Backwardation plus inventory draw equals high prices
Over the weekend, millions of people around the world took to the streets demanding an end to fossil fuels and a rapid transition to clean energy sources. Although the ambitious plan is to convert to renewables within 5 years, that’s just not possible. In reality, we’re looking at 20 to 30 years instead of 5 years, and fossil fuels will be a major part of our energy solutions during that period. At the recent G20 summit, world leaders, who represented 80% of global emissions, decided to set the goal of tripling renewable energy production, but they could not agree on fossil fuel reduction actions. The reason for the disagreement is because presently we are running short on oil as we stand on the sidelines and watch inventories deplete from week to week as OPEC+ has been resolute with their production cuts. Truth be told, solar, wind, hydroelectric power, geothermal and biomass are technologies that we have mastered and that can usually be deployed quickly. But they need capital, particularly in countries that have not even started down this road. Someone has to go first. Who was the first person to look at a lobster and think “wow that sure looks good”?
Futures prices for crude delivered in October climbed over $90 per barrel, up from $70 in less than 3 months. Market spreads are also signaling a supply shortage. The three month backwardation is now over $2.00/barrel. Of course, once the market is backwardated, the incentive to store oil doesn’t really get any worse as the market gets more backwardated. So don’t give up on terminals yet. Cushing crude stocks are down over 40% since the beginning of the summer. But don’t cry over spilled milk when it comes to Oklahoma. Just because Oklahoma State lost by the score of 33-7 to South Alabama, it doesn’t mean that the world has gone crazy. Overall crude oil inventories in the US are actually higher than the average levels. However, there has been a shift from Cushing to the Gulf Coast, in order to furnish export demand. Remember, people didn’t build 100 million barrels of tank storage in Cushing because they thought that it would never be needed. Cushing is a NYMEX hub, and thus gets a lot of attention. Inventory levels wax and wane and traders will once again be asking about Cushing storage. Someone has to go first. “He was a bold man that first ate an oyster.” The Tank Tiger is presently not offering up any lobsters or oysters, but if you have interest in Cushing storage at VERY reasonable prices, we’d be happy to hook you up.
The higher oil prices are a source of consternation when it comes to our domestic policy. U.S. consumer prices in August rose by their most in more than a year, driven by a nearly 11% increase in retail gasoline prices. At these prices, we should – in theory – start to see some gains in US horizontal oil rig count, but that deployment has been incredibly sluggish. Come on gang, there is money to be made out there! I guess someone has to go first.
