Slippery Business

By Rob Kirby, May 24, 2010

Back in 2008 in an article titled Oh Yes They Did! (reposted here), I documented how the U.S. Government [specifically, the Dept. of Energy (DOE)] “released” crude oil from the Strategic Petroleum reserve to help precipitate the collapse in oil prices from close to 150 dollars per barrel:

0524.01

That such a “swap” occurred back in 2008 is not open for debate – it is a matter of historical record acknowledged in the DOE’s 2008 annual report.

The “tell tales” [besides written acknowledgement which came long after the fact] that such a swap had occurred were:

1] The unanticipated release of crude from the Strategic Petroleum Reserve [SPR] caused a localized glut in the crude oil pipeline / storage complex centered at Cushing, Oklahoma.

2] Because the pipeline / storage system was “full” – alternative, temporary storage facilities were required on very short notice. This created a “spike” in the spot day rates of the otherwise moribound super tanker [Very Large Crude Carrier or VLCC] market.

3] Because the engineered “glut” or release of crude was West Texas Intermediate [sweet high grade crude oil] – it created an anomoly in the “normal” price relationship between Brent North Sea Crude [a lower grade crude because of its higher sulphur content] and West Texas Intermediate Crude which normally trades at a premium in price.

Recently, in the immediate aftermath of the the gigantic oil rig mishap on April 20, 2010 in the Gulf of Mexico, the price of crude oil “collapsed” by 20 bucks – despite the fact the official U.S. government economic statistics indicate that our economy is “improving”. Such a scenario, one would logically think, should naturally be putting increased demand on existing crude oil stocks.

0524.02

Articles have begun appearing in the mainsteam financial press confirming all of this:

From Bloomberg:

Cushing Glut Weakens U.S. Crude Against Brent: Energy Markets By Grant Smith

May 18 (Bloomberg) -- Oil for July delivery in New York is weakening relative to London contracts as inventories at the U.S. storage hub rise to record levels.

West Texas Intermediate crude for July delivery sells for $1.97 a barrel below the corresponding contract for North Sea Brent, more than double the discount of 71 cents on May 10. When the June Brent contract expired on May 14, the corresponding WTI future was $5.57 a barrel cheaper…

And again from Bloomberg although they attribute the spike in VLCC rates purely to “contango”:

Morgan Stanley Says Tanker Rates May Double on Floating Storage By Moming Zhou

May 17 (Bloomberg) -- Supertanker shipping rates may more than double to $50,000 a day as the premium the third-month futures contract holds over the front month encourages traders to use the tankers to store crude, Morgan Stanley said.

“With the forward price of crude oil surging, the amount of vessels used for floating storage should coincidentally increase, cutting available supply to the market and driving freight rates up,” Ole Slorer, a Morgan Stanley analyst, said in a report yesterday.

The premium the third-month Brent crude contract holds over the front month, a formation known as a contango, rose to $2.31 a barrel on May 13 on the ICE Futures Europe exchange, the highest level since Oct. 15, according to data compiled by Bloomberg. That’s up from 55 cents on March 17. The contango was $1.84 today.

“At current contango levels, we calculate that the current spread justifies VLCC rates above $50,000 per day,” Slorer said...

When the 2010 DOE annual report is written in the coming months, if anyone wants to take the time to read the fine print – they will undoubtedly find – buried in the ‘notes’ – something similar to this detailing a “crude oil swap” where physical crude leaves the SPR and is replaced by what amounts to an I.O.U. [oil to be replaced at a later date] but for accounting purposes, it appears as if there was NO MOVEMENT WHAT SO EVER [an accounting trick borrowed from Central Bankers and their treatment of vaulted gold, no doubt]:

0524.03

Excerpt from: DOE 2008 Annual Report

If history doesn’t repeat, it certainly does rhyme.

Today’s Market

Overseas equity markets were uneventful with Japan’s Nikkei Index giving up 26 points to 9,758. North American markets ended the day lower with the DOW off 126.80 points to 10,066.6, the NASDAQ down 15.49 points to 2,213.55 and the S & P losing 14.05 points to 1,073.65. NYMEX crude oil futures were unchanged at 70.05 per barrel.

On foreign exchange markets the U.S. Dollar Index added .81 to 86.23.

Benchmark interest rates: the 5 yr. government bond ended the day at 2.02% while the 10 yr. bond was last seen at 3.22%.

The precious metals complex was higher across the board with COMEX gold futures adding 16.40 to 1,194.40 per ounce while COMEX silver futures gained .29 to 17.95 per ounce. The XAU Index gained .90 t0 167.01 while the HUI Index added 4.71 to 436.

On tap for tomorrow, at 9:00 a.m., March Case-Shiller Index data is due – expected + 3.0% vs. prior +.6%. At 10:00 a.m. May Consumer Confidence data is due, expected 57.8 vs. prior 57.9. Also at 10:00 a.m. March FHFA Housing Index data is due – last reported -.2%.

Wishing you all a pleasant evening.

Rob Kirby

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Rob Kirby
Kirby Analytics Newsletter | Toronto, Ontario, Canada
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