Wednesday, July 22, 2009

Fill er up! Where's all the oil going?

The oil markets are always fun to watch and while the popular media concentrates on how much higher oil can go, I'd like to point out some bearish data.

Oil and oil products in America are on the rise and nearing levels not seen in at least 20 years.

While the I do not have access to the raw data for the OECD, graphs from the International Energy Agency show the same trend.

(If you have access to additional data on inventory levels in America, OECD or emerging markets I'd love to see it.)

I present this information not to buttress a prediction for lower oil prices but to highlight some info that contradicts the current outlook.

Some additional factors for oil:
+ Peak oil - We'll eventually run out of the oil we pump out of the ground. When production will fall off and how much is finally extracted is up to debate. LONG term I am of the opinion prices will be much higher than they are now, the path to those higher prices is unknown in my mind.
+ Geopolitical - The Israeli / Iranian situation could heat up at any time and if the missiles start flying oil prices will rise.
+/- Oil is priced in dollars - Concerns regarding a weakening US Dollar have played a major factor in daily oil price movements.
- Excess supply - OPEC has cut supply and has the capability of pumping more. The timing and extent of their supplies are entirely up to them but for now that excess supply is available.
- Cheating by OPEC members - Cheating does happen by the member countries.
- Floating storage - Oil tankers are being used to store oil and refined products throughout the world. While some of this storage is due to the contango trade earlier in the year, the profitablility of storing then reselling has dropped dramatically.

Additional reading:


Disclosure: Personal account: long RDC, client accounts: short USO call spreads, long RDC
[edit 07/23/09 12:40pm: cleaned up the prose a bit, added position disclosure]

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