Morning Petrospective – May 23, 2011
il prices were higher on Friday in thin expiration-related trading. We had short-covering as the June crude oil contract expired and there was some light optimism that next week might have better fundamentals, both for oil and for the economy in general.
At the same time, though, the buying was never aggressive and traders did not have much new to get excited about. There was still concern over the economy, which has shown mostly disappointing numbers over the last week.
Dow Jones reported: “U.S. gasoline sales in April fell for the first time this year due to high pump prices, the American Petroleum Institute said Friday. Gasoline sales averaged 8.9 million barrels a day in April 2011, down 2.2% from the same month last year, the industry group said.” We are coming into the heart of driving season, between Memorial Day and Labor Day, although the best consumption is not seen until July and August.
Prices ended the week on a higher note, but it was hardly convincing, and it seems to have been more short-covering than new buying.
The latest CFTC report showed extremely heavy long liquidation in crude oil futures by both funds and the trade. The curious part of that is that they got in at different time for different reasons. Funds started buying in September and kept buying through January on the prospect and arrival of QE2 and then on a weaker dollar. The trade was a heavy buyer when events in the Middle East started getting ugly, in February and March.
The very heavy long liquidation in the latest reporting period tells us something very important. The funds have given up on there being a QE3 at exactly the same time that the trade has decided that events in the Middle East have stabilized enough to remove any immediate threat to Saudi or Petroleum Gulf oil supplies. They both started kicking out long positions two weeks ago as they reached those conclusions.
They did not – and have not – gotten short, yet. They have decided that their individual best reasons for buying have gone away, but they have not come to the decision that oil prices are overpriced. But, surely, they are. If the funds no longer have their main reason for buying and the trade no longer has its main reason for buying, we have a structure in the sky supported by nothing. If prices were $74 on September 1st, before QE2 was proposed by Fed Chairman Ben Bernanke and before Mubarak or Khadafi was threatened, then why is it at $100 now with neither of the elements that took it there still operable? If it does not belong at $74, it surely does not belong at $100. Maybe the residual impact of these major events allows the market to hold onto $6 or $11 a barrel. That makes $80-$85 a barrel the new equilibrium point.
The latest CFTC sums up this market here quite well. The trade and funds got out of long holdings massively, but they could not bring themselves to get short, yet. The markets, commodities and equities, seem to be frozen here. Economic statistics seem frozen here. There is a sense that the reasons to think things should move higher have gone … but people are having a hard time being the first to yell, “The Emperor has no clothes!” But, that is what we are starting to believe may be coming next.
We like buying puts.
FMX Newswire
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Bentek Energy
- Texas Observer – HH Expected to Strengthen with Warming Trend in SE/Gulf Region.
- Industrial End Users Analytic Report – Demand is Up From Weekend Levels.
- Nuclear Plant Status Analytic Report – Outages Climb Over the Weekend, Expected to Drop 10 GW by End of the Week.
- Power Burn Analytic Report – Power Burn Up 1.5 Bcf/d Over the Weekend.
Platts
- Capacity payments work best in open EU power market, says industry group Eurelectric.
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- Chinese oil major Unipec takes 2 Malaysia AET-owned VLCCs on time charter, say industry sources.
- UK-based Gulf Keystone prepares to export Kurdish oil from Iraq.
Bloomberg
- Oil Declines Amid Concerns Over U.S. Economic Growth, Greek Debt Default.
- Uranium Rebound Seen on China Nuclear Plans.
- Tepco Names 36-Year Veteran as New President.
- Ensco, U.S. Report ‘Significant Progress’ in Deepwater Drilling-Ban Talks.
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