European distillate oversupply, EIA…

by Jim Colburn • Monday, February 29, 2016

The always excellent Today in Energy discusses the oversupply of distillate in Europe, contango and longer voyages for product:

“Trade press reports indicate that several cargoes from the Middle East and India are opting for the longer voyage. A lack of storage space and a large contango have pushed distillate supplies into floating storage and have encouraged import cargoes to take the longer shipping routes. Contango is a situation in the futures market where prices for delivery dates further in the future are higher than those for more proximate delivery. When contango in the futures contracts become sufficiently large, market participants can lock in a profit by purchasing distillate supplies on the spot market, chartering a vessel, and selling a longer-dated futures contract.”


Here is the link:



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Rate hikes back on the table, Sober Look…

by Jim Colburn • Sunday, February 28, 2016

Here is an interesting take on inflation from Sober Look:

Here is their conclusion based on the idea that inflation expectations (or lack of) may be overdone:

“Some suggest that raising rates in the current environment is nothing short of insanity. Given the monetary easing by the ECB, the BOJ, etc. (as rates move deeper into negative territory) or the dovish stance by the BOC, the BOE, and others, the US dollar is bound to resume its rally, causing further damage to the US economy. In fact the latest PMI measures, (from Markit as well as ISM) suggest that the US economic activity has already slowed sharply in the first quarter. Nevertheless, given the Fed’s focus on some of the indicators discussed above, rate hikes in 2016 are now back on the table.

Perhaps the longer end of the Treasury market is picking up on this too (from







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Railcars as storage… WSJ

by Jim Colburn • Sunday, February 28, 2016

From the WSJ (

“Analysts estimate there are now as many as 20,000 tank cars—about one-third of the North American fleet for hauling oil—parked out of the way in storage yards or along unused stretches of tracks in rural areas.

Producers and shippers who signed long-term leases for the cars during the boom are stuck paying monthly rates that typically run $1,500 to $1,700 per car. Traders can pay those prices and still profit. Oil bought at the April price and sold via the futures market for delivery a year later could net a trader $8.07 a barrel, not including storage or transportation costs.”


The article also mentions an average capacity of a railcar of around 600 barrels.  Lack of storage would cause a spike lower in the nearby price of crude.  More available storage capacity buys time until the market balances.  Swimming pools and bathtubs are next…



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Rise of the machines?

by Jim Colburn • Saturday, February 27, 2016

From Marginal Revolution:

“You sometimes hear there is no evidence of automation putting people out of work, but arguably the automation of manufacturing, plus IT-enabled foreign competition, are significant factors behind this trend.  This picture also casts doubt on the common view that there are hidden real wage increases, not picked up by standard data and wage deflators and the like.  You would expect higher real wages, if indeed they were in place, to be reflected in a more positive labor supply response, but we don’t see that – ”



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Berkshire Hathaway on pricing climate change…

by Jim Colburn • Saturday, February 27, 2016

I was wondering how insurance companies are pricing climate change… According to Berkshire Hathaway latest report, via Marginal Revolution:

“…insurance policies are customarily written for one year and repriced annually to reflect changing exposures. Increased possibilities of loss translate promptly into increased premiums. Up to now, climate change has not produced more frequent nor more costly hurricanes nor other weather-related events covered by insurance. As a consequence, U.S. super-cat rates have fallen steadily in recent years, which is why we have backed away from that business. If super-cats become costlier and more frequent, the likely – though far from certain – effect on Berkshire’s insurance business would be to make it larger and more profitable. As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries. –

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“$30 and $2 doesn’t work”…

by Jim Colburn • Friday, February 26, 2016

This is from the CEO of Devon, David Hager, via CNBC:

“Now you’re starting to see the decline, and I believe you’re going to continue to see the decline as you move through 2016,” said Devon Energy CEO David Hager to an audience at the annual IHS CERAWeek energy conference this week.

“Right now to summarize it: $30 and $2 does not work — $30 oil and $2 gas,” he said. “Most of us are in place to make sure we can survive, and make sure we are in place when it turns.”


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$0 oil? St. Louis Fed

by Jim Colburn • Thursday, February 25, 2016

Not quite… But the St. Louis Fed analyzed current inflation expectations in the marketplace and suggested that oil prices would need to trade down to zero (and below) for expectations to be realized… Here is their conclusion:

“According to our calculations, oil prices would need to fall to $0 per barrel by mid-2019 in order to validate current inflation expectations. After that, there is no oil price that would allow our model to predict a CPI path consistent with December 2015 breakeven inflation expectations. This implied path of oil prices is very different from the path of oil prices implied by futures contracts, which rises to more than $50 per barrel by mid-2019.

To be fair, they suggest some other possibilities:

“Expectations for the future growth of the other CPI components besides energy may be lower than the annual rate of 2.87 percent we assumed in our model.
The recent movements in breakeven inflation expectations may have been caused by something other than the decline in oil prices. It is even possible that a third variable is driving the decline in both.
Investors may expect the relationship between oil price and the CPI energy component to change in the future. (This would be despite the strong relationship seen over the past 20 years, shown in the second figure in our previous blog post.)
Changes in the inflation risk premium for bonds that are not inflation-protected and/or changes in the liquidity premium for TIPS may be distorting breakeven inflation expectations in the last few months.”


Here is the link:

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Gallows humor.. WSJ

by Jim Colburn • Thursday, February 25, 2016

From the WSJ (

“Night is darkest before dawn, said Joe Kaeser, CEO of Siemens AG. His remarks captured the Darwinian mood. To survive a bear attack, one needn’t outrun the bear, just out-sprint another person running for his life, Mr. Kaeser joked.”

There is more:


“More are soon to follow, shale pioneer Mark Papa, the former CEO of EOG Resources Inc. and now a partner at energy-focused private-equity firm Riverstone Holdings LLC, told attendees. There will be “a lot of bodies, a lot of bankruptcies,” said Mr. Papa.”

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Oil inventories…EIA

by Jim Colburn • Thursday, February 25, 2016

The EIA discusses oil inventories in This Week in Petroleum (


“Using inventory levels from the latest Weekly Petroleum Status Report, utilization in PADD 3 and at Cushing was 84% and 89%, respectively. Since the end of September, however, it is likely that new storage capacity has been built, which would reduce overall utilization. Weekly crude oil inventory numbers also include pipeline fill and lease stocks (oil that has been produced but not yet entered into the supply chain), which are not included in the capacity survey estimates.”

And, comparing today’s situation with 2008:

“There are a few differences in the crude oil market now compared with 2008 and 2009 that may explain why contango is not as great and floating storage is not as prominent. Since 2011, onshore storage capacity has grown on both an absolute basis and compared with refinery runs, likely mitigating some of the increase in storage costs. The switch in the global crude oil market from inventory draws to inventory builds was much larger in 2008 compared with 2014. From the first quarter to the fourth quarter in 2008, global stocks went from a draw of 1.38 million barrels per day (b/d) to a build of 2.38 million b/d, or a net change of 3.76 million b/d. In 2014, the net change was only 1.36 million b/d.”

Here is the takeaway:

“However, with inventories already high after generally building over the past 18 months, this turnaround season could push storage capacity use to new highs”

This is why we see -$5 puts trading on the April/May spread.  And, price rallies should be difficult to maintain while in an inventory building cycle.




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Reuters: CERAWEEK-World’s oil bosses eyeing more pain try to look past 2016

by Jim Colburn • Wednesday, February 24, 2016

How bad is sentiment in oil? Reading about the tone during IP week, and now during CERA week, even the most contrarian among us would be rattled… Will $5 puts trade this cycle? $zero puts? (My bold, below)…

CERAWtEEK-World’s oil bosses eyeing more pain try to look past 2016 – RTRS

24-Feb-2016 01:00
By Ernest Scheyder, Anna Driver and Ron Bousso

HOUSTON, Feb 24 (Reuters) – The world’s top oil executives gathered in Houston this week seem to agree on one thing: this year is set to be so horrible that many skip right to 2017 and beyond to talk about hopes for market rebalancing that so far has eluded the battered industry.

In April 2015, the energy sector’s biggest annual conference was abuzz with speculation when oil prices might bottom and the idea that prices could hover below $60 for years after tumbling from over $100 seven months earlier was considered a sobering one.

This time, with prices near $30 and last year’s “lower for longer” catch phrase replaced by “even lower for even longer,” oil executives attending the IHS CERAWeek conference are more solemn and guarded in their predictions.

This year we are in a survival mode,” Juan Carlos Echeverry, chief executive of Colombia’s national oil company Ecopetrol told the conference on Tuesday.

John Hess, chief executive of Hess Corp HES.N, one of the independent U.S. shale producers, said the industry appeared to be only halfway through its downturn.

It’s probably a three-year process and we’re in the middle of that rebalancing now,” he said.

Stephen Chazen, CEO of Occidental Petroleum OXY.N, agreed, but warned that hopes to see the market rebound can make people too optimistic.

Usually you get a false bottom, or two or three or four,” Oxy’s CEO said.

The industry experienced one such false dawn last year when oil prices rallied in the second quarter only to give up gains in the second half of the year before tumbling further to fresh lows at the beginning of this year.

Now, executives are pinning their hopes on forecasts that global oil demand will continue to rise and eventually eliminate global oversupply, in part created by the U.S. shale drilling boom of the past decade.

However, with the International Energy Agency now predicting such rebalancing to start next year and continue in 2018, the chilling message is that many oil companies, primarily among the U.S. shale producers, may not live to see that recovery.

Mark Papa, former chief executive officer of EOG Resources EOG.N who pioneered drilling in shale for crude oil, said this was the worst downturn he has seen since 1986 and one that would “leave bodies and companies all over the place.” (Graphic:

“I think you will see a much more stable and more balance-sheet focused industry emerge from the ashes, but it’s going to be really, really ugly to get through this valley,” said Papa, who is now a partner at private equity firm Riverstone Holdings.

On Tuesday, Silver Run Acquisition Corp SRAQU.O an investment vehicle sponsored by Riverstone, raised $450 million in an initial public offering to fund acquisitions of energy companies seen as available at discounted prices. (Full Story)

More than 40 U.S. energy companies have declared bankruptcy since the start of 2015, with more expected to come.

Saudi Oil Minister Ali Al-Naimi, industry veteran of seven decades, who came to Houston with assurances that it was not the Kingdom’s intention to drive U.S. shale rivals to extinction, struck a philosophical note. (Full Story)

“I’ve seen oil at under $2 a barrel and at $147, and much volatility in between. I’ve witnessed gluts and scarcity. I’ve seen multiple booms and busts,” he told the annual gathering of some 2,800 energy executives and professionals.

“These experiences have taught me that this business, and this commodity, like all commodities, is inevitably cyclical. Demand rises and falls. Supply rises and falls. Prices rise and fall.”

That could not ring more true at a conference where just two years ago Chevron CEO John Watson declared that $100 a barrel oil was there to stay. “$100 a barrel is becoming the new $20,” he said back then.

But whereas executives of big players such a Britain’s BP BP.L or Canada’s Suncor Energy SU.TO voiced confidence that they’ll make it through this slump like many others, that sense of historical perspective is a luxury many U.S. shale drillers can ill afford.

“There seems to be a preocupation with ‘When is it going to turn? How long is it going to last?,'” said Mark Berg, executive vice president for corporate operations at Pioneer Natural Resources PXD.N, a large Permian Basin operator. “That is understandable because there are a lot of companies facing stress and trying to plan for a very uncertain future.”
(Reporting by Ernest Scheyder, Anna Driver, and Ron Bousso at IHS CERAWeek in Houston; Writing by Tomasz Janowski; Editing by Terry Wade, Bernard Orr)
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