Oil adds fear premium despite high surplus

The Price of Fear

Fear is back in the market as oil put in a bit of what you might call a "WikiLeaks" premium. Oh sure, there were other things to be fearful about, but to understate the importance of the WikiLeaks revelations about Korea and the Middle East means that you really don't understand how risk premium works. Oil traders constantly try to assess the risk to supply and add a fear premium or an insurance rate premium that reflects the fluidity of supply. With the revelations such as King Abdullah of Saudi Arabia urging U.S. attacks against Iran or that North Korea helped Iran with the development of a nuclear weapon, it is obvious that the market has to face up to some of the realities of risk that it had tried to ignore.

Yet fear was on display everywhere you looked. We saw markets from bonds to stocks and commodities try to reassess their comfort zone in a day that led to wide trading ranges. Of course the market still fears that the eurozone could collapses and war could break out in the Korean peninsula and the revelations from the leaked memos only adds to our angst.

There is no doubt that the WikiLeaks added to the price of oil. The Energy Information Agency released some statistics and David Bird, the energy statistics analyst for Dow Jones, pointed out some fascinating facts. For example did you know that the United States exported the most gasoline since 1947? Well they did! In fact exports of finished gasoline averaged 113,000 barrels per day in the first nine months of 2010. That's the highest volume since 1947 according to Dow Jones. The U.S. has been a net exporter of gasoline in 14 of the past 15 months and in 16 of the past 23 months, beginning in November 2008. Prior to that, the U.S. was a net importer of gasoline since 1961. Mexico accounted for 62% of US gasoline exports, which totaled 226,000 barrels per day in September. Gasoline imports were 130,000 barrels per day in the month, with Canada the biggest supplier, accounting for 29% of the total.

The EIA also reported that US crude oil stocks rose by 1.3% to 360.115 million barrels a day, the highest end-September level since 1980. Stocks were 25.1 million, or 7.5%, above the year-ago level, the biggest surplus in any month since September 2009, when stocks were 10.2% above a year ago. End-September stocks were 42.3 million barrels, or 13.3%, above the five-year average. The rise came as refiners cut crude runs by 369,000 barrels a day from August levels, to 14.741 million barrels per day. That was the lowest since March, but the most in September since 2007 and 31,000 b/d above a year ago. US crude output rose 1.1% in September from August to 5.567 mln b/d, the most since May 2005 and the highest level in September since 2003. Crude imports in September fell 3.4%, or 318,000 b/d from August and were 1% below a year ago. Imports were the lowest in September since 2008, when hurricanes disrupted flows.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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