The political problems with oil are well reported. No one could have missed the troubles caused by assorted kidnappings in the Niger Delta. Nor could they have missed the mad mullahs in Tehran waving their nuclear option in the face of Israel and the West.
On the markets, the reaction has been predictable. Oil prices have soared, and stock markets have slithered lower. At first The Slug simply shook his head, saying “Here we go again”.
But this time around there seems to be a difference. Well, possibly two differences.
Firstly, the political process has been so predictable that it has been a licence to print money for the hedge funds of the world. The rocket scientists running these things only have to “go long” with the oil component of their fund and they make a fortune.
In fact, the activity of the hedge funds has become such a part of the oil game that in some ways they are not just playing in the market, they are the market. The impact of their billions of dollars buying oil, and the many financial derivatives which hang off the oil markets, makes it easy to see the funds playing a key role in pushing prices up.
How far up? Well, that’s the $64 trillion question. On the one hand we have fear, loathing and the hedge funds at work. On the other we have “the great mystery” which kept The Slug awake overnight. How can prices go up at the same time as a sharp increase in oil stockpiles?
Strange is it might seem, that is precisely what’s happening in the “real” oil market. Prices are rising as stockpiles rise which, for anyone unfamiliar with the fundamental laws of supply and demand, should not be happening.
Last week, as the mad mullahs and the boys with guns in Nigeria did their worst, a report from the US Energy Information Administration slipped quietly into the market. It showed that US oil stockpiles rose by 2.7 million barrels in the week which ended on January 13.
What made this such an interesting event is that oil industry forecasters had been predicting a rise for that week of 700,000 barrels.
Explanations have been offered as to why oil stockpiles rose at a rate four-times faster than expected.
And it is only one week’s numbers, but the sharp rise does raise questions.
The most important is whether oil consumption, because of the high prices experienced through 2005, is topping out. In other words, are consumers really cutting back, either voluntarily (unlikely) or because they’re being forced out of the game because of the high prices?
Whatever the reason, something odd is happening in the oil market, and it’s caught the eyes of the chaps who call the shots at the Organisation of Petroleum Exporting Countries (OPEC). They have also seen the stockpile rise, and some are already calling for a production cut because of a fear that oil is heading into a glut when the northern winter ends.
In fact, one of OPEC’s leaders, Hossein Kazempour from Iran put the issue rather poetically when he told Platts Commodity News that the growing stockpile would cause future problems. “In the second quarter, this heap of snow will fall down on the oil price as an avalanche.”
The Slug, while admiring that delightful language, admits that he has no more knowledge than anyone else in the oil patch, and perhaps a bit less. But he is fascinated by the forces at work in the market.
The political factors, combined with the activity of the hedge funds, is driving prices higher, at a time when rising stockpiles should be driving prices lower.
Something’s got to give, and the next few weeks on the market should be fascinating.
