Headlines

January 19, 2009
Crude Players Likely to Store Oil on Ships for Short Term Only

The deep contango price trend is encouraging more traders and refiners to store crude onboard ships for up to six months, but a longer term play could be tricky because of the difficulty to secure loan, maintaining fluid cash flow and the high financing cost, traders told OPIS on Monday.

The estimated volume of crude oil stored on ships has shot up to as much as 100 million bbl or 50 ships, double the volume seen in early January.

The contango price trend on the NYMEX crude futures market has widened in the past few weeks, encouraging more players to take up a long position now and bet on a market rebound later this year, possibly in summer.

Also, freight rates have fallen to the lowest level in the past six months, products demand is poor and crude supply is ample.

"The contango trades in the crude market is a short-term play," a source at a bank said. "It would tie up a lot of capital by storing that much oil on ships, and in the current scenario in the financial market, banks are not granting loans easily."

Several major banks have reported heavy losses in the past few weeks because of their exposure of the subprime mortgage problems and weakening economy.

The bank source estimated that it would be likely for players to store the oil for a few months and up to six months before taking profits.

A Very Large Crude Carrier could store about 2 million bbl of crude oil. The value of the cargo onboard would be about $70 million, based on Monday's front-month crude futures price.

With as many as 50 ships tied up as floating storage, the value of oil onboard ships could be about $3.5 billion.

The freight rate for a VLCC is $68,000 per day.

To make a successful contango play in the market and roll that long physical position to the next month, it would take about $2/bbl to break even on the logistics and chartering costs, and time-money-value factor.

Players are also more likely to store oil for only a few months rather than until the end of this year not only because it would be difficult for players to tie up huge capital for a long time period, but also the intermonth contango price trend is substantially weaker at the end of this year.

The February-March intermonth crude price spread on the NYMEX was wide at minus $6.23/bbl at presstime, but the intermonth price gap shrunk significantly going forward to May-June.

March-April was at at minus $4.09/bbl, and April-May was at minus $2.29/bbl.

The August-September price trend was in a backwardation of plus 68cts/bbl. 

Some ship charterers have booked ships for six months, with an option to extend the charter for another six.

"Money is more expensive as banks are more reluctant to make big loans in the current financial environment, but oil is also a lot cheaper," a second source said, explaining that the demand for ships to store oil for the prompt months should
remain strong.

Some players are still in the market looking for ships to store oil. However, the actual ship booking activity has slowed as ship availability is tighter.

January 7, 2009
Special January Meeting Will Examine Oil Price, Supply, Economics

Oil prices are off to a hectic 2009 start with some petroleum products up 40-50cts/gal in less than two weeks. The spike is attributable to a perceived increase in eopolitical risk, hopes for an economic recovery, and a tightening of refined products and renewable fuels' capacity, particularly in the U.S.

Spot increases for gasoline since the December 24 intraday bottom have totaled 36cts/gal in New York Harbor; 39.5cts/gal at the U.S. Gulf Coast; 38cts/gal in Group 3; and 47cts/gal in Chicago. The West Coast gasoline market flirted with 85cts/gal earlier in December but has surged by about 64cts/gal in less than 40 days. Meanwhile, crude prices are up by about $13 bbl from their late November lows.

A special OPIS Fuel Price & Profitability Outlook conference will address all of the near term and long term drivers for fuel prices. Attendees will convene and hear from fifteen blue ribbon speakers on January 26-27, 2009 at the Ritz-Carlton in Orlando, Florida. Here are just some of the companies that have already signed up to attend this comprehensive meeting:

AccuWeather                Hopkins Appraisal
BioUrja                          J. H. Williams
BP                                Lewis & Raulerson
BJ's                              NuStar
CHS/Cenex                   PFC
Citgo                             PRX-Geographic
Citizens Bank                Ramsey Capital Markets
Colonial Oil                    Reid Petroleum
ConocoPhillips               Sunoco
Comdata                       Swift Transportation
Crystal Flash                 The Pantry
Flying J                         Turner Mason
Fuel Masters                 United Airlines
Friendly Express            Wawa

There's still time to register for this meeting and take advantage of the special $100 early bird discount -- but you need to register before this Friday, January 9th! Visit www.opisnet.com/priceoutlook or call toll-free 866-620-5940 for details.

Sessions at this premiere two-day conference include:

-  After a year that saw $115 bbl separate market lows and highs, what's in store for 2009 and what keys might tip the supply community off to drastic price moves? OPIS Chief Oil Analyst Tom Kloza will give an exclusive forecast that's unfettered by vested interests. Find out the four vital factors that need to be watched in the weeks and months ahead.

-  Do U.S. refineries represent the next major industrial segment to face financial shake-ups or are reports of the "Dark Ages" overblown? Turner Mason senior vice president John Auers will zero in on prospects for U.S. processors as a new wave of global refining starts up.

- Are raised hopes for a financial recovery premature? Economist James Galbraith
will look back at the $700-billion bailout, and look forward at the $1-trillion stimulus package and detail what these unprecedented expenses might mean for energy markets.

- Will poor economics hamstring clean fuels' initiatives and targets? Friedman Billings Ramsey Capital Markets senior analyst Kevin Book will tackle this issue as well as likely Obama Administration goals for flex vehicles, new fuel efficiency standards, hybrid technology and a generation of new feedstocks.

-  What will 2009 present in the Mergers & Acquisitions arena? There was only
one refinery transaction in 2008, but it was a busy year for deals in terminals, and
c-store chains. A panel that includes top executives from BioUrja, Hopkins Appraisal, and PFC Energy will look at the likely deal environment for the next twelve months. Bonus: Hear from one of the still active lenders in the petroleum segment, Citizens Bank, about what banks expect from companies still looking to grow or upgrade in this challenging environment.

-  Top agricultural analyst Marty Ruikka will look at the controversial blend wall and whether present day RFS represents unattainable goals, or promises continued upheaval on the farm and at blending sites.

-  Are fears about a more adversarial relationship with Middle East oil producers and other vital countries overblown or on the mark? Against the backdrop of the most contentious conflict in years, PFC Energy's Ben Cahill will look at which headlines can be ignored, and which conflicts could impact oil prices and supply over weeks, months, or years.

 -  Get a rare midwinter look from perhaps the most trusted name in meteorology, AccuWeather's Joe Bastardi, who will give a sneak peak as to how the 2009 hurricane season may shape up, as well as what's in store for the rest of the winter. Find out why there's much greater precision in long term forecasts than there was just a few years ago.

-  Plus, all attendees will all get copies of a special year-end report that details the unprecedented price movement from the refinery to the pump in 2008. This will include analysis of the winners & losers by market segment, geography, and brand.

December 29, 2008
Magellan Cancels Huge Pipeline Project, Revamps Expansion

Magellan Midstream Partners today revealed that it has canceled plans to build an
80-mile pipeline between Houston and Pt. Arthur and instead will join forces with Explorer and construct a line that will allow customers to move products from Motiva's Pt. Arthur refinery to East Texas markets.
  
Instead of the ambitious 80-mile pipeline, Magellan will build a smaller 9- mile,
20-inch diameter pipeline to connect its East Houston terminal to Explorer's existing 28-inch pipeline that moves products from Pt. Arthur to Fauna, Texas (just east of Houston). Magellan's East Houston terminal serves as an origin point for Magellan's 8,500-mile system. The revamped project will cost $120 million, or half of the $240 million price of the original pipeline plan.
  
Additionally, Magellan will construct a pipeline connection between its East Houston terminal and Motiva's existing Pasadena terminal. All of the projects are expected to
be operational by 2011. Observers note that Motiva's Pt. Arthur refinery expansion project -- that will roughly double its capacity -- will be completed early in 2010.
  
Magellan still has plans to add capacity at existing locations including the construction of 900,000 bbl of storage and three additional truck rack lanes at its East Houston terminal and 200,000 bbl of storage at its Frost, Texas, facility. Those enhancements should be fully operational by 2010.
  
Magellan recently added ethanol blending capability and a third truck rack at West Fort Worth and should add two truck rack lanes at Odessa early in 2009.

 

December 29, 2008
Surprisingly, Fund Length Increase for Crude

Here's an interesting year end paradox for anyone who thought that large speculators - - often simply referred to as the "funds" - - were the clear culprit for the meteoric rise and fall of crude oil prices in 2008.
  
As 2008 draws near to a close, there is far more "net length" among the "funds" than there was back in July, when crude raced to $147.27 bbl. In fact, there are nearly 30-million bbl of additional long positions in the "non- commercial" category for WTI futures and options that the Commodities Futures Trading Commission (CFTC) tracks. It's this "non-commercial" category that most neutral observers believe is representative of large commodity pools, financial wheeler-dealers, and well-heeled investment or index funds.
  
Net length for WTI futures and options (subtracting outright short positions from outright long positions) totaled 128,140 contracts last week. Since each contract reflects an underlying 1,000 barrel futures position, the length represents a buying bias of more than 128-million bbl of WTI crude. When oil first raced above $140 bbl, net length was under 100-million bbl. It declined to 78.8-million bbl by the time prices slumped to $100 bbl; and dipped to 53.2- million bbl at $75 bbl. However, fund length bounced back and moved above 90- million bbl as $50 bbl was breached, and the money on the long side in this category continued to swell through mid-December.

Net Fund Length at $145 bbl (7/1/08)
    WTI Crude      -     99,782 contracts
    Heating Oil      -    12,629 contracts
    RBOB              -    63,716 contracts

Net Fund Length at $100 bbl (9/30/08)
    WTI Crude       -    78,793 contracts
     Heating Oil     -      5,908 contracts
     RBOB             -    21,113 contracts

Net Fund Length at $75 bbl (10/14/08)
    WTI Crude       -    53,156 contracts
    Heating Oil      -      5,150 contracts
    RBOB              -    21,141 contracts

Net Fund Length at $50 bbl (11/25/08)
   WTI Crude        -   92,198 contracts
    Heating Oil      -     8,507 contracts
    RBOB              -   42,612 contracts

Net Fund Length at c. $40 bbl (12/17/08)
    WTI Crude       -  128,140 contracts
    Heating Oil      -      8,929 contracts
    RBOB              -   51,819 contracts
 
Net long positions don't surprise anyone. A long bias for the non-commercial category has been the rule, rather than the exception for years. The last time there was a "net short" position in crude was September 30, 2003 and it was a small bias of less than 15-million bbl.
   
Buyers have long out numbered sellers in other oil contracts as well, thanks in part to commodity index funds which hold "long only" positions in heating oil, gas oil, or gasoline and simply roll those futures forward as expiration nears. Since the RBOB contract replaced unleaded gasoline as the trading spec for motor fuel, there has never been a week where the short positions outnumbered the non-commercial long positions in that fuel.  Heating oil has on occasion seen sellers outnumber buyers within the fund sector, but not since March 2007.

Like any data set, the numbers can be interpreted many different ways by the always subjective trading audience.  Here are some of the most salient observations OPIS gleaned from trading houses that monitor the CFTC data and draw conclusions from the recent spurt in fund length:

   1. Despite a $110 bbl loss for WTI, there is still risk of more bloodletting to come,
as a final wave of capitulation may come with economic malaise in 1Q 2009. This
is by no means the dominant theory, but oil bulls would be more comfortable if less investment or speculative money was on the long side. This belief suggests that funds have accumulated length from $75 bbl on down to present numbers of less than $40 bbl, and there are questions about how patient funds will be with current
red ink.

   2. Comparisons with Summer data are misleading because the CFTC has reclassified companies into the speculative or "non-commercial" class. Net length hasn't necessarily increased --  the CFTC has simply moved some statistical longs from the commercial category, some sources say. 

   3. Despite talk about "deflation," investors in the financial segment still believe that inflation represents the greater long term threat. Once crude oil prices slumped through $50 bbl, the banks, commodities' funds, and index funds saw more money flow into oil futures as a hedge against inflation. That money is there for the long haul.

   4. A lot of the money that was invested (or speculated) in oil has moved from the netherworld of the over-the-counter markets into the NYMEX, where performance is guaranteed. However, in theory, this should increase open interest across all energy contracts, and increase short exposure as well.

   5. Too much blame was levied upon the funds when prices screamed higher, and
too much credit goes to the funds for the slide. The human folly witnessed among individuals, or professional pundits, manifests itself in the "non- commercial" CFTC data. In essence, proponents of this theory argue that there really is no such thing as "the smart money."

   6. The case for a long term bull market in commodities can still be made, despite the 75% intra-year drop. If one believes in population growth and the resumption of global growth, then one can buy into commodities - particularly in natural resources - as a great long term investment. As badly damaged as commodities were in 2009, they will turn before equities, this school of thought holds.

 

December 22, 2008
Credit Suisse Sees Oil Price Rebound in 2009; Refining to Enter Dark Ages

Credit Suisse is expecting the weak oil market to hit the "reboot" button in 2009 after crashing in the second half of 2008.
  
Oil prices soared to a record high of near $150/bbl in July before free- falling to below $40/bbl in a short span of a few months.
  
Also, the Swiss bank expects to see multiple closures of refineries in the U.S. due to a weakening demand and stronger supply from new and more efficient refineries in other parts of the world.
  
"We expect 2009 will be the year when most of the energy cycle reboots itself, propelled by severe depletion in oil and natural gas production, setting the scene for another upswing once demand curves stabilize.
  
Much more of the world's oil production today is coming from mature and hyper-mature oil basins than has ever been the case.
  
There is little or no momentum in either OPEC or non-OPEC supply, and by the end of 2009, the world will have lost a significant amount of oil capacity.
  
"Depletion is a bigger problem than the market suspects," the Swiss bank said.
  
The deferral of new projects and the acceleration of depletion effectively eliminates all prospect of sustainable volume growth among the world's largest oil companies (Big Oil).
  
The failure of the Big Oil business model will be laid bare in 2009, and will likely prompt the long-awaited industry consolidation.
  
As China and other emerging economies struggle to avoid a collapse, 2009 will be a year of lost demand, Credit Suisse said.
  
However, the market still has not answered the question of how to provide the world's emerging population with automotive transportation.
  
The issue is moot for 2009, but probably not for much longer than that.
  
Consumers in China, India, and elsewhere will soon be back asking for more vehicles, and for now that means more oil.
  
"When they want it, it may not be there," the bank said.
  
Although the price outlook for crude oil in the future may look somewhat bullish, the refining sector may not fare as well at least in the near term.
  
For the global refining, the bank said the industry is entering its Dark Ages.
  
A sharp downward lurch of the demand curve coincident with the start-up of new large, highly efficient plants close to the centers of future demand growth (East of Suez) will force the closure of smaller and less complex plants in merchant refining centers.
  
The U.S. appears particularly vulnerable in this respect.
 
The bank expects multiple plant closures and some potential bankruptcies in 2009.
  
The trend toward a more global natural gas market will likely slow a little in 2009.
  
The secular story remains intact, but Credit Suisse expects a lack of urgency to dominate a market that will see fewer Liquefied Natural Gas approvals, and a less obvious need to switch from oil.
  
However, long-term access to gas supply remains a vital strategic question, particularly for Europe, but also for China and other energy-intensive but resource-poor areas.
  
In U.S. natural gas, the bank sees an industry in financial crisis now cutting capital expenditure aggressively in the face of a surprisingly weak demand curve.
  
As drilling falls sharply, the underlying rates of production decline will be revealed, and the market should start to tighten meaningfully toward the end of 2009.
  
For alternative energy, Credit Suisse said that the cycle crash of 2008 destroyed equity values in this sector, right ahead of the swearing in of a new U.S. administration with high-profile commitments to the greening of America.
  
The bank is somewhat positive on alternative energy for the future.
  
"We see selective opportunities in the Alternative Space, mainly driven by policy rather than economics," the bank said.
  
"We also see the arrival of the plug-in hybrid electric vehicle (PHEV) as inevitable at this point."
  
Finally, the bank expects more progress in 2009 toward the control of carbon emissions, with the U.S. likely sprinting to catch the rest of the developed world.
  
The bank cautions that the rollout of more renewables into the electricity system could have unexpectedly negative impacts on both traditional power generators and on demand for natural gas.