I love it…”temporary delays”

I’ve felt that the inventory build/non-build argument for present oil price trajectories missed the real ‘black spec’ drivers for the price spike, so I’m glad to have this all gone over here in detail—and now we’re even getting probable inventory builds! Mamma mia, this a-ones gonna end in tears.

But oil companies are still making record profits.

I discussed the imbalance between physical and contract volumes on the ICE (with NYMEX, one of the key exchanges for oil price determination) in this post. Opinion is divided on what this means.

Pardon if you already know this but the modern oil price regime is one of formula pricing. The various oils are priced +/- in reference to a few benchmark crudes such as WTI and Brent, while discovery of benchmark prices takes place within what are financial markets.

Physical production of benchmarks has been in long decline, (i.e. the physical markets for these have become progressively thinner), which evidently has had the effect of making price formation increasingly dependent on the non-physical.

Not to say this just began but has been a multi-decade process that rose from OPEC’s mid-1980s loss of ability to manage price(s), an ability that itself had developed out of earlier contradictions between OPEC members and the major integrated oilcos, and these latters’ loss of control.

As you say, aggregate [global] supply and demand are not determinant.

A twist to the above would be inclusion of transfer pricing and cross-subsidizing between upstream and refiners within the same vertically integrated organizations.

In the real world, the light sweet v. heavy sour question is not simply availability of the former but refiners ability to throughput the latter grades, and the spreads. To a point, ’standard’ refineries can be upgraded to handle the latter and, purely recollection, both India and China have been building heavy sour dedicated refineries.

Since I don’t have the theoretical expertise, after a while, due to my science training perhaps, it occured to me to use the data. smart huh?

So… if the price of oil is purely reflective of supply and demand, then it necessarily follows that when the price of oil dropped precipitously immediately prior to the 2006 election, a drop that was a bigger delta than across the entire 2001 recession period, (in a matter of weeks, not years), it follows that this must have been entirely due to supply and demand. uh, no. No way, sorry not buying it. The idea that supply in 2001 was tighter than in 2006, or that demand in 2006 with the economy booming, was less than than demand at the bottom of a recession, and that moreove this change happened in a couple of weeks, instead of a couple of years is… absurd.

It is in fact, beyond absurd, it is manipulative to even propose it. That price drop in 2006 clearly demonstrated that oil prices are affected by things other than supply and demand. You may choose to believe that it was a nefarious manipulation of price or that it was a surprise consequence of Goldman Sachs for some reason choosing to make a change, but you cannot argue that supply and demand together swung by that amount in that short of a period of time with little or no macro cause, or consequence interestingly enough.

The whole thing is absurd, and for any economist to devote more than one word of theorizing about why it isn’t a consequence of the financial market structure, is for them to be engaged in foolish sophistry, at best or outright duplicity at worst

But the fact that there is inventory of “Iranian heavy crude that nobody wants to refine at the moment” cannot be dismissed. Why doesn’t anyone want to refine it?

My guess is the value of the products that refiners produce from the sour barrel would be insufficient to cover costs (”crack spreads”). But then, how can that be?

I’m guessing (again) that rbob and distillate markets are more regulated and therefore aren’t participating in the shift of capital into this asset class.

For instance, according to yesterday’s Schork Report (its a pdf via a subsription…so unfortunately, i can’t post a link…but they offer a free three week sub…worth a look imo) non-commercials held almost 10 long rbob contracts to each short, “the longest position in the 25-year history of NYMEX gasoline trading.” I have a feeling “commercials” in this market are indeed real commercials…whereas the crude mkt has those jumbled (big time) as Yves points out.

If indeed that is true, my bet is crude gets regulated before rbob gets “de-regulated”…eventually facillitating the consumption of sour by refiners– away from the benchmark WTI — as cracks would recover.

As for the tankers, I believe they are holding Iranian heavy crude that nobody wants to refine at the moment, not lashings of black gold racked up by heartless speculators. Heavy sour crude is all that Saudi Arabia has in its fabled spigot, so that won’t come to the rescue of a world that only runs properly on copious amounts of cheap light crude.

As for deep sea oil, it may be economic now but in terms of its potential for staving off Peak Oil, it’s like asking a weir on the upper Thames to fill in for the Hoover Dam. It’s demand destruction, Jim, but not as we know it.