Crude Oil: On Direction and Equity Correlation

My eyes have been on crude, and I’m genuinely confounded on where it goes. I’ve been burned too many times trying to short crude lately, thinking for a while that this was a speculation driven ascent – but the last two EIA reports show support for this latest move. This is an example of price action showing fundamentals before the reports do.

The latest EIA petroleum status report shows a draw in crude stocks that simply dwarfs the impact of a week over week reduction in product imports (Some 8M barrel draw of crude against 4M barrels less imports). Additionally, a net draw in major product (1M or so between gasoline and distillates) stocks points to refiners producing and actually selling more product than being produced. I would discount a draw in stocks only if there was a matching build in products to offset this – that would say it is merely a function of refinery behavior (simply overproducing). But instead this looks like supply falling faster than demand. I know I’m late to the game (well not entirely, if you consider my first blog from 2006 asserting Peak Oil), but I think this may be the long awaited “Peak Oil Supply Crunch.”


Reading the news of the recent CFTC investigation and Michael Masters’ testimony acknowledges the public thought the same as what I suspected all along. A natural contrarian, it makes me suspicious – this seems like a smokescreen to placate Congress. Was the optimist in me suspecting this ascent was a conspiracy, not wanting to acknowledge that this may indeed be the supply-side driven crunch where genuine product demand simply outpaces supply? It was easy to deny after all, since EIA reports this past few months were not overly bullish, minus the events in the distillates market. All of this intersection of politics and financial stockpiling conspiracy suggests that perhaps the truth is somewhere else.

A recent read of UCSD Professor James Hamilton’s ‘Understanding Crude Oil Prices’ lends more support to the supply deficiency argument. Simplified, he asserts that we will know quickly if this price ascent is due to market manipulation by an eventual flooding of stockpiled inventories by financial players cascading out as quickly as they entered the market, in efforts to avoid losses. You can never avoid equilibrium in the long run.

iStockAnalyst