The OPEC-o-pods and Putinoids certainly huffed and puffed and had the Wall Street speculators reacting in confused anticipation of the outcome of the freeze-a-thon that ended up being fizzle-flop.
When I was asked if I was surprised that the fretful group of 16 could not come to an agreement, my answer was a resounding, “No.” There was no point in even having the meeting if the Iranians had no intention of showing up, let alone agreeing to a Saudi engineered production freeze. If the bride doesn’t show up at the reception then send the band home. As a matter of fact, why hire the band in the first place?
With the conclusive collapse of collusion (note the double alliteration for impact), one would expect an immediate resumption of good ‘ole status quo, meaning the return of crude supply at record levels with prices for crude and its derivatives falling noticeably.
But with all the business jet exit vapours still trailing in the air over Doha, oil workers in Kuwait downed tools, knocking production from 3.0 to 1.5 million bpd before a hammer had time to hit the ground. This drove up the price of crude as the pin stripers felt the unrest may spread, shortening supply from other Middle East producers. With crude oil being Kuwait’s only revenue source, the strike was settled as only things can be settled in Kuwait – quickly and quietly in all of 72 hours.
Surely then this would get prices moving down!
No, not really because April 20 was the last trading day for May futures for crude, so profit taking was the rule of thumb and prices rose. If there was ever any doubt in your minds about the involvement of speculation in the end prices of crude oil, please read on and be converted.
A crude oil contract is 1,000 barrels. The current global demand for crude is approximately 91,000,000 barrels per day or 91,000 contracts for physical delivery. On April 20 the settlement volume for June futures delivery was 791,318 contracts, yet only 91,000 contracts are deliverable! This means that during the day approximately 700,000 contracts covering a volume of 700 million barrels were bought and sold without ever leaving storage.
And that folks is how prices get manipulated – not by oil producers but by the wing tippers in New York.
As I have mentioned in previous reports, there are, at any given point in time, nine identifiable, objective factors that go into the price of crude and eventually gasoline and diesel prices. Then there is another one that is completely subjective – I am talking about the “risk factor,” which I call the “what if” factor, which is a cushion value that is at most times added into the cost of crude. I have just described one above with the end of month contract game.
The most dangerous one as far as higher prices is concerned, is the geopolitical factor, as it can’t be measured nor sometimes even explained.
The problem I have with today’s low crude prices due to oversupply is that there is no risk factor being incorporated yet, but it will come and maybe sooner than most think.
With Saudi Arabia, the master in the OPEC supply house on the verge of securing a $10 billion loan thereby becoming a debtor rather than a creditor, the risk factors here are:
What financial stresses are the other OPEC members experiencing?
Are crude prices so low that it is not in their best interests to continue the crude flood?
If the answer is yes, consumers should enjoy the sun because storm clouds may be on the horizon. That’s just speculation, but weather forecasters are speculators too, and it seems to me they’re right only 50% of the time.
Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada. All posts by Roger McKnight