Pickens and Speculative Hype

NYMEX Oil Complex Roars Higher on Speculative Hype; We Compare Hype to Reality

May 20, 2008
By John Troland, Tom Waterman
Oilintel.com

All records fell again today as speculators drove the oil markets to new heights after T. Boone Pickens added his two cents to the Goldman rally. Speculators were only too happy to oblige.

The NYMEX June crude, which expired today, along with the gasoline and heating oil contracts roared higher, setting new all time highs and settles.

There are few real reasons for today's rally other than to say this is how the commodity speculators have been playing the energy markets for about four years, and never more pronounced than since the first Goldman rally back in December drove prices to within an eyelash of $100 per barrel.

The standard reasons are as numerous as they are irrelevant. A weak dollar, demand in growth areas such as China, India and the Middle East, geo-political concerns regarding potential supply disruptions in producer countries Iran, Iraq, Nigeria and Venezuela and so on.

Today's rally began early in the morning after T. Boone Pickens was interviewed on CNBC and affirmed last week's predictions by Goldman Sachs' analysts that prices for crude would hit at least $150.00 by year's end. It should be mentioned that at one point in the interview, Mr. Pickens had to admit that he was quite long some NYMEX energy contracts such as crude oil and natural gas. As anyone that heard the full interview knows, these types of predictions are self serving, and are the root cause of current runaway prices.

It's our opinion that this is just another example of what's going on in the energy and commodity markets and yet politicians are helpless to do anything about it.

Maybe it is time for Washington to step in and put the brakes on speculative trading. We don't suggest eliminating speculation, merely limiting the amount of influence it now has. Today, Congress was holding hearings about speculation, but there were probably enough smoke and mirrors in the room to at least deflect what damage is being done as a result of a market that escalates on a whim. We don't have much confidence that Congress will get deep enough into the matter to suggest any way out. They need to hire specialists to watch the markets on a day-to-day basis for about a month and report back. Unfortunately, nobody is doing that currently.

While there is truth to the argument that oil resources need to advance in order to satisfy rising energy demand, it is has already reached the point where demand for those resources is slowing down. It is also at the point where many other alternatives are suddenly more viable.

If current fundamentals mean anything at all, the crude oil glut just continues to expand, as do gasoline supplies. The slow U.S. market is backing up gasoline in Europe, where demand is not exactly flourishing either. This is supposed to be the spring gasoline rally but it has become the diesel and crude oil rally instead. By this time in a "normal" year, there would have been many more millions of barrels of gasoline flowing into the U.S. from Europe.

While the total amount of imported gasoline is down by less than 1.0% (it's actually down 0.4%), the actual volumes are more dramatic. On average since the beginning of the year, the U.S. has imported about 4,000 barrels per day less gasoline than a year ago. In total, it's a little more than a half million barrels of gasoline that has not arrived in U.S. ports this year. Yet refiners have not been running at rates seen in normal years and gasoline stocks remain well above last year.

In total, this tells us that we're probably right about how gasoline demand is going to fall by 1.5% to possibly as high as 2.4% this year. That tells us we will need a lot less crude oil this year as well.

Diesel inventories are admittedly low in Europe, parts of Asia and South America due to an extended spring maintenance season in all regions of the world. In the real world of oil, that is a temporary situation as refiners will surely start building excess distillate supplies if for no other reason than they are worth more than gasoline at the moment. What is not true is that demand for diesel is soaring. Quite the contrary, diesel demand is slowing down perhaps faster than gasoline, which will shorten the period where there is a perceived tightness.

Here in the U.S., there are cargoes slated for export to various locations, particularly Europe and South America, as refiners, faced with lower profit margins at a time when margins should be the highest of the year, are purposely churning out more diesel.

Are gasoline inventories in danger? Highly unlikely given the fact that U.S. supplies are still well above last year while demand will be under year ago totals.