OVERVIEW:

COMMENTARY:

Speculators started early this year divorcing the price of oil from the laws of supply and demand.  This past week oil price rose even though inventories are high and demand has dropped in the US for four consecutive weeks. (Canadian Oil Press ).

 Speculation has gotten to the point that even a few of the Senators, who accept huge amounts of money from the banking and oil industries, are beginning to show a little independence.  Perhaps we might even see some results. Vermont maverick Senator Bernie Sanders is introducing legislation in Congress this week to shut down speculation completely. He notes that speculation accounted for 30% of all futures contracts traded 10 years ago but 80% of all trading now.  Sanders also notes that between 20% to 40% of oil pricing is due to speculation of the six largest Wall Street investment banks, Goldman Sachs, JP Morgan, Morgan Stanley, et al.  They are making record profits on the backs of home owners and drivers. Even the CFTC has begun charges against (smaller) speculators. (speculators charged with manipulating the market)

 The S & P has just released a report indicating that commodity speculators could take up to a 45% hit if China curbs its growth to combat inflation.  Inflation in foodstuffs to China’s masses is far more dangerous to China’s rulers than cutbacks in growth. Inflation rose 5.3 percent last month, exceeding the government’s full-year target of 4 percent.  China has raised interest rates four times and boosted lenders’ reserve-requirement ratios by three percentage points since September. (S & P China Commodities Report).  More Chinese controls on growth would be bad news for speculators but good news for world economies and consumers.

May 15, 2011

The good news is that futures prices have dropped by about 40 cents per gallon from their peak a couple of weeks ago. We are in the process of getting pre-buy prices from our dealers.  More good news; we have secured a new dealer to cover most of Vermont as well as Littleton, NH where we previously had no service.

Look for emails from us soon on pricing, at least for oil.  Propane is still higher than we are prepared to recommend.

More good news: Natural Gas discoveries are changing the energy picture in the US

http://oilprice.com/Energy/Natural-Gas/The-Joy-of-Natural-Gas-It-s-Here-Aplenty.html

The bad news is that prices are still volatile. Even Exxon Mobil agreed in testimony before Congress that if supply and demand were working, oil should be closer to $70 a barrel than the $100 plus on the day of their testimony.

See http://blogs.forbes.com/benzingainsights/2011/05/13/even-oil-companies-know-that-oil-prices-are-rigged/

Want to now why the price of gas is so high? "In a March 2011 research note, Goldman Sachs estimated that for every million barrels of oil held by speculators, the price of gas went up 8 to 10 percent. As of May 3, speculator-held positions in U.S. crude oil contracts were equivalent to a near record of 258 million barrels"

Seventeen US Senators have formed a bipartisan group to establish controls on the rampant speculation that threatens to put the US and European economies back in the toilet.  Let's hope that their goal is supported by the remaining Senators who take scads of money from the banking/finance industry, the primary speculators.

http://www.ktvz.com/news/27857707/detail.html

March 31, 2010

Still a lot of conflicting signals.  The WTI price (US Cushing OK) is about $10 less than the Brent (Europe's) price.  Cushing is overflowing with oil and has virtually no space left for storage (No More Storage in Cushing-Business Insider).  US crude oil inventory is above the high side of the average range.  Saudi Arabia is replacing Libya's output. Japan, the world's third largest oil consumer is forced to turn away Mideast oil because its refineries are closed. Yet prices now and for 2012 futures still remain high.  Commodity traders are pricing in unsettled political environments, current 3.2% growth in demand in the US plus Asian and South American demand growth. But demand for gasoline is now dropping in the face of higher prices.

The Business Insider is predicting that traders can't keep prices up artificially forever and that the current excess supply situation will eventually catch up. It predicts that prices will drop from the current $105/bbl to the $90/bbl level .  It remains to be seen whether oversupply will trump over trading.

However, OTEA does feel that prices will drop somewhat when the weather turns warmer, regardless of this blizzard that is about to hit us today. We'll be watching carefully for a buying opportunity.  Keep your fingers crossed.

The Middle East, Japan and Speculation 3/21/2011

Huge political unrest in the Middle East, disaster in Japan. The result has been fear and loathing in the commodities market. Oil prices surged by 10 percent while the oil supply in Libya -- a moderate oil producer -- decreased only by 1 percent.  Moreover, Saudi Arabia announced that it would pump enough extra to cover that shortfall. In spite of the facts,  speculators' net long positions in U.S. crude oil futures rose 2 percent to a record high for the week of March 8th. See:

 Exchanges Defend Speculation

OPEC Sees No Oil Shortage, 'futures are "disconnected" from the physical market '

Market Speculation, Rising Demand Inflate oil prices

The retail price of heating oil for January 2012 delivery is about $3.80/gallon today, even though stocks on hand are high above seasonal average.  Our Town Energy Alliance will continue to "watch and wait" until we see some stabilization or profit-taking on the part of the speculators that would bring the price down. The same is true for propane to a lesser degree since the price of propane is pegged to a percentage of oil price.

The Bakken Shale 3/4/2011

In recent months we've had a lot of inquiries from members about the Bakken Shale formation. Much of the information out there is incorrect and it's worth taking a few moments to correct it.

"The Bakken comprises three layers of shale--an upper, middle and lower Bakken--located at a depth of between 8,000 and 11,000 feet in the play’s most productive areas. Drilling activity targets the Bakkens middle layer, a naturally fractured shale rock that contains a light, sweet high-quality crude oil.

Some parts of the play include another productive formation, the Three Forks-Sanish. Operators initially characterized the Three Forks as an area where oil that spilled out of the Bakken collected. But drilling results increasingly suggest that the Bakken and Three Forks are actually separate plays; activities in the Three Forks formation don’t sap production from nearby Bakken wells.

The Williston Basin and Bakken Shale aren’t new discoveries--the first wells were drilled back in the 1950s. Technology and techniques were the real discovery.

The simple vertical wells sunk in the 1950s failed to produce oil at high rates. A vertical well travels straight through the Bakken formation, but the only productive part is the 50 to 100 feet of the shaft that touches the middle Bakken. In contrast, a horizontal well drilled along the productive layer exposes thousands of productive feet to the well. In addition, hydraulic fracturing supplements the middle Bakken’s natural fractures, further enhancing productivity".  Source: Investors Daily

The US Energy Administration originally estimated that the Bakken held close to 900 billion barrels of oil in 2002. they have issued a correction, revising that number downward in 2010 to about a tenth of the original estimate. Importantly though, the oil is high grade, "light, sweet" crude.  Just as important is the vast reservoir of natural gas.

"The U.S. Geological Survey estimated mean volumes of 896 million barrels of oil (MMBO) and about 53 trillion cubic feet (TCFG) of non associated natural gas in conventional, undiscovered accumulations within the National Petroleum Reserve in Alaska and adjacent State waters. The estimated volume of undiscovered oil is significantly lower than estimates released in 2002, owing primarily to recent exploration drilling that revealed an abrupt transition from oil to gas and reduced reservoir quality in the Alpine sandstone 15–20 miles west of the giant Alpine oil field." Source: USGS

That is still a lot of oil, recoverable by new modern techniques. It cost about $22/bbl in 2007 to get the oil out of the ground. A per barrel cost of about $60.00/bbl is adequate to support drilling at a profit. At current prices, according to Investors Daily, drillers in the Bakken are making a 100% return on every well drilled. Current production is around 400,000 bbls/day. It's hoped that production would ramp up top 1.5 million bbl/day in the next few years, about the current production of Libya. This would have a substantial impact on oil production in the US and hopefully, on pricing as well in later years of higher production..

Impending Crude Oil Correction???  - 3/4/11

The Middle East & Revolution - Effect on Prices 2/23/11

An old Chinese curse for people they don't like, is "may you  live in interesting times".  Well, that has certainly been true this year. Tunisia, Egypt, Libya and Yemen on the brink. Who would have thought?  These autocrats have been in power 30, 40 even fifty years. Tunisia and Egypt were just fodder for speculators to drive the price up; their oil production is negligible. Libya is another matter. They are the 18th largest oil producer in the world at 1.8 million/bbl day (See EIA overview on Libya).  Prices briefly shot up to $103/bbl yesterday but dropped down after King Abdullah of Saudi Arabia announced Saudi Arabia would immediately pump enough to make up for the temporary Libyan shortfall. President Obama also announce he would use the Strategic Oil Reserve to calm markets if necessary.  Prices dropped $7/bbl to $96/bbl but are up again today for no reason that I can deduce except speculation.

This will impact our buying plans until the markets settle down. The good news is that several countries with repressive regimes have thrown them off in their search for more democratic forms of government.  Let's hope for the best for these men, women and children who have lived in fear for generations. They still have a long way to go to avoid their country's takeover by another military junta or "strong man". Turkey's democratic example is the best in the Middle East. a good military and trade partner of the US and an ally of Israel (with some friction since the killings of the Turkish nations on the humanitarian relief ships bound for Gaza), Turkey is the most successful Islamic democracy in the Middle East.

If Libya gains a democratic government, still a hope and not a certainty, it will be better for all of us in the long run. 

Reference Tools for Serious Researchers- 2/10/11

There are several basic authorities that are worth following if one is serious about following the oil market. We've mention the US Government's Department of Energy, also known as EIA many times. 

There is also the IEA, the International Energy Agency. Both of these compile statistics on the US and Global energy markets. and make forecasts (their crystal ball and sometimes about as accurate ). 

New to most of you is the OPEC Website which contains a wealth of data. Of particular interest are its publications. It publishes the World Oil Outlook and monthly reports. since OPEC controls about 40% of the world's oil, you might say they have an inside track. 

Here’s what OPEC has to say about speculation:

“A strong upward trend in volumes, particularly for futures options, has been observed on the Nymex over the last decade. Open interest in Nymex light sweet crude oil contracts (futures and options) has risen sharply, moving from an average of less than 600,000 contracts in 2000 to an average of around 1 million contracts in 2004, before surging to more than 3 million contracts in mid-2008, a few days before the West Texas Intermediate (WTI) front-month hit a record high.”

 “Since oil has emerged as an asset class, macroeconomic and financial data have become ever more important factors impacting price direction, compared to prompt supply and demand fundamentals. See Figure 1.”

 Every day in our newspapers, financial magazines and  on TV reports we hear dire stories about shortages of oil and expected high prices Here is what the Secretary General of OPEC has to say:

 And so, as OPEC Secretary General, Abdalla Salem El-Badri, said on our website on January 18: “Any assumption that there is tightness in the market … is incorrect . In reality, commercial crude oil stocks remain well above the five-year average and forward cover stands at around 60 days”.

And he was emphatic in adding: “Supplying the world’s media with unrealistic assumptions and forecasts will serve only to confuse matters and create unnecessary fear in the markets. Ultimately, this is adding to volatility in the oil market and destroying the stability that OPEC works so hard to support”

 In other words, much of the smoke is coming from hedge funds and the “banks too big to fail” that taxpayers recently bailed out who’d like to stampede small investors into playing their game in the futures market. Their motto is, “There’s one born every day”.  Unfortunately, in the commodities world, perceptions are as important as, if not more important than the actual facts. The US and the world would be far better off by outlawing the trading of energy futures to anyone who does not actually produce or utilize energy. Even going back twenty years to when oil companies competed with each other and set their own prices would be preferable to the current situation.

Overview 12/28/2010

Another roller coaster year.  A very, very slow economic recovery for the US and a real threat of deflation. The BRIC nations, China, India, Brazil and Russia showing respectable growth. The EU being dragged down by first Greece, then Ireland and the threat of bankruptcy by Portugal and Spain hovering in the background. We are also simultaneously hearing claims of China’s rapid oil demand growth and news that the rapid growth has overheated the Chinese economy; China’s attempt to slow inflation down with interest rate increases have put a pall on many commodities, not including oil or gold.

 This is the grim picture we see since the world’s bankers, led by the US’s “too big to fail” banks, enabled by Congressional deregulation,  came close to bankrupting the globe with arcane, mathematical slight of hand parlor tricks.  Though life must be good for them at least  since they’ve bounced back to award themselves a record $144 billion in bonuses for 2010.

How are we doing with oil for the current season?  

Not badly. What did we predict last year??  Last year, I recommended pre-buy or hedging 50/50 pre-buy and rack plus for the current season. See below.

 St Paddy’s Day (2009) Update (News Page)

“What does this mean for Our Town Energy Alliance and its members??
It means that we will pay more than we should for oil and propane.  In the short term Our Town Energy is watching the market and waiting. We like most experts, feel that some warm weather will result in a dip in prices for the winter months of 2011, probably in the next four weeks. We'll negotiate fixed price contracts at that time. We still feel fixed price is the way to go as we don't see Congress passing any financial regulations that would prevent the current level of speculation. Thus we don't feel that prices will drop for next year lower than pricing this Spring. Sadly, fuel prices should be much lower based upon supply and demand but until we have a bipartisan congress that refuses to accept lobbying ceash from the banks and hedge funds it won't happen. Don't hold your breath, as they say.”

We obtained pre-buy prices of $2.519, $2.599, $2.649 and $2.749 from our various dealers this year. The $2.745 was the high price and I hasten to point out that the decision to buy at that price was a joint decision, as they all are, between myself and Eastern Oil & Propane, i.e. please blame me and not Eastern Oil.  Mea culpa. We made the decision after a very substantial drop in price and when the prices started rising again. However, prices dropped  even lower subsequently.  I’d like customers of Eastern Oil to know that Eastern went out of their way to buy more oil at the later, lower  price and “blend”  the overall price, giving early pre-buy signers a retroactive discount.  It’s worth noting that Easern was among the very lowest priced dealers last year at $1.99/gallon for oil last February.

 But as prices touch close to $3.00/gallon for oil recently, even the $2.745/gallon looks good. Those who did pre-buys are saving approximately twenty five  to fifty cents per gallon. Those who chose rack plus alone, rather than pony up a big chunk of money up front are hurting a little bit but are still paying less than market price.

What does it look like for next year??

In two words;  Not good. All my comments about speculators still apply.  Currently, 132,000mb contracts of crude oil for delivery to Cushing OK are due at the end of the month. However, Cushing can only store 45 million barrels and it is already full. Under a deregulation loophole passed in the year 2000, these bogus contracts which will never be delivered except on paper will be rolled over to the February futures contract period.  These unsold contracts will be rolled over to March, etc. It’s one way to greatly increase the price of crude oil by creating false demand. The answer to this particular scam is to bring back the regulation dumped in 2000. For a great explanation of how this and another scam work, see The Market Oracle . The writer is a little over the top but the explanation is clear and concise.

The good news is that the United States is conserving (we are not using as much as in 2008) and we are finding more oil and gas at home.  Now if we could only limit commodity sales of oil futures to those who actually USE it on the basis of national security, we’d be all set.

Back to the Nuts & Bolts (OTEA Plan for 2011)
In terms of buying fuel, what does Our Town Energy Alliance recommend to its members and what does it plan to do?  As usual, we encourage all members to sign up immediately after January 1^st . This gives us maximum flexibility in case it looks like the most advantageous deal is a series of early pre-buys .  We can only order for those who are signed up.  Furthermore, due to the high base cost of heating oil now, six time higher than when we started in 1999, we are restricted to smaller, (read less risky) buys at a time. For the safety of all, we don’t order the next buy until the first is sold out.  This can lead to awkward situations. For instance, last year I urged  members to take advantage f the $1.98 and $1.99 pre-buys we obtained in late January and early February. However, many members waited until prices rose.  The oil that had not sold out n January, February or March sold out in a few days in April. But b y then prices had risen some more. We bought more oil but the savings were far less than for those who acted quickly in February.

Will we buy in January? Act as if we will  in case we can do the early pre-buy we’d like to do but we don’t know yet. Futures prices for January 2010 and next winter are higher than we feel they should be due to a number of factors discussed in this article and below. We’ll watch carefully, discuss it with our dealers and make our best decisions.  We’ve been “on the money” for nine out of eleven seasons.  We’ll try to better that percentage.

Note that we have not talked much about propane in this update. Firstly, propane s no longer traded on the commodities market so its price volatility is far less even though it does trade at a ratio percentage of oil.  But I must note that there is an acute shortage of propane in Europe currently. I’ve heard of per gallon retail prices as high as $10/gallon. Much of our propane produced in the Gulf of Mexico is being shipped to Europe. This will result in higher pricing.  Natural gas on the other hand will decline in price due to abundance and new discoveries.

 More Info for those who want to dig a little deeper

Speculators, not supply and demand, are driving oil prices up
 Why? If demand is down and supplies are plentiful — and they are — why would prices be going up?Because Wall Street speculators are driving up oil and gasoline prices again — just in time to dampen holiday cheer. …Read more:

Crude Oil Futures Scam Continues Unabated: What a joke the oil market is!
First of all, the NYMEX contracts for January delivery close on Tuesday and there are still 132,168 open contracts or 1,000 barrels each (132M) scheduled for delivery to Cushing, OK, a facility that can handle at most, 45Mb of crude and is, at the moment, full.  Read more

Crude is Rising But NOT because of Demand:
Just in time for Christmas, On Wednesday, Dec. 22, U.S. gasoline prices hit an average $3 a gallon for the first time in more than two years, according to AAA's Daily Fuel Gauge Report. Meanwhile, U.S. stocks and oil also climbed to the highest levels since 2008. Read More

 Distillate (Oil products) stocks are higher than normal throughout the year 2010 .  9% Increase in proven US oil reserves and 11% increase in proven natural gas reserves (the largest since EIA began reporting proved reserves) in 2010. Read more: Full article:

US Dept of Energy Residential Heating Oil Prices:  Read More:

OPEC Expects Increased Demand in 2011: OPEC forecasts an increase in the global oil consumption by 1.2 million bpd to 87.11 million bpd in 2011. Read more:

Chinese Oil Demand Hits Record Levels:  China consumed 13 percent more oil in November than it did in the same month in 2009 and refineries are running at full steam, Read More

End Article 12/28/2010

topsy turvy                    Summer-Fall 2010

Good things come to those who wait

Bursting Bubbles -  2009