1/th/pre/i/2010/100/c/5/end_is_nigh_walter_kovacs_by_venkman_project.jpg
twocats on Fri, 15th Jan 2016 10:26 pm
ron is out with the latest bakken & ND production numbers
http://peakoilbarrel.com/bakken-up-in-november-plus-steo/#more-11191
And of course production is up, why wouldn’t it be? Swing batter batter. One theory I haven’t seen considered – At this point could the market essentially be calling the oil industry’s bluff? I mean, if $30/barrel still increases production, maybe we could get to $5/barrel before companies seriously choke back production.
makati1 on Fri, 15th Jan 2016 10:33 pm
twocats, or the loans to pump could dry up. I don’t see many oily companies living on the profits from existing wells, nor investing in more. That is going to make the future interesting, to say the least.
twocats on Fri, 15th Jan 2016 10:36 pm
sorry, in november WTI was around the $40’s (though trend was declining). December is when it got cozy in the $30’s, so let’s see if that does the trick.
twocats on Fri, 15th Jan 2016 10:42 pm
or the loans to pump could dry up. (makati)
that is very possible makati. from the producer’s point of view I’ve seen in real time companies that were willing to operate at a loss just because unwinding a company is a huge ordeal, and if you have family making salaries, etc, and as boss you drive a company car, you know, it’s a whole thing. On the other side, these banks do NOT want to own oil assets. It’s not like construction equipment which you can drive to auction and get money. Who would buy these rigs? who would buy these land rights/leases? I’m not sure their market value is very high. But certainly I’ve read articles where banks are tightening credit lines and that might starve out another round of operators.
Boat on Fri, 15th Jan 2016 11:16 pm
twocats,
Thee is an estimated tipping point/estimate for every well. If they think they can make enough money they will drill and find no problem getting money. Right now there is 17+ trillion making almost no money in US government debt. There will always be enough investors who can tolerate risk and take it. The smart ones were out of the oil market long ago, just waiting to jump back in. This is how markets work. Winners and losers in volatile markets. Coffee, wheat, cars etc are all the same. It’s not the product it’s correctly reading the market that separates.
twocats on Fri, 15th Jan 2016 11:21 pm
boat,
once the deck is cleared, you are absolutely right, the money will flood back in. in the meantime, if you are still right that the money flows and production stays… flat to slightly rising (?), then I guess we could see demand eventually rise and catch up to supply. I’m just trying to flesh out the scenario you are presenting.
twocats on Fri, 15th Jan 2016 11:39 pm
Of course, this scenario is a very low probability, like interest on a car-loan low ;), we’ve got several global economic crises that are all happening simultaneously and the global economy is clearly at stall speed. Investors have been piling first into, and now out of, high yield debt (read: oil companies) and the contagion could easily blow this sucker to bits. I don’t think many people will be investing in oil during such a combined crises as that. so you are saying money is going into these? doubtful:
http://www.zerohedge.com/news/2016-01-11/very-unusual-move-avenue-capitals-junk-bond-fund-stops-reporting-asset-levels
Boat on Fri, 15th Jan 2016 11:46 pm
twocats,
World wide historical consumption grows 1-2 billion bpd per year. I see that trend to continue regardless of the economies of individual countries. More efficient cars and trucks make headwinds for oil but shear transportation growth from emerging countries will drive consumption.
The big question is how much Iran and Iraq will add in production even when prices are low. If they add that 1-2 billion barrels per year frackers and other higher cost producers will have to absorb the hit. To me this could take a couple years to flush out.
theedrich on Sat, 16th Jan 2016 3:44 am
As global population grows, so does poverty. American gated-community types (academe, media, politicians, etc.) hope to exploit this by importing unskilled, low-wage primitives to outcompete traditional American workers. (Of course, the low-wage types cannot really buy much unless they engage in criminal activity — hence the success of the “El Chapo” types.) With the ongoing reduction in workers’ wages and in oil prices, plus increasing real unemployment (not the fake numbers touted by the Swarthy One at 1600 Pennsylvania Ave.) in America, the Gordion Knot is becoming ever tighter and impossible to undo. The psychopathy of the (“liberal/progressive”) upper classes makes civilizational self-strangulation inevitable. The current see-saw of the global stock and oil markets is similar to the up-and-down health of an overaged geezer. His state of health — and its prognosis — has little to do with emotions about how much or how little food is in his refrigerator. There are grave, malignant processes happening within and without the U.S., and there is no way to stop them, considering the genosuicidism which grips the White mind.
JuanP on Sat, 16th Jan 2016 5:55 am
Theedouche, we, the primitives are taking back through breeding more successfully that which the thieving whites stole from us and rightfully belongs to us. We are taking back the whole world. The world belongs more and more to the yellow, red, black, green, orange, and brown peoples. Whities are a diminishing minority and shall be completely eradicated from the face of the Earth. The whites are the most stupid, ignorant, and maladaptive race and that is why they are commiting genosuicide.
All the rest of us look forward to living in a world without douche bags like Theedouche!
shortonoil on Sat, 16th Jan 2016 7:32 am
“or the loans to pump could dry up.”
The shale industry is obviously borrowing money that they will never be able to repay.As such, one would be inclined to ask who would loan them money when they knew it was not going to be returned. No one loans out 10s of $ billions without collateral to back it up, and the shale industry has long since run out of collateral. When the price of oil fell from $100 to $30 their book value fell with it.
The 70% drop in prices has benefited one sector of the industry enormously. Refiners have seen their raw material cost decline by $360 billion per year. US refineries are now the most competitive in the world; and they are exporting finished products in ever increasing amounts. Handing out a few $ billion to keep these dogs pumping would be nothing more than just good business. As the old adage goes, “follow the money”.
Cloud9 on Sat, 16th Jan 2016 8:39 am
Juan, Obama and I have something in common. We both had white mothers. I look white. Consequently I move within white circles. There is an undercurrent growing within the white community that is a backlash against progressive trends. You might be wise to note this undercurrent. https://www.youtube.com/watch?v=sn4mVDtqi7g
joe on Sat, 16th Jan 2016 9:27 am
http://www.cnbc.com/2015/10/13/oil-demand-growth-to-slow-iea-says-but-is-opec-listening.html
This market was called years ago. High prices caused demand to slow. Greed caused an oversupply. Now there will be a crash in the oil market. Until oil gets so cheap, people start using it in greater demand. The biggest difference between now, and when the market was called, is tight oil. The US should expand and grow it’s tight oil sources as per the peak oil model.
One main reason for slowing demand beyond price is urbanization of developing countries.
http://www.prb.org/Publications/Lesson-Plans/HumanPopulation/Urbanization.aspx
Resources are more centralised and planned people don’t have to drive to receive essential services.
Aging will also slow demand as government spending must go on medical and housing care for the future and less on grandiose building projects and 5 year plans.
https://en.m.wikipedia.org/wiki/Population_ageing#Ageing_around_the_world
The consequences are obvious, our parents generation gave themselves Reganomics and trickle down theories, they wasted and generation of post war savings and liquidated their grandchildrens pension funds and gave it to Trump and Apple.
That process is ending now, thus the slump, which is going to last a long time. We are all Japan, now.
twocats on Sat, 16th Jan 2016 11:04 am
The 70% drop in prices has benefited one sector of the industry enormously. Refiners have seen their raw material cost decline by $360 billion per year. US refineries are now the most competitive in the world; and they are exporting finished products in ever increasing amounts. Handing out a few $ billion to keep these dogs pumping would be nothing more than just good business. As the old adage goes, “follow the money”. [short]
Gumshoe Short! Forget it Short, it’s Chinatown!
BC on Sat, 16th Jan 2016 4:35 pm
JuanP, Whities/Pinkies are the genetic mutants after all who successfully adapted to the mid- and upper latitudes of the late ice age.
So, the interglacial peak warming period would be the likely time during which the population of Whities/Pinkies would peak and begin to decline, which is what is happening.
Theedrich, might the Whitie/Pinky genosuicidism you describe be genetically, thermodynamically, and probabilistically inevitable?
If so, why fear it? Why be angry? It’s Nature. The Universe is always right. 🙂
makati1 on Sat, 16th Jan 2016 6:35 pm
BC, you hit the nail on the head. White skin will be a negative in the new, hotter world to come. Cross breeding is natures way of giving everyone a darker skin and a warm climate adaptable body. You see it everywhere, even here in the Ps where white Anglos or northern Asians come and marry Filipinas by the hundreds. Soon, if the species lasts long enough, everyone will have a ‘permanent tan’. LOL
onlooker on Sat, 16th Jan 2016 6:42 pm
White supremacy actions and mindset is a fact of history!
Dredd on Sun, 17th Jan 2016 8:52 am
A new (previously hidden) source of sea level rise will increase the supply but not the demand for certain liquids (The Gravity of Sea Level Change – 4).