Why Oil Prices Defied Expectations

Happy Thanksgiving to all! It was a normal work day here in Scotland for me, which stinks. But I am now home, the turkey just came out of the oven, and soon I will be sitting down to watch the Dallas Cowboys on my Slingbox. What a great invention that thing is!

A lot of people – including me – were very surprised that we didn’t break through the $100/bbl barrier on Wednesday. After all, analysts had expected a large crude build, and instead there was a large draw. Given that on Tuesday night WTI had traded as high as $99.29 – and as nervous as the markets have been – I thought $100 was a sure thing given the bad news.

Yesterday’s OPIS report has an explanation for why traders may have discounted the news:

Crude oil overnight traded up to $99.29/bbl, but only got as close as $98.70 during the pit session even after the DOE reported a draw in crude oil inventories. However, a closer look shows that Cushing crude oil stocks grew by more than 1 million bbl. After yesterday’s big gains, today’s losses were relatively minor in scope with the January contract settling at $97.29/bbl loss of 74cts.

Crude oil inventories dropped by 1.1 million bbl last week, but a look at the Cushing stocks, the NYMEX WTI delivery point, inventories grew by 1.2 million bbl. A large chunk of the drop came on the Gulf Coast as stocks there fell by 1.9 million bbl, but the stock draw could be a result of a decent sized drop in crude oil imports. Crude imports fell to 9.82 million b/d a drop of more than 600,000 b/d.

The report also raised concerns over distillate supplies:

While most of the attention this holiday weekend will be placed on gasoline prices and the driving public, it’s the retail price of diesel that is setting all the records and global tightness is contributing to strong heating oil futures.

Distillate demand over the last four-weeks has been red hot and is running some 3.2% over the same time last year. Sources tie the strong demand to exports heading mostly to Europe from the East Coast and Gulf Coast as refinery glitches across the Atlantic have opened the export window.

East Coast heating oil inventories last week saw a drop of 1.4 million bbl as the first real cool weather headed into the Northeast. There is cause for concern if there is an extended cold snap as current East Coast heating oil inventories are nearly 9 million bbl behind the same time last year.

I’ll worry about that tomorrow. It’s turkey time.

Why Oil Prices Defied Expectations

Happy Thanksgiving to all! It was a normal work day here in Scotland for me, which stinks. But I am now home, the turkey just came out of the oven, and soon I will be sitting down to watch the Dallas Cowboys on my Slingbox. What a great invention that thing is!

A lot of people – including me – were very surprised that we didn’t break through the $100/bbl barrier on Wednesday. After all, analysts had expected a large crude build, and instead there was a large draw. Given that on Tuesday night WTI had traded as high as $99.29 – and as nervous as the markets have been – I thought $100 was a sure thing given the bad news.

Yesterday’s OPIS report has an explanation for why traders may have discounted the news:

Crude oil overnight traded up to $99.29/bbl, but only got as close as $98.70 during the pit session even after the DOE reported a draw in crude oil inventories. However, a closer look shows that Cushing crude oil stocks grew by more than 1 million bbl. After yesterday’s big gains, today’s losses were relatively minor in scope with the January contract settling at $97.29/bbl loss of 74cts.

Crude oil inventories dropped by 1.1 million bbl last week, but a look at the Cushing stocks, the NYMEX WTI delivery point, inventories grew by 1.2 million bbl. A large chunk of the drop came on the Gulf Coast as stocks there fell by 1.9 million bbl, but the stock draw could be a result of a decent sized drop in crude oil imports. Crude imports fell to 9.82 million b/d a drop of more than 600,000 b/d.

The report also raised concerns over distillate supplies:

While most of the attention this holiday weekend will be placed on gasoline prices and the driving public, it’s the retail price of diesel that is setting all the records and global tightness is contributing to strong heating oil futures.

Distillate demand over the last four-weeks has been red hot and is running some 3.2% over the same time last year. Sources tie the strong demand to exports heading mostly to Europe from the East Coast and Gulf Coast as refinery glitches across the Atlantic have opened the export window.

East Coast heating oil inventories last week saw a drop of 1.4 million bbl as the first real cool weather headed into the Northeast. There is cause for concern if there is an extended cold snap as current East Coast heating oil inventories are nearly 9 million bbl behind the same time last year.

I’ll worry about that tomorrow. It’s turkey time.

Analysts – Correct 52% of the Time!

A sign the oil prices are headed down:

OPEC fears may hike price

Crude oil may rise next week on speculation that OPEC won’t increase production as fast as consumption grows this winter. Twenty-one of 35 analysts surveyed, or 60 per cent, said oil prices will rise through Nov. 9, the first bullish response since July 6.

Is that a mistake? The first bullish response since July 6th? So they were bearish throughout a 30% rise in price, and now become bullish? That’s funny. But this may be even funnier:

Respondents have predicted price drops in the previous 16 weeks. Prices have declined in five of those weeks. The oil survey has correctly predicted the direction of futures 52 percent of the time since the survey’s introduction in 2004.

Wow! All that analyzing, and correct 52% of the time. I can’t even think of anything funny enough to do that justice.

However, that seems to fly in the face of yesterday’s OPIS report:

11/1 – Crude oil traders moved to take profits this afternoon amid a flurry of forecasts for a steeper downward correction. Analysts this afternoon pointed to a recovering U.S. dollar as a catalyst for more selling.

I guess I will just flip a coin. I know my 50% odds aren’t quite as good as the 52% accuracy rate of the analysts, but my coin flip doesn’t charge me for the prediction.

OPIS on the Bull Rush

My daily OPIS summary weighed in on my side over the level of oil prices. I am beginning to think I may not be crazy at all.

Today’s “excuse de jour” for the rally has been the reported shut-in of 600,000 b/d of crude oil by Mexico’s state-owned oil company, Pemex, due to inclement weather. In a climate where U.S. crude supplies are dangerously low, such a shut-in would likely spur some panic buying.

Supplies are not dangerously low, however. In fact, stockpiles are near the upper end of the average range for this time of year, according to the U.S. Department of Energy. And in that kind of a climate, news like the Pemex shut-in becomes justification for a move that has little to do with fundamentals.

As has been the case for the better part of 2007, money flow continues to drive this rally. According to the most recent Commitments of Traders report from the U.S. Commodity Futures Trading Commission, speculative long positions on the NYMEX outnumbered short positions by 60,026 contracts for the week of Oct. 26.

In my mind, the only question is whether the correction begins before or after I lose my bet.

(Yes, I know that almost all I have been writing about for the past week is oil prices, but this is a news story that in my opinion dwarfs most of the other happenings in energy.)