The complete, total, and virtually complete, disconnect in the oil market and commentators continues to astound and amaze. Let’s keep in mind our econ 101. When demand is greater than supply, prices rise until the higher cost has killed enough demand to allow a deal to be made.

With this in mind, let’s look at today’s Bloomberg story:

OPEC’s daily shipments of crude oil declined by 4.3 percent in the four weeks ended May 4, according to Lloyd’s Marine Intelligence Unit.

Members of the Organization of Petroleum Exporting Countries, excluding Angola and Ecuador, exported 22.762 million barrels a day on tankers, according to data from the London- based tanker-tracking service. That compares with 23.786 million a day in the equivalent period to April 6.

“They seem to be trending downwards, but only by a marginal amount,” LMIU analyst Jacqueline Steele said in a telephone interview.

The decline in exports preceded plans by Saudi Arabia, OPEC’s largest producer, to raise output by 300,000 barrels a day in June, announced by Oil Minister Ali Al-Naimi on May 16.
OPEC Shipments Dropped 4.3% Last Month, May 23 2008

Couple this with declines in the other non-OPEC major producers, Russia and Mexico, and you end up with, surprise surprise, new record crude oil prices.

OPEC’s production is year over year down about 1 million barrels per day, that is. Now you know why oil futures hit $135 yesterday, and why more clear heads are pointing to supply problems in addition to speculation and the collapsing US dollar.

The chairman of NYMEX stated recently that commodity future traders accounted for only about 20% of all NYMEX futures transactions, in other words, most crude oil futures are being bought by the people who will consume the crude, or are things like airlines using crude futures to hedge against jet fuel price hikes, which itself apparently has no futures market.

Is the Crude Futures Market Actually Being….. Rational?

I’m starting to think it is. Take a look at this story, for example, and keep in mind that you buy futures to hedge against prices that might rise higher than what you buy the futures contract for, as well as creating a scenario where you can do longer range financial planning, which for the transportation sector is obviously crucial.

Crude oil rose, headed for a third weekly gain, after a report forecast that the 2008 hurricane season may be more active than usual, threatening oil platforms and refineries in the Gulf of Mexico.
…
Oil prices are up 4.8 percent so far this week and have doubled in the past year. The biggest gains in prices were for futures for later delivery with the December 2016 contract rising 7.9 percent this week.

The International Energy Agency said yesterday it may cut long-term supply forecasts as fields deplete faster than expected. Banks have increased their price forecasts because of supply constraints and demand growth while ministers from the Organization of Petroleum Exporting Countries have said the group is powerless to stop the surge in prices.
…
“The market is getting more and more worried about the supply prospects in the long term,” said Eliane Tanner, commodity analyst at Credit Suisse Group in Zurich. “This is also driving up long-dated crude prices and is supportive for short-term prices.”
…
Crude oil may rise next week as investors buy futures after banks raised price forecasts and U.S. stockpiles declined. This is the first time in 20 weeks that analysts forecast an increase in prices.
Oil Rises on Forecast of Worse-Than-Average Hurricane Season , Bloomberg,May 23

Interesting stuff. Basically, couple global supply problems with expected possible, almost probable, disruptions in the Gulf oil producing areas, and futures rise. This all seems quite logical to me, hardly panic, although of course big money is jumping into crude oil futures and other commodity trading simply because the numbers are more and more proving that to be a good investment.

One question will be how long the market keeps listening to Saudi and OPEC lies, for example, when will the more main stream business media begin to distinguish between crude oil types, eg, light sweet vs heavy sour, when reporting things like Saudi increasing crude production by 300,000 barrels per day. But the wrong kind. As noted in an earlier posting.

This entry was posted on Friday, May 23rd, 2008 at 12:42 and is filed under Our World. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.