Is it all about speculation?
Oil prices are soaring because of the reports out of Libya and gasoline prices, according the Lundberg survey, have had the biggest two-week jump in history. This comes at a time when US oil supply is at a record high and gasoline supply is running over the five-year average. It just has to be the speculators behind this move, doesn't it? Sure, this is just another case of the evil speculators taking advantage of the situation in Libya to get rich and rip off the American consumer, right?
Wrong! Every day I have the pleasure to be on the Fox Business Network with Cheryl Casone and on Friday we got the question whether the price move in oil was a result of speculation or does the price fairly reflect the fundamentals. I said absolutely it reflects the reality of fair price. So later that day on the Cheryl Casone’s blog called, "The Casone Exchange” put the question to viewers like this.... "Today we did a five minute segment with Phil Flynn of PFG Best from the floor of the CME. We usually talk with him briefly at the top of our show, but considering that stocks are selling off right now because oil is hovering at $104, we felt it best to have him give us some context. I am a big Phil fan, but when he said the market [fundamentals] could absolutely support this, and that the fear was real with regards to the Middle East (and not from pure speculation), my other on set guest James Frischling said wait a minute? James believes the supply is there, and investors are getting greedy. They disagree! That is what makes great debate and great television, but I am curious what all of you think? You've been emailing the show, sending me the fundamentals and commenting on Facebook and Twitter, but let me know here at Casone Exchange in the comments section. It's time for you to give your Best Guess...have at it."
So have at it and vote for the fact that speculators are not just driving price but are being driven to the market because fundamentals. I can't print the link but if you go on the Fox Business website and search for Cheryl's blog you should find it. If you are not convinced and you need some reasons why the fundamentals are backing this move let me give you ammunition.
As if 1.0 million barrels of lost Libyan oil production wasn't enough. First of all when people talk about fundamentals they sometimes have too narrow of a view of what the real fundamentals are. Too often they think it's a numbers game of just supply versus demand, counting barrels if you will and hard figures as compared to demand. While that is part of it the meaning, fundamentals goes far beyond that. You also have to include transportation cost, which includes insurance or risk premium. Already we are seeing actual oil buying driving up prices because certain refiners and European countries are fearful they won't be able to get oil next week. Not speculators, unless you define refiners as specs and users speculating that they won't get supply.
Bloomberg News reported on Friday that we have, "An 18-fold surge in oil-tanker rates in two weeks is a sign that European refineries are rushing to secure cargoes of crude from Libya as an uprising against leader Muammar Qaddafi disrupts supply. Rental income from tankers, capable of carrying about 600,000 barrels of oil, was at $46,330 a day today, up from $2,511 on Feb. 14, data from the Baltic Exchange in London show. The ships, most commonly used to carry oil across the Mediterranean, now cost more than supertankers, which are more than three times bigger, according to data from the bourse, which publishes rates for more than 50 maritime routes.”
So we see the cost of getting a tanker to move your oil is sky rocketing. And the quality of Libyan oil is some of the best oil in the world. As Bloomberg News goes on, "Europe is the largest importer of Libyan crude and at least seven oil companies' output in the country, Africa's third-largest oil producer, has been disrupted. Six tanker owners have said they loaded at Libyan ports in the last week, possibly taking oil produced before disruptions. Protests in northern Africa have toppled leaders in Tunisia and Egypt.”
"The French and the Italians are trying to secure as much cargo from the countries that are operating as normal," said Sverre Bjorn Svenning, an analyst at Fearnley Consultants A/S in Oslo, part of the Astrup Fearnley A/S shipbroking and investment banking group. "Quite a few ships are waiting off Libya so some of the transportation capacity is also idled. West African and Caspian Sea crudes have surged to the highest in more than two years as European refiners find their grades more suitable for replacing disrupted Libyan exports."
The other reason why this is not just speculation is the increased risk of getting oil from point A to point B. What I call the insurance cost, which is a real cost not just the result of speculation. The risks in the region are at the highest level perhaps ever. The tumult in the region that began in Tunisia continues to spread. There is still tension in Egypt, home of the Suez Canal. There are demonstrations in Iraq, Iran, Yemen, Bahrain, Algeria and Oman. In Saudi Arabia, the world's largest oil producer, they are calling for "days of rage" starting on Friday. Now just contemplate the amount of oil that we have to include with an increased risk premium. Saudi Arabia was producing 8.4 million barrels a day, Algeria 1.25 million barrels a day, Iran 3.705 million barrels a day, Libya 1.385 million barrels a day, Iraq 2.595 million barrels a day.
The stunning price increase has the Obama administration panicking. The blame will in part fall on their shoulders. Their anti-energy policies may come back to bite them. Over the weekend White House Chief of Staff William Daley said the administration is "looking at the options. The issue of the reserves is one we are considering." "It is something that only is done -- has been done -- in very rare occasions. There's a bunch of factors that have to be looked at and it is just not the price," he added. "All matters have to be on the table when you go through -- when you see the difficulty coming out of this economic crisis we're in and the fragility of it."
Of course at this time, a reserve release may not help very much. Refiners are scrambling for supply here in the United States so a release at this time would not be advantageous. In fact a premature release could do more damage than good. What we are seeing is a historic risk to the global oil market. I could go on with more fundamental reasons for the price increase and will address these in coming days.
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 firstname.lastname@example.org.