July 31 An Amusing Day For Overpriced Crude Oil

By: Andrew_McKillop

Suddenly There Is Ample Supply
Newswires and energy sites on the Internet desperately sought rational explanations of why oil could not only flirt with the “100 dollar benchmark” but (OMG!) fall well below it in just a few days of so-called “hectic trading”. We can now await the pro domo explanation from Goldman Sachs telling us this is only a “temporary downward blip”. Keep calm and carry on. The natural price is well above $100 a barrel.

Of course.

The Ukraine situation is still mostly used as a secondary and supporting rational for the “collapse” of oil prices – in any case the run-up to an all-out nuclear war between Putin's Russia and Obama's USA (whenever he can tear himself away from playing golf) should in theory push up oil prices. How about the precedent of the Liberation of Kuwait in 1991 if that's not too far back in time? Pushing up oil prices is a time-hallowed way to aid the process of getting public opinion on board and hollering for war. Nevertheless,  oil journalists trying to earn their living tell us “the Ukrainian situation” is now weighing on oil prices. Downward.

Like a lead balloon. Any serious escalation in the simmering standoff between Russia and West, sparked by the Ukraine crisis, will depress global economic activity and slash oil prices. Probably well before that however, Putin can respond to mounting EU and US economic sanctions and simply cut-off Russian oil supplies to Europe – around 32% of all oil consumed in Europe - sending oil prices on a brief but spectacular upward trajectory. Saddam Hussein-style.

A very nice see-saw of prices for traders playing futures and options is in prospect – but after that we get nuclear war! Sorry about that.

We Tried Everything
A weekly report released Wednesday by the US Energy Information Administration showed crude inventories fell by 3.7 million barrels last week in the US, while gasoline and distillate stocks rose. Using time-hallowed prose, this was a bigger-than-expected draw on crude oil stocks which normally speaking would have allowed the oil bulls to engage in their time-hallowed ritual of always pushing oil prices upward.

In fact their daily routine is logic-free. Why oil prices should always “drift higher” is unknown. Whatever “fundamental rationales” the oil bulls might have for this are unknown, or forgotten due to the extreme-high price of oil energy compared with almost anything else – starting with world coal and natural gas in the US. Oil is vastly overpriced “but we didn't know that”.

The stock draw did draw a prompt short rally in US Nymex oil market mid-morning trading, but sad to say for the bulls and for Goldman Sachs, prices for both Brent and US WTI crude soon turned negative as “concerns about weak demand” were joined by the plain fact of excess oil supplies and highly negative economic signals in almost all G7 economies except the US with its apparent “4% growth in first quarter”, only due to company inventory builds.

The geopolitical context, shifting from fears of nuclear war with Russia driving up prices, to fears of nuclear war with Russia driving down prices, is now playing.

The time-hallowed market talk is that the crisis between Russia and the West continues to keep the oil market “on edge” and a great arena for speculation, after the EU and US imposed further sanctions against Moscow on Tuesday for its support of pro-Moscow rebels in Ukraine. Despite that, the chitchat continues, “analysts remain dubious” on whether the new economic sanctions on Moscow will have any immediate impact on Russian exports. For the moment at least, Putin will not cut supplies. Be careful when that happens and its not you, but Putin who decides!

Oil prices tumbled on Wednesday, with Brent leading the decline weakened by excess supplies in Europe and Asia while US crude followed suit despite a larger-than-expected drop in nationwide stockpiles – only of crude but not gasoline and distillate stocks. Surprisingly enough, those “excess supplies” which were there 1 week and 1 month ago had no downward impact on oil prices. But that was in the time before!

Traders were said to be “continuing to keep a watchful eye”, if only one of them, on continued fighting in Gaza, Iraq and Libya. In this last case the probably almost-total collapse of Libyan oil shipments, for an unknown period, is however unable to help them talk back prices, up to their “rightful level” as defined by Goldman Sachs which of course is never wrong except when it is wrong.

The simple reason is too much oil. Period. Sad days for the Overpriced Oil Fraternity!

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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