Dian Chu: A Tale of Crudes.....Anybody Got A Big Rig?

From guest blogger By Dian L. Chu at the EconForecast......

On Wednesday, Feb. 16 Israel said Iran is sending two warships into the Suez Canal on way to Syria, and that the action is considered a “provocation.” Due to the long history of bad blood between Israel and Iran, this very possible scenario was enough to even send the bear infested NYMEX crude oil futures volume surging midday.

West Texas Intermediate (WTI) on Nymex rose to just below $85, while Brent crude on the ICE futures exchange spiked $2.17 higher to $103.81 a barrel, a 29 month high, widening the WTI Brent spread to a new record near $19.

High Middle East Tension

Then on Friday, Feb. 18, AFP reported that permission has been granted for Iranian warships to transit the Suez Canal into the Mediterranean. Canal officials say it would be the first time Iranian warships have made the passage since the 1979 Islamic revolution, while Israel has labeled the Iranian action as "hostile' and said Israel was closely monitoring the situation.
As the worst Israel-Iran conflict scenario failed to materialize, at the close Friday Feb. 18, Brent crude oil for April settled at $102.79 while WTI for April delivery rose to $89.71, narrowing the spread to $13.11.

Crude Glut at Cushing, OK

Since WTI is lighter and sweeter crude which requires less processing, it has historically enjoyed a $1 – $2 a barrel price premium to Brent crude oil. According to Bloomberg, the WTI Brent gap averaged only 76 cents last year.

However, WTI’s premium disappeared about a year ago and in recent days it has been trading at more than a $10/bbl discount to Brent mainly due to rising inventory levels at Cushing OK, the delivery and price settling point of Nymex crude futures.....Click Here to Read The Entire Article and View Dian's Charts.



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Dian L. Chu:Natural Gas: Better Days Ahead....in Two Years

Natural gas posted the first weekly increase this month in the week of Nov. 14, on forecasts of colder than normal temperatures in most of the eastern U.S. from Nov. 24 through Nov. 28, which could spur an average 20 percentage rise above the normal heating demand. Natural gas for December delivery down 25 percent this year gained 9.6 percent in one week to settle at $4.164 per Mmbtu on the NYMEX.

However, this temporary seasonal strength does not alter the fact that U.S. gas stockpiles climbed to an unprecedented 3.843 trillion cubic feet in the week ended Nov. 12. A 9.3 percent above the five year average level and 0.3 percent above last year’s level.

As I said before that we are literally swimming in crude oil amid high inventory, but when it comes to natural gas, “drowning” would be a more appropriate description. While crude was hammered by China’s efforts to curb inflation, natural gas has an even bigger problem, nowhere to go, since it is region bound, and not as widely traded.

Worse yet, the latest short term outlook published on Nov.9 by the Dept. of Energy estimates natural gas production will rise in 2010 to the highest level in 37 years. Marketed natural gas production is forecast to increase by 2.5 percent this year, and fall by 1.2 percent in 2011.

However, the drop in 2011 is not because of a decrease in shale gas production, but mostly a result of a 13.5 percent production decline in GOM production from the 2010 drilling moratorium......Read the entire article and see Dian's charts.



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Dian L. Chu: 131 = The Number of Years to Replace Oil

It seems the panic time for both green enthusiasts and peak oil pundits. According to a new paper by two researchers at the University of California–Davis, it would take 131 years for replacement of gasoline and diesel given the current pace of research and development; however, world's oil could run dry almost a century before that. The research was published on Nov. 8 at Environmental Science & Technology, which is based on the theory that market expectations are good predictors reflected in prices of publicly traded securities.

By incorporating market expectations into the model, the authors, Nataliya Malyshkina and Deb Niemeier, indicated that based on their calculation, the peak of oil production could occur between 2010 and 2030, before renewable replacement technologies become viable at around 2140.
The estimates not only delayed the alternative energy timeline, but also pushed up the peak oil deadline. The researchers suggest some previous estimates that pegged year 2040 as the time frame when alternatives would start to replace oil, could be “overly optimistic".

As I pointed out before, despite the excitement and hype surrounding a future of clean energy, a majority of the current technology simply does not make economic sense for regular consumers and lack the infrastructure for a mass deployment….even with government subsidies, tax breaks, and outright mandates. In addition, the supply chain of renewable technologies is not as green as people might think. Most alternative technologies rely on rare earths for efficiency. However, the......Read the entire article.


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Zero Hedge: U.S. Distillate Demand Falling off a Cliff

Crude Oil had a breakout this week as the risk trade was put on, it benefitted from the short the dollar, and go long commodities play. Plus equities have been testing the higher levels, and trying to establish a higher trading range. The problem with market participants today is that they become too bearish when indications appear bad and too bullish when indications appear good. For example on July 5th you couldn`t give crude oil away for $71 a barrel, and one month later, you couldn`t get anybody to sell it for $82.70 a barrel either.

And the odd paradox of oil trading is that this is exactly what you should have been doing as a market participant. The issue with getting too bullish on crude oil right now is that there are weekly inventory reports that give great insight into the fundamentals of the commodity. Unlike other commodities such as wheat or copper whose precise inventory levels are often a mystery at best, the EIA does an excellent job of providing a detailed report each week that comes out on Wednesday.

And the current fundamentals do not support a strong bullish case for crude; in fact, they are quite bearish for the near term. Enough so that crude oil most likely will not go above $84 a barrel on this breakout. And if it does, statistically speaking, the odds favor being on the other side of the trade, It only pays to buy at the top of the market if there's a runaway bull market, and the current dismal fundamentals of crude oil preclude such a scenario.....Read the entire article.

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