What's up with oil inventories?

If you have been watching the oil inventory lately, you have probably seen headlines screaming record oil inventories. This has puzzled me for more than one reason. First of all how can oil prices sustain at such levels if the perceived oil glut is true ? Especially for more than 6 months. It is very clear that sophisticated buyers of this commodity ( Refiners ) are willing to take delivery of oil at such sustained high prices. I was wondering why a company like Valero/Tesoro would buy oil amidst the so called "glut", at these high prices ? These were all questions that crossed my mind. Some facts, my speculation and conclusions follow.

These are some of the facts from the recent release from EIA

1) Domestic production of oil is down 7.1% for the first 166 days of this year compared to the same time period last year on a bpd ( barrels per day ) basis.

2) Exports are down 55% ( Granted, it is fraction of a relatively small number)

3) Refinery gains are down 3.7% YTD compared to last year.

4) Net product supply has ( including refined products, NGL etc ) increased only 0.2%

5) Net imports have increased 3.6%

6) Total nventory including SPR and finished products is 1732.8 million bpd, enough to last us for 83-84 days at the current level of consumption.

7) Total inventory excluding SPR is up 0.8% compared to last year. Nothing to write home about.

8) Tottal inventory including SPR and finished products is up 0.1% compared to last year.

Besides, as far as I know, there is no one dipping a stick into storage tanks to figure out the inventory level. These are at best not accurate but a computer based projection. All these talk about Oil glut is nothing but a well planned propaganda which the market has rejected completely. I have serious doubts about Fed Reserves resolve in fighting inflation or high commodity prices. There is only one way to introduce a drop in the price of oil - a serious recession. The current federal reserve doesn't have the backbone of the Paul Volcker Fed. Besides, this time any recession driven drop in the price of oil will only be a short term solution.

The odds of a recession by the end of the year is pretty high, to my mind. Fed will be doing massive reflation of money supply before the end of the year. As far as oil goes, I am raging bull. But then, I don't claim to have any crystall ball.

References:
( Weekly Petroleum products stocks )
( Weekly Petroleum Status Report )

Commodity bubble ?

One thing that I hear about over and over from the talking heads on TV and the mainstream media is that commodities are in a bubble about to burst, sort of like the dot com bubble. Could this be true ?

Commodities are supply and demand driven and most commodity demand is driven by its commercial/social application, except for may be Gold. Gold obvisously has some investment demand. Gold is easy to store unlike Crude oil, Natural Gas or Copper. Price of these commodites are driven by Supply and Demand situation.

The price quoted for most of these commodities are scheduled for delivery in 2-3 months time. Most of the speculators in the commodity market has no intention of taking delivery on the futures contracts they trade and they exit well before it is time to take delivery. So if there is a glut of crude oil like some of these so called experts suggest, a bubble will not sustain beyond a 2-3 months period. If there is a glut of contracts in the market that the speculators are trading up, when it is closer to delivery, there will be a massive exodus from these commodities and price will collapse. We have seen this happen with Natural Gas futures last winter. But most other commodities including crude oil, base metals and precious metals have been in a sustained bull market for years and somebody is actually taking delivery on all those contracts. How much "overpriced" copper and crude oil can you store in your basement ?

This is not to say there is no uncertainity or fear premium in the price of crude oil. I believe there is. But the notion of Crude oil prices retreating to $25 a barrel is ridiculous at best. Could prices retreat from the current levels ? yes it could. Will it retreat ? I wish I knew for certain. The only two scenarios that could lead to a substantial drop in commity prices are a 1) a drop in demand or 2) an increase in supply.

As far as the dropping demand goes, it would take a severe recession on a worldwide basis to see a substantial drop in the price of commodities. This is very bullish for commodities long term because the supply situation will remain unresolved.

An increasing supply is nowhere to be seen on the immediate horizon. As for Oil, we might have already entered the terminal decline in the production of the precious resource or we very soon will.

I do not want to pretend that I am an expert commodity trader. I am not, far from it. Just a computer engineer trying to apply some common sense logic. But if you see any discrepancy in logic, please post your comments.