Economic Peculiarities

dices throw in online casino

C’mon lucky 7… No whammies; no whammies!

Yes… Yes… I still blog here. Thank you for your concern. Sorry for my recent absence. One of the strange things about practicing law out here in the wilds of West Texas is that judges occasionally make me show up to court. If I could only make them understand the inherent logic of my filings!

Yesterday, oil rallied. Good news! Today, it seems to be sustaining said rally. Yay!

We’re all the way to (almost) $31/bbl of my dear, sweet WTI! Pop the champagne!

We all know, of course, that this is not good enough news for us to actually start doing Snoopy dances in West Texas – but at least it’s a turn in the right direction…

The only issue I have with said turn is that I don’t understand it. As a lawyer, I don’t like things I don’t understand. There be dragons, as they say.

You see, oil inventories rose again this week. Refined products inventories fell, but not by enough to offset their earlier rises last week and before. The EIA report was the “official” report, but that only mirrored the earlier report by the American Petroleum Institute. I read one article that argued, since the inventory reports were relatively similar, the information had already be “absorbed” into the price by the time the EIA report came out. (I’m sorry, I cannot find that article to link to it now… I will continue my search, but will always accept help from internet minions.)

Respectfully, this is nonsense. Before the API report published, the price sat around $26.50 per barrel. Two days after the API report, we’re touching $31. The economic impact of a rise of inventories of almost 5 million barrels does not provide price support for a $15% increase. Likewise, there has been no news reflecting imminent demand increases.

I know, I know. The ECB announced that it would consider stimulus measures. One must remember, however, that the near-term effect of economic stimulus is support in the existing economy – not demand creation. Whatever the long-term effects of a stimulus may be, it should affect the short-term pricing of WTI. If anything, this news should have quickened the step of the contango dance. (Hmm. Maybe there’s something to this.)

Believe me, it’s not that I mind higher prices. I’ve argued that the natural price floor was $32. I hate being wrong, and the rise makes me closer to right (which I like).

My nagging problem, however, is that I understand why prices fell to $26+, and I don’t understand the rising price. The explanations that I’ve read so far smell a bit like, well, bull droppings and pixie dust.

When something smells like dung, it tells me that there is at least a non-optimal chance that I’m onto something. If I am, it means the price rise is either a). manipulated or b). the result of pure speculation.

Neither of those options is particularly palatable. If it is manipulation, it is because players are taking profits now due to fear that another leg downward is on the immediate horizon (not including my nascent idea that it might be contango players making big purchases.). If it is pure speculation, that means that there is no more than a gambler’s chance that the price increase is sustainable.

Either of those options is worrisome, but I’m certainly hopeful that the riverboat gambler of option “b” knows what she’s doing.

This entry was posted in Economics, Investing, Oil & Gas, Oil Prices, Uncategorized and tagged , , . Bookmark the permalink.

2 Responses to Economic Peculiarities

    My below comment contains Spoilers about the movie The Big Short.

    I agree, short term market fluctuations are puzzling. Speculation surely is a part of it. I remember when I was thinking about buying oil at $70/barrel, because that had to be the end. I imagine though at some point, the price gets to be so uncomfortably law for the traders that they just stop selling and wait to see if the price goes back up, and when it does, they sell sell sell, until it goes too uncomfortably low again. Over time, today’s uncomfortably low becomes tomorrow’s normal. It’s sort of like the movie the Big Short where the main characters knew the housing market was going to crash, but the question was, how long could they wait for the bubble to burst. There was a time where defaults were up and so were the price of the housing bonds, and the characters were so confused. (Sorry for the Spoiler! The housing market crashes in the Big Short).


    • Jeff Lambert says:

      This echoes my thoughts, at least indirectly… I think that the price is (was?) so low, that the (ever-increasing) storage costs could not overcome the value added by storing unrefined products offshore for a few months… For example, if one could lock in a contract at $26, the forward price next February was around $39. That’s $13/bbl in guaranteed profit for sitting on your hands for a year – for a ULCC ship, that’s something on the order of $27 million.


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