Oil Prices

[tanjm]

And what if opec keeps prices down for longer? Storage is expensive and can be costly if the bet on the upside doesn't work out. Not only pay for the storage cost, have to pay insurance to backup.

-- via Xperia Z1 with tapatalk

Here's one way.

Enter into forward market to physically sell 1 barrel of WTI at $55 6 mths forward.
Buy 1 barrel of WTI now at $52

Suppose it costs (all in - leasing, insurance, transport costs to delivery location) $0.01 per day to store the oil. Then 6mths of storage is about $1.8. You also forgo interest on the $52 (say 6m treasury is 0.5%). 6m of interest is $0.26

In 6 mths, deliver 1 barrel of WTI at $55. It has cost you $52+1.8+0.26.

What are the risks (its not totally riskless)? mainly counterparty risk. i.e. the risk that the other side will not honor your bet.

If price continue to drop lets say to below $50 or less in half year time?

Pretty sure no one's going to buy your big tanker of oil. Picture a line of tankers lining up to sell cheap oil to China

For every upside there is a downside, no such thing as sure bet.

I suspect you did not understand. A forward contract is a legally binding document between 2 parties to exchange 2 assets (in this case $55 for a barrel of oil). Any failure to execute is a contract break and liable to suit. Also a forward contract topically has margin requirements.

I.e. If you lock in a price, the spot price is irrelevant when you settle.

Of course, you still have to find someone to trade with. For large amounts of oil, you would probably move the market. Also due to said counterparty risk, you might need to break up your trades into many pieces. So basically the above example assumes you can find someone to trade with at the forward price you want and be able to get that storage. If there are multiple such parties who want to do the same thing, then this will itself move the forward price. Any arbitrage margins will therefore be slim.

Trying this for longer periods would be even more problematic. This assumes access to long term storage and the ability to find counter parties.

[HitandRun]

Nevertheless it seems likely that shale will continue to be a swing element due to the rapidity with which producers can adjust production. And given that the production volumes are within the demand supply gap.

jm san

I agree that light tight oil or LTO (aka shale oil, official name by industry players) will be the swing element. However, I am not so optimistic with regards to how fast they can swing on the way up because the bulk of their activity was financed by debt. If the debt holders get screwed this time round, they might be a bit more reluctant to get screwed again.

A case in point: Hess Corp.
Hess is a sizable, independent Oil E&P (exploration and production) company, 30% bigger than Continental Resources in terms of market capitalisation @ USD22 billion. It is one of the bigger players at Bakken shale.

For 4Q14, it only broke even on its E&P operations at average crude oil price of USD75, inclusive of hedging. The price it received for its Bakken Oil was only USD60. The delta should be mainly due to cost of transportation for Bakken Oil. I suspect their 1Q15 will look even more awful.

Due to its size and current gearing, Hess should have no problems to secure financing. However, a lot of the smaller E&P players do not have that luxury and should be filing for bankruptcy soon. Debt holders burnt once by this crash would hesitate to lend .....

[FA+TA]

Goldman: Here's Why Oil Crashed—and Why Lower Prices Are Here to Stay
Source: Bloomberg

[yewkim]

Goldman: Here's Why Oil Crashed—and Why Lower Prices Are Here to Stay
Source: Bloomberg

Thank you. A very good article indeed. The law of supply and demand will eventually prevail, nothing much matter more than this. I has said that we won't see 44$ for this year, but after assessing, I think we may( we may) see 40$ by Q4 or late Q4, but next year we will sure to see this price been taken, and eventually lower.

I believe we will see 65$/70$ first, before we see a new low of 30$/35$. I am afraid the price of oil is going to stay this low for a long time.

So far I was right, so some ask me in the line chat, has my opinion changed as the price of oil is weakening. I say I am no oracle, what I form as my opinion is through experience in trading and assess from material i read, just like anyone here. And i told them, it is not over till it is, and my opinion has not change just because some weakening in price action does not in anyway alter the law of supply and demand which has shown over several session.

But we too must not be blinded by our own opinion and must change as when market dictate. I am still holding to some OnG stocks and UCO.

As and as usual, there are no sure thing in life, as in absolute wrong or right. You all are right too. Thanks for all your contribution.

[tanjm]

Goldman article basically plays games with correlations. It just sounds fancy with all these terms but unconvincing to me.

Supply and demand are non linear dynamics. And is probably statistically non stationary with respect to prices.

Not only that, but all the charts and words in the front of the article don't explain this statement at all in the last para : “the new equilibrium price of oil will likely be much lower than over the past decade.”. It's almost as if someone used the fancy language in the front to slip in an assertion that the reader will take to be authoritative.

[yewkim]

Goldman article basically plays games with correlations. It just sounds fancy with all these terms but unconvincing to me.

Supply and demand are non linear dynamics. And is probably statistically non stationary with respect to prices.

Exactly, market is always forward looking. Remember last year, when data out was mostly bad, but the Dow soar even higher and break new high. That is because market assume that FED will not increase rate as economy is not doing well. So in the end, bad news was good news.

This is happening to oil too. Despite all these bad news in the media, it drop is not volatile. That is a good sign. I believe it is heading higher later,

[egghead]

World's Largest Traders Use Offshore Supertankers to Store Oil
Posted on 20 January 2015 4:04 | By Sarah Kent and Georgi Kantchev | DOW JONES INSTITUTIONAL NEWS

The supertanker TI Oceania was built to ferry vast quantities of oil across oceans, but for the next year it is expected to remain anchored off the coast of Singapore, storing millions of barrels of oil for Vitol SA, a giant trading house.

According to shipbrokers and analysts, the 3-million-barrel megaship--one of the largest in the world--is just one example of efforts by traders to turn a profit in the slumping global oil market. The strategy is simple: buy and store oil at cheap prices now, selling futures contracts to lock in the higher oil prices expected later.

"It is one of the easy ways to make money and that's one of the interesting things about it from a trading perspective: It's a counter cyclical source of profit for the Vitols and Glencores and Trafiguras," said Craig Pirrong, a finance professor at the University of Houston, referring to a handful of the biggest oil traders in the world.

According to shipbrokers and analysts, major traders including Vitol SA, Gunvor SA, Trafigura Beheer BV and Koch Supply & Trading Co. Ltd have chartered supertankers capable of storing a combined total of more than 30 million barrels of oil--many of them in the past few weeks. Vitol, Gunvor and Trafigura declined to comment. Koch didn't respond to requests for comment.

The opportunity to stockpile oil in such large quantities has come from the dramatic shift in the market for the commodity in recent months. Since June, prices have collapsed, tumbling by more than 50% amid soaring production from the U.S. and unwavering output from the Organization of the Petroleum Exporting Countries, at a time when global economic growth--the main determinant of demand--is slowing.

The oversupply has given rise to a so-called contango in the market, when the current price of a commodity is lower than prices for delivery in the future. That makes it attractive for buyers to purchase oil now at the cheaper rates, store it and strike sales agreements at a higher price in the future, locking in profits.

The price difference between the March and August contracts for Brent crude oil, the international benchmark grade, is currently $6 a barrel. That is the steepest premium since an oil-price slump in 2008 and 2009.

For years, oil trading houses have contended with high prices and low volatility, which have squeezed margins. Firms have responded by investing in infrastructure like oil-storage tanks, terminals and refineries to gain flexibility in trading, as well as better information about what is happening in the market.

Combined with the companies' access to the physical oil market, these investments have made the trading firms uniquely well-positioned to exploit the shift in the market and store oil for a profit.

Glencore PLC, a Swiss commodity-trading giant, and Trafigura Beheer, one of the world's largest independent oil traders, have both already highlighted to investors that the market's dramatic change since June is expected to bolster their profits.

Onshore storage tanks are filling up fast. According to Citigroup Inc., China's coastline storage facilities ran out of space as the country filled up strategic oil reserves last year. Stocks at the U.S. storage hub at Cushing, Okla., have risen more than 20% since December, according to Genscape Inc., a data provider based in Kentucky.

That means more unusual storage options, such as the ships, are becoming increasingly popular.

"Because so much oil doesn't have a home right now, there is a frenzy of traders and companies looking to hire supertankers," said Halvor Ellefsen, chief executive officer of Galbraiths, a London-based shipbroker .

The last time there was a similar situation, in spring 2009, more than 70 million barrels of oil were stored in tankers, according to shipbrokers.

The current tanker craze may not quite reach those levels, as the disparity between current and futures prices isn't as steep at the moment. Bank of America Merril Lynch predicts the volume of oil stored on tankers could rise to 55 million barrels by the end of the second quarter.

However, the potentially lucrative storage trade isn't open to everyone, nor is it risk free. It requires detailed knowledge of the way oil is moved around the world that few outside a tightknit group of oil traders possess. Making a profit depends on numerous factors, including rates for freight and storage and, ultimately, finding a buyer for the crude.

"If people think the contango is some kind of magical way to make money they are incorrect," said Benoit Lioud, senior research analyst at Mercuria Energy Group, a Swiss-based trading house. "Storing big quantities of crude oil is not an easy game. It's not a game at all."

Costas Paris in London and Christian Berthelsen and Nicole Friedman in New York contributed to this story.

January 19, 2015 15:04 ET (20:04 GMT)
Copyright © 2015, Dow Jones & Company, Inc.

[yewkim]

egghead,

I think everything else is a bet. What if really the economy is bad and oil stay low for some 2 years?

I think they will really "contango" and end up in the hospital.

Just like those trader who price oil right now 6 months into the future even though demand and supply tell them otherwise.

What to do, we are small, we follow them to profit. We know they are wrong, But they are big boy, we are all too small. I know too all here are right to say this about oil fundamental been bad, I agree totally with you all here.

But market price action dictate where my bucks( $) should be. This is how we should react if we want to make money. BB rule the market. If they said Sh** is worth 1000$ per barrel, who are we to tell them that it is not. If you got $, u are king. U do what you like.

That is why we said, never fight the FED, never fight the market, go with it. In other word, follow the trend. The trend is your friend. This is the hard truth, sadly. Till one day, some where got to give. Time to pay back years of fake prosperity. Another Greece..could be.

We are heading into a long drought upfront..I hope not.

[CityFarmer]

egghead,

I think everything else is a bet. What if really the economy is bad and oil stay low for some 2 years?

I think they will really "contango" and end up in the hospital.

Just like those trader who price oil right now 6 months into the future even though demand and supply tell them otherwise.

What to do, we are small, we follow them to profit. We know they are wrong, But they are big boy, we are all too small. I know too all here are right to say this about oil fundamental been bad, I agree totally with you all here.

But market price action dictate where my bucks( $) should be. This is how we should react if we want to make money. BB rule the market. If they said Sh** is worth 1000$ per barrel, who are we to tell them that it is not. If you got $, u are king. U do what you like.

That is why we said, never fight the FED, never fight the market, go with it. In other word, follow the trend. The trend is your friend. This is the hard truth, sadly. Till one day, some where got to give. Time to pay back years of fake prosperity. Another Greece..could be.

We are heading into a long drought upfront..I hope not.

Don't be dictated by market price action (or Mr. market mood in value investing terminology) is a basic concept of value investing. We take advantage of it, and have made money.

Is value investing work? It should be, with lot of results from gurus. We are here because we believe it works.

I am not so sure you are in a right forum

[yewkim]

cityfarmer

I am referring purely to oil only, not any stock or counter that require due diligent as in value investing.

Oil is heading higher, currently 52$, but i believe with each day pass, the supply is building up. Next week, we will hear again US stockpile at record high, then it may retrace down a little only to soar even higher later.