Oil Market Speculation
It is ironic that as Oil markets are at multi year highs and so are gasoline inventories for this time of year. But that is what you get in futures driven speculation in financial markets. We have gasoline prices both at the pump and in the futures market going up while existing gasoline inventories in storage are going up as well, and in fact are much higher than this same time last year.
Building Product Inventories
The oil market is a scam market in many ways, you can make the oil inventories go down if you process enough products for refining, even if you don`t have the product demand, or actually need to be refining the product because nobody really is using this product. Both distillates and gasoline inventories have been quietly building the last couple months, under the radar as traders focus on perceived Iran oil shortages.
Iran Will Get Around Sanctions Like North Korea
Iran will do what they always do under a sanctions regime, they will discount their oil heavily, and sell their oil on the black market. This runup in oil markets is largely the result of oil futures speculation, in financial markets where nobody actually takes delivery of physical oil barrels.
For all this Iran hype about how tight the oil market is, we actually had an oil data point, you know real facts which shows both oil and gasoline inventories building this past week via the weekly EIA Oil report. Furthermore total petroleum products actually built this past week while oil prices were going north. The oil market has very little to do with the actual fundamentals, but more so with capital flows.
Let us look at the actual oil market fundamentals per the EIA Data. The most recent EIA Oil report showed gasoline inventories at 236 million barrels in storage, for frame of reference at this time last year with much lower oil and gasoline prices we only had 217 million barrels in storage, that is an increase of 20 million barrels in storage in a supposedly tight market. In fact gasoline inventories have been at glut levels the entire year, there isn't enough actual real demand to work these gasoline inventories off, so the gasoline inventory levels continue to build.
When you look deeper in the gasoline numbers the story gets even more bearish, on the east coast there are now 67 million barrels of gasoline in storage, which is a huge number given last year we were bloated on the East Coast in gasoline inventories, and we only had 56 million barrels of gasoline in storage this time last year. Yeah this oil market is all about the fundamentals, hogwash it is about financial players speculating in oil market futures. If we look at the Gulf Coast we have 82 million barrels of gasoline in storage compared with 74 million in storage this same time last year. Thus it is very transparent, supply is more than demand for the products.
Gasoline Prices at the Pump
But the actual on the ground fundamentals aren`t being reflected in gasoline prices at the pump or the gasoline futures market because of rampant oil market speculation. Thus economics are working at odds with the actual fundamentals of the market. The actual retail average gasoline prices in the market last year at this time were $2.58, and the most recent we are at $2.85 with a lag, after the runup in gasoline futures this week it will be much higher.
The culprit is the scam nature of the oil market and the refining industry at large which basically can manipulate their profits by juicing up gasoline crack spreads via gasoline futures. Thus we were at $1.67 for RBOB regular gasoline futures this time last year, have much more actual gasoline supplies, and the most recent RBOB Gasoline futures are close to $2.10, and rising in a week when we had another bearish gasoline build in the physical market.
What has gone under the radar is the bearish build in Distillates inventories during this last quarter, another bearish sign of actual weak economic demand in the energy market. We had knocked off a large glut in the Distillates Inventories last year, and were showing real underlying strength this time last year. But we have largely eroded all the gains made in reducing these inventories with steady building back of inventories. For example, a year ago we stood at 138 million barrels in Distillates storage, and for most of the early part of this year we were at a huge year over year deficit in Distillates Inventories, now we have been steadily building in the recent quarter, and are right back at the same 138 million barrels in Distillates inventories. Again, you wouldn't know it by the price in the actual market for Distillates with on highway Diesel Fuel Prices $3.28 and rising compared to just $2.79 a year ago with the exact same level of inventories. If we look at the other component of Distillates in Heating Oil Futures prices we were $1.82 a year ago, and most recently we are at $2.35.
Emerging Markets & Demand Destruction
There is more bearish news regarding these high prices and their effect on emerging markets and demand, especially given the strong US Dollar versus the much weaker emerging market currencies which only raises the prices of gasoline and oil in these emerging market economies. Moreover, most of the demand gains in the oil market from the demand side of the equation have been coming from emerging markets as the developed markets are mature, and in many cases are showing declining real demand. So add to this the fact that many gasoline subsidies have been taken away or reduced in these emerging market economies, throw in a strong dollar, and rising prices on top of that in an energy speculation wave, and we could really start to experience demand destruction for gasoline and petroleum products in the one area which was providing the actual real demand growth in the energy market.
China Trade War
Throw in a trade war with China that is only starting to hit both economic supply chains of the United States and China, and the oil markets are not looking anywhere near as good as the headline runup in electronic energy futures.
Oil Market Speculation - Electronic Markets
Given that fundamentals in the market are taking a backseat to rampant speculation, the best way to lower energy prices is to bust the speculators out of the market. Donald Trump has tried tweeting about OPEC with very little effect, he fails to take responsibility for his role in promoting the rampant speculation in the oil market with his Iran policy which gives the oil bulls the only real bull case that can be made for these high prices divorced from the actual fundamentals. Oil bulls always need a story to hype, a reason for believing that this time is different, that high energy prices will not cause the next oil market crash and economic recession, and this week it is Iran. Please, North Korea was able to buy all the oil on the black market it wanted with the most severe sanctions imaginable, Iran has a proven track record of getting around oil market sanctions, all it means is some country is going to get much cheaper Iranian discounted Oil. But the Iranian story fits the narrative the oil bulls are trying to weave in the financial electronic marketplace. A fiction perpetrated for financial profits at the expense of consumers in the fundamental economic marketplace.
Donald Trump & High Oil Prices
There are a couple of choices that Trump could do to lower energy prices immediately. He could change his stance on Iran killing the Iran Shortage hype story by either allowing waivers for Iranian Oil or he can make nice with Iran and do a Deal, you know the thing that he is so good at making Deals. How is that working out Mr. Art of the Deal Trump?
Since he will lose too much face by admitting he is largely responsible for the runup in oil prices with his failed Iranian strategy, the only real option I can see for Trump to crush the oil shorts given that energy markets are largely speculative in nature with nobody actually taking delivery of physical product but just buying electronic energy futures.
The best way to crush the oil shorts is to do a large (too big to fail) 100 million barrel coordinated release along with Europe of the Strategic Oil Reserves, and this will immediately take the excess oil market frothy speculation out of the market. This is what has worked in the past to reduce this kind of rampant speculation in the market. But it needs to be big to be effective, and it needs to be coordinated with European Strategic Oil reserves to hit the various grades that the market will require to fully flood the physical market with oil.
And it needs to catch the market by surprise to really teach the lesson of beware of just buying up the market with rampant enthusiasm without any potential consequences, as at any time, the SPR Hammer can come crashing down, and blow your speculative ass out of the water, costing you a fortune for your overly speculative fervor in the oil markets.
Tweeting Versus Action
So far Donald Trump has been asleep at the wheel regarding his negative effect on the oil market. He alone is responsible for the recent runup in prices, when the actual fundamentals point to much lower energy prices for consumers. The question is will Donald Trump crush the Evil Oil Market Speculators and do a large, coordinated surprise SPR Oil Release, or will he just continue to sit on his hands, and tweet mindlessly at OPEC? It is a time for action Donald, either put up or shut up about high oil prices which you caused in the first place with stupid policy strategy that has backfired for consumers at the pump!