ENERGY PRICES WERE STRONG ON WEDNESDAY…Henry Hub gas futures in New York firmed above $4, while front-month crude oil values in London finished above $75 for the first time since October.
Thus, the next psychological target is $80… which of course, makes about as much sense as $75 crude oil.
Supplies at the NYMEX hub in Cushing, OK (PADD II) have climbed by more 5 MMbbls or 18% since the week ended June 19th. Supplies are now at the highest level, 33.3 MMbbls, since reports surfaced in March that the Oklahoma Attorney General’s office was investigating alleged dumping of Canadian crude oil into the complex.
We have not been able to find any follow-up as to whether or not the Oklahoma AG is actually pursing dumping claims other than the original story by Reuters back on March 06th.
Be that as it may, if our friends to the north are “dumping” into the NYMEX hub we could hardly blame them given the structure of the forward curve in New York.
Despite a flurry of anecdotes of green shoots, coupled with actual reports of refinery shut-ins, the discount on spot barrels on the NYMEX has once again moved out. For example, looking at the chart in today’s issue of The Schork Report, six weeks ago spot crude oil in New York was trading at 95.4 cents on the dollar to the 6th month contract on the curve. As of the latest DOE report, front-month crude oil was trading at 92.9 cents on the dollar. Last night, despite that strength [sic] on the NYMEX, spot crude oil closed at just 92.4 cents on the dollar to the 6th month.
Got that? Nearby oil is rising, but oil for delivery out into the future is rising faster! Contrary to the extraordinary popular delusions of mad crowds, this structure is NOT a bullish flag. So get over it.
A contango does not mean prices are set to rise in the future. A contango… a rising contango at that… is a screaming signal of just how poor demand is in the spot market. The fact that the contango on the NYMEX is rising at the height of the summer driving season underscores this point.
Think about this… we are at the height of seasonal demand. The obligatory nod to China aside, the U.S. drinks 1 in 4 barrels of the world’s oil. The majority of this oil has to be boiled to manufacture gasoline. In other words, demand for crude oil by the world’s largest consumer is at its highest right now. Yet, because demand for gasoline is so poor, refiners are minimizing output (see chart in today’s issue of The Schork Report) right now. Therefore demand for crude oil, right now, is poor… and it will get poorer as we move into the shoulder-months this fall. That is why crude oil is on sale right now.
In this vein, vis-à-vis the contango, supplies of crude oil are set to remain high. Why sell incremental production or current barrels in tank in the near-term when I can sell the forward curve (net of carry) and still collect a profit? If demand prospects were real, you would not be able to do this.
But, we can do this… and we have been able to do this (at varying degrees) since the fourth quarter of 2008. The extant contango is a virtual license to print money. The academics maintain this event should be short lived. The fact the market still has not been able to arb this trade out is a clear sign of how poor demand really is.
That said, our friends, the speculators, still like owning NYMEX crude oil. Per last week’s update from the CFTC, net non-commercial length on the ICE and NYMEX (inclusive of futures, swaps and options) was 2½ times greater than the actual inventory sitting in Cushing (see chart in today’s issue of The Schork Report).
Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.