Peak Oil Notes 1/22/09

[Javaman]

1. Volatility
The expiration of the February contract coupled with the oil market’s contango has led to fast moving prices so far this week. Monday started things off with the February contract falling to $33 a barrel, then climbing to expire on Tuesday at $38.74. The March contract became the lead month and closed Tuesday around $41. A stock market rebound on Wednesday sent oil up 6.6 percent to close at $43.55 a barrel. This rally dramatically reduced the spread between the front month and the next month from over $8 a barrel last week to $2. That suggests that short-term crude is no longer as plentiful and the oil market may be turning around.
OPEC production cuts are still underway, but it will be another month or so before a major impact will be felt. The additional Saudi cut of 300,000 b/d next month has been confirmed. This should bring total OPEC cuts to 4.5 million b/d.
We had a pair of rather divergent predictions about the future this week. Goldman Sachs sees a “swift, violent” oil rally later this year taking oil to $65 a barrel. NYU Professor Nouriel Roubini says oil will stay between $30 and $40 a barrel for the remainder of the year. Roubini made headlines this week by suggesting that total losses from the credit crisis will reach $3.6 trillion thereby rendering the US banking system insolvent.

2. West Texas Intermediate (WTI)
Since oil starting trading on the NYMEX in the early 1980’s the value of WTI delivered at Cushing, Okla. has been the key benchmark in the world for pricing oil. The recent fall in prices, coupled with an oversupply of oil, contango in the oil markets and the ensuing violent price movements however, are causing distortions and raising questions as to whether WTI prices are really representative of current oil values. The distorted prices may be sending the wrong signals to refiners and producers.
This week Deutsche Bank released a report suggesting that the oil market needs more speculators that would provide needed liquidity and stabilize the markets. This irony comes six months after speculators were widely vilified as being the root cause of high oil prices.
Brent crude which is usually sells for $1.50 a barrel less than WTI has been selling at a $10 premium in recent days. Part of the problem is that Cushing, Okla. is landlocked and cannot relieve over supply by loading oil onto tankers. For the short term there seems to be no solution to this problem; US consumption is unlikely to rebound dramatically, and it is going to be awhile before OPEC production cuts are felt at US ports. In the meantime there is a danger that an oversupply at Cushing could cause further distortions in the markets. Some are concerned that WTI could be forced into the $20s due solely to these technical considerations.