Streetwise Professor

December 23, 2008

Lookout Below

Filed under: Commodities,Economics,Energy — The Professor @ 2:54 pm

The price of oil continues to drop.   Earlier today, February Brent fell below $40/bbl.   It is now at $40.23.   WTI is also down.   This follows a rather steep drop yesterday.   Inventories continue to build in the US Midcontinent, and reports that oil companies are leasing supertankers to store crude are common.   In the Midcontinent, Cushing storage is almost full up.   (This is why WTI delivered in Cushing is selling at a discount to Brent, in contrast to the typical relationship where WTI sells at a premium.)

This accumulation of inventory will have a lasting effect on the price of oil.   Even when demand turns up (and who knows when when is?), much of that demand increase can be met by drawing stocks down to more normal levels, thereby dampening any price recovery.     Inventories may well continue to build, moreover, due to the fact that supply is very inelastic in the short run, and shutting down wells is a costly proposition.

Update: Urals Med (per WSJ) was quoted at $33.87/bbl this PM in Europe.   Ouch!   Or, should I say —ой!

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  1. Merry Christmas Professor! I guess the readers need more insight into the current financial crisis now 🙂 Perhaps some more from the Allen and Gale book.

    Comment by Surya — December 25, 2008 @ 8:09 pm

  2. Given that the DJIA has been resilient to a lot of bad news (defaulting of auto companies, employment reports and plummeting retail sales and the dropping oil prices), it looks as though the market has bottomed out. The 8000 mark has proved to be a tough barrier. What are the Professor’s insights?

    Comment by Surya — December 25, 2008 @ 8:12 pm

  3. Thanks, Surya. Will try to accommodate this PM–holiday festivities/commitments have affected the posting pace;-) Have some thoughts re Allen-Gale, and crisis models in general. A few remarks re the market too. Thanks for asking, and your interest–feel free to suggest topics, or ask questions–it’s much appreciated. That goes for everybody;-)

    The ProfessorComment by The Professor — December 26, 2008 @ 12:49 pm

  4. Thanks Professor. Happy New Year.

    Comment by Surya — December 27, 2008 @ 1:38 pm

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