Finally, it appears that the weak market is showing up in the forward curve for oil prices, and credit crunch or not, stocks are starting to rebuild.
Never mind today's weekly Energy Information Agency report that showed crude inventories largely flat week-on-week. Total US petroleum inventories -- crude and products combined -- have risen to 999.1 million barrels from 964.8 million barrels in early October, and crude has risen to 302.5 million barrels from 311.9 million barrels.
The numbers released today that were more significant came from the International Energy Agency, which showed that oil inventories in OECD countries stood at 2.63 billion barrels at the end of September, representing "high" stock cover equivalent to 55 days of forward demand. Preliminary data for October show a "very sharp recovery" or 51.2 million barrels, of which 41.5 million barrels was in the US, the IEA said.
It took awhile, but the forward curve for oil is now providing a huge incentive for market participants to store oil. For example, the one-year spread between December 2008 and December 2009 crude is running about $10, and the combination of financing and storage costs aren't enough to wipe out that profit incentive to buy oil now, sock it away for 12 months and collect the difference in price. In his most recent weekly report, economist Philip Verleger on Monday noted that at the peak of the market in July, the four-year forward curve for WTI was trading at a three percent discount to the spot price. Last Friday, that premium was 38 percent. A similar comparison for Brent last week revealed a 54% difference.
"One can find very few instances where forward curves have been in such steep contango in the last 22 years," he wrote. He also wrote that the contango "tells us that tanks are full," though a speaker at a meeting of the Energy Forum in New York earlier this week said he believes that tanks are not full, and the credit crunch is the reason for that; there aren't enough playerswho want to tie up cash to take advantage of a one-year or even four-year spread, no matter how appealing it may look. That's why it appears that tanks still have room to hold more oil.
The inventories tell the story of the weak market in another way. In the second quarter, when the world usually builds inventories, the build was negligible at best, according to the IEA. In the fourth quarter, when the world normally draws inventories -- and did so heavily the last two years -- inventories will probably build worldwide. That's a stunning turnaround.
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