The U.S. shale boom has driven the cost of Gulf Coast light, sweet oil to its lowest level versus Brent crude in almost a quarter century as the nation’s dependence on foreign supplies wanes.
Light Louisiana Sweet, the benchmark grade for the Gulf Coast known as LLS, has traded on the spot market at an average of 15 cents a barrel more than Brent this year, the smallest premium since at least 1988, data compiled by Bloomberg show. The spread’s highest annual average was $4.02 in 2008.
The drop has cut costs for refiners in Texas and Louisiana accounting for 45 percent of U.S. capacity and replaced competing shipments from Africa. Gulf imports of light, sweet crude have fallen 56 percent since 2010, according to U.S. Energy Department data. A shale-oil influx from the Eagle Ford formation in Texas and Bakken in North Dakota and new ways to bring crude to the Gulf, such as this year’s reversal of the Seaway pipeline, may accelerate the shift.
“The market dynamics are changing,” Edward L. Morse, head of commodities research at Citigroup Global Markets in New York, said in a telephone interview. “When the Gulf Coast was a crude importer, they had to attract crude from elsewhere in the world, which meant LLS had to be at a premium to Brent. But now we’re moving into a totally different situation.”
Light Louisiana Sweet, a grade prized because its low- sulfur content and density make it easier to process into fuels such as gasoline, was 92 cents cheaper than Brent yesterday. It averaged 20 cents less than the benchmark in the third quarter.
Brent oil for October settlement rose 40 cents, or 0.4 percent, to $113.49 a barrel yesterday on the London-based ICE Futures Europe exchange. The contract advanced as much as 0.5 percent to $114.05 in trading today.
U.S. oil output surged to the highest level in 13 years in July, according to weekly Energy Department data. The U.S. met 83 percent of its energy demand from domestic sources in the first five months of this year and is heading for the highest annual level since 1991, department figures compiled by Bloomberg show.
“Unconventional oils and gas are changing everything about our competitiveness in the United States,” Bill Klesse, Valero Energy Corp.’s chief executive officer, said yesterday at the Barclays CEO Energy/Power Conference in New York. “Before you know it, we’re going to have so much light, sweet crude that in the U.S. Gulf Coast we’re not going to be importing light, sweet crude, and we think that happens next year.”
Houston, New Orleans and other ports along the Gulf Coast accepted about 554,000 barrels a day of light, sweet oil from outside the U.S. in June, down from 964,000 barrels a day in June 2011 and about 1.25 million in June 2010, according to the Energy Department’s Energy Information Administration.
The West African nations of Nigeria, Angola, Gabon and Equatorial Guinea accounted for 58 percent of the light, sweet crude imported into Gulf Coast ports in June 2012. North African nations accounted for a further 30 percent.
LLS will become about $5 a barrel cheaper than Brent during the next 12 months, David Pursell, a Houston-based managing director for Tudor, Pickering, Holt & Co., said in a telephone interview. The discount would take into account the extra cost of getting LLS to other customers, such as refiners on the East Coast, Pursell said.
Like oil in the Midcontinent, the relationship between LLS and Brent has been upended by surging shale production. West Texas Intermediate oil at Cushing, Oklahoma, the U.S. benchmark grade traded on the New York Mercantile Exchange, shifted to a discount to Brent almost two years ago after trading at a premium for decades.
Cushing inventories surged to 47.8 million barrels in June, the highest level since Energy Department records for the hub began in 2004. The WTI-Brent spread reached a record $27.88 in October. It was at $18.03 a barrel today.
“Over the last year and a half, with the WTI-Brent spread blowing out, the primary beneficiaries have been the Midcontinent players,” Cory Garcia, a Houston-based oil analyst for Raymond James & Associates, an arm of the financial-services company with almost $40 billion under management, said in a phone interview. “As LLS disconnects next year, the benefits to Gulf Coast refiners will be brought to the forefront.”
Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) reversed the flow of crude on the Seaway pipeline on May 19. The link, carrying as much as 150,000 barrels a day from Cushing to Gulf Coast refineries, is scheduled to pump as much as 400,000 barrels a day early next year.
- Report: Shale boom revamping U.S. refining industry (fuelfix.com)
- Gulf of Mexico production ramps up after Isaac (fuelfix.com)
Obama administration officials ripped into GOP proposals to tie Strategic Petroleum Reserve releases to increases in federal oil and gas land leases and to require new analysis of the economic impacts of several gasoline-related environmental regulations.
A new GOP bill would require a new interagency panel to analyse how certain future Environmental Protection Agency rules might impact gasoline prices and jobs, but an EPA official said the bill wouldn’t reduce prices at the pump and could threaten Clean Air Act health protections.
The Gasoline Regulations Act targets a number of looming EPA regulations, including one for cutting sulfur in fuel by two-thirds, U.S. ozone standards and refinery emissions standards.
Gina McCarthy, an EPA assistant administrator, said in written testimony that the bill appears to use high gas prices as the reason to rollback public health protections, but those protections have little to do with gasoline prices. The bill would also duplicate analysis that is already done by officials.
“This legislation also delays — indefinitely — rules that EPA has not even proposed,” McCarthy said. “In short, this legislation does not address the reasons for the recent increase in the price of gasoline, while rolling back core aspects of the Clean Air Act — which was passed on a bipartisan basis and signed by a Republican president.”
Gasoline prices have steadily become a growing political point as prices rise near the $4 mark for the first time since 2008. The national average hit $3.91 Wednesday, a rise of 2 cents, according to the AAA gas gauge. Houston drivers are paying $3.87, or 9 cents below the record-high price of $3.96 in July 2008.
As prices have risen, the Obama administration has touted an “all-of-the-above” energy plan that officials say is the best long-term solution to the rising energy costs. Republicans, however, have argued the administration should remove unnecessary regulations and spur domestic drilling.
Republicans have also recently proposed that a 1 percent increase in federal lands leased for oil and gas production be required for every percentage point drawdown in oil from the strategic reserve, a 700-million-barrel stockpile on the Gulf Coast for emergency supply disruptions.
That proposal also came under fire by Obama administration officials.
Deputy Assistant Energy Secretary Chris Smith said in written testimony that the Strategic Energy Production Act would make it more difficult for to respond promptly to supply interruptions in crude oil. He argued that the bill would also make release from the strategic reserve more dependent on actions of potential lessees.
“It would also limit DOE’s ability to manage the SPR on a day to day basis, in which releases occasionally are necessary for the routine maintenance and operation of the reserve,” Smith added.
Republicans are proposing the legislation in seeking to position themselves against Democrats and the White House on oil and gas policy, which has surged to the forefront of political debate in the wake of higher gasoline prices. GOP lawmakers insisted Wednesday their legislation would increase oil supplies and decrease refining costs, helping put downward pressure on gasoline prices.
Democrats have called for cracking down on what they view as excessive speculation in oil markets and urged the White House to consider releasing oil from the strategic reserve.
But analysts have repeatedly said policymakers have few, if any, short-term tools to address gasoline prices, which are tied to oil prices set on global markets.
James Burkhard, managing director at IHS CERA, a research firm, said in written testimony said the current run-up in oil prices, the biggest determinant of what consumers pay at the pump, stems from geopolitics, specifically from uncertainty linked to the Iranian nuclear issue.
Analysts have said increased U.S. drilling would take years to kick in and would have, at best, a fractional impact on oil prices. They also have said the strategic reserve is intended for use only during supply emergencies, not as a price-smoothing tool as some Democrats have advocated.
Obama has ripped into GOP proposals to expand drilling into new waters and lands as an election-year “bumper sticker” that wouldn’t reduce gasoline prices. He has touted an “all-of-the-above” strategy of more oil, gas, renewable energy and fuel-efficiency boosts to cut oil use as a long-term strategy for U.S. energy independence.
- US Gasoline Prices Top $3.90 (247wallst.com)
The energy industry has the appearance that it is about to undergo a major shift in pricing structures again. We saw it lately with the spread between crude and NG blowing out. We have seen signs of it happening in Brent and WTI before, and I expect we will see new signs of it again.
To be clear, we could see extremely expensive Brent oil, as international supply fears increase with tension in Iran. This would be happening while the price of WTI, a lighter sweeter standard, crashes in US terms do to its own over supply and lack of demand issues.
This would all be happening under a backdrop of world markets bidding for refined products from a US export happy refining complex. This would lead to US gasoline prices hitting all-time highs, while refinery complexes in the US Midwest would have the highest profit margins in their history.
The US Midwest is growing its own domestic sources of oil, while its own capacity to ship the oil out is limited. This causes a bottle neck in exports in the region. This is causing the price locally to crash.
The planned refinery work in the Midwest has lowered the take-off demand for Bakken oil. This is happening inside of a window of time while the Bakken production sets all new production records every month.
This is causing the price of oil in the Midwest to crash in localized markets, as the take-off capacity does not equal the supply of new barrels. The region is buried in supply, all of which is now seeking a path to Houston refining complex.
The price difference of an equivalent grade of oil in Bakken Terminals & Louisiana terminals is now $40. This imbalance in like qualities will generate a short term arbitrage trucking bonanza, as the profit per trip approaches silly levels.
I expect to hear about a fleet of white trucks driving loads of crude oil from the Midwest to the refining complexes with accessible pipelines capacities. You don’t have to drive it all the way there, to deliver it.
I wish I had a fleet of modern fluid haulers right now. There is more oil supply in the Bakken then local demand, and that won’t change much when the refinery’s turn around. The Bakken supply is still growing every month, and will for a while.
The growth in rail take off capacity will not keep up with the growth in new oil production in the near to intermediate term. This will lead to price differentials that will last longer than people expect. There is always a profit to be made when these events happen. It will be interesting to see who ends up owning those fleets of white trucks.
Just like the old gold rush stories of stores making more then people digging for gold. There just might be more money made in shipping the oil by truck, then there is in producing it, or refining it. As they say, this could get interesting in the near term.
Read more: BI
- Conoco’s Brent Control (mb50.wordpress.com)
- Brent WTI Back To $20 – Some Thoughts On What’s Next From Goldman (zerohedge.com)
- Seaway Pipeline gets turned around; oil markets react quickly (mb50.wordpress.com)
- Seaway pipeline creates contango with oil glut (mb50.wordpress.com)
- JP Morgan Hikes 2012 Crude Price Target To $110 On Seaway Reversal (zerohedge.com)
- InvestmentOptions.Net Releases Response to President Obama’s Decision to Reject Keystone Pipeline (prweb.com)
The Automatic Earth | Jan. 14, 2012, 10:14 PM
I’d like to try a little intellectual exercise. There were two pieces in my mailbox this week that concerned posts at Naked Capitalism. Though their topics have at first glance little to do with one another, there is a term that is pivotal to both. Inventory.
When it comes to real estate, it’s popularly called “shadow inventory”. With regards to commodities, the term “dark inventory” has been coined. While there are plenty of differences in the way the terms are applied, I’m for now intrigued more by – potential – similarities between them.
Not that I have the illusion that I can treat this in a way that could even border on comprehensive, don’t get me wrong. I want to lift only part of the veil that hides from view what underlies how and why the financial system that rules our economies is going to the dogs: market manipulation.
In particular, I’m interested in how both shadow and dark inventory phenomena pervert their respective markets, as well as the entire free market system as a whole, where everyone is supposed to have “full access to information”. Something both dark and shadow inventories make impossible. Something the 99% general public are not aware of. At all.
And it’s not like they’re alone. Try your average pension fund manager, banker, politician. Not a clue.
Let’ start with a trip back to June 2011, when Izabella Kaminska for FT Alphaville perhaps first used the term “dark inventory”:
Dark inventory: Inventory that’s out there, but which no-one else can see.
It comes in many shapes and forms. Equity inventory, which has been internalised by banks and parked off-balance sheet (appropriately via private dark pools). Copper inventory, which has been stashed off-market and encumbered via finance deals. It’s also yet-to-be-produced commodities which have been pre-sold, but which nobody else knows have been encumbered.
But if you have the power to see or command the darkside inventory, you have the power to stay ahead of the game. Especially if you can move quickly. Indeed, almost every befuddling market move of late can, if you think about it, be explained by the concept of dark inventory. For example, consider the impact of dark inventory accumulation (the possible consequence of cheap liquidity).
In oversupplied markets this can mislead fellow investors. They see buying interest coming from somewhere, though they can’t quite understand from where. The fundamentals don’t explain it, but prices are rising regardless, led usually by the cheapest securities, and in tandem. With no ability to see the dark inventory, the market finally falls for the trend. They believe the demand is real.
If you are the accumulator of dark inventory, or privy to the flow, you are able to foresee the market rallies and position yourself accordingly. This is a profitable time.
Of course, in continually oversupplied markets you will begin to suffer the costs of hedging inventory, if you are bothering to hedge, (since forward curves may eventually flatten out) as well as the burden of balance sheet expansion. Eventually it will make sense to park that inventory off-balance sheet.
Thanks to matching, aggregation and netting you can use the inventory (in a sliced up, mixed up manner) to back equitised structured products, exchange traded notes, exchange traded products as well as synthetic funds. Lots of launches follow. This especially makes sense if by then everyone is a believer in the rally, a fact which has translated into genuine buying interest which can now be captured to back your dark inventory.
The game is afoot.
Ilargi: I certainly recommend reading Izabella’s entire piece (like all other pieces I quote from). But even from the quote above alone, you can, even if you’re not familiar with the topic, still get a genuinely queasy feeling. We’re talking market manipulation here, a way to influence investment decisions without anyone ever knowing they’re being manipulated. And fully legal.
Chris Cook, former compliance and market supervision director of the International Petroleum Exchange, writes this about “dark oil inventory” at Naked Capitalism:
All is not as it appears in the global oil markets, which in my view have become entirely dysfunctional and no longer fit for its purpose. I believe that the market price is about to collapse as it did in 2008 and that this will mark the end of an era in which the market has been run by and on behalf of trading and financial intermediaries.
In this post I forecast the imminent death of the crude oil market [..]
Global Oil Pricing
The “Brent Complex” is aptly named, being an increasingly baroque collection of contracts relating to North Sea crude oil, originally based upon the Shell “Brent” quality crude oil contract which originated in the 1980s.
It now consists of physical and forward BFOE (the Brent, Forties, Oseberg and Ekofisk fields) contracts in North Sea crude oil; and the key ICE Europe BFOE futures contract which is not a deliverable contract and is purely a financial bet based upon the price in the BFOE forward market.
There is also a whole plethora of other ‘over the counter’ (OTC) contracts involving not only BFOE, but also a huge transatlantic “arbitrage” market between the BFOE contract and the US West Texas Intermediate (WTI) [..]
North Sea crude oil production has been in secular decline for many years, and even though the North Sea crude oil benchmark contract was extended from the Brent quality to become BFOE, there are now only about 60 cargoes of BFOE quality crude oil (and as low as 50 when maintenance is under way), each of 600,000 barrels, delivered out of the North Sea each month, worth at current prices about $4 billion.
It is the ‘Dated’ or spot price of these cargoes – as reported by the oil price reporting service Platts in the ‘Platts Window’– which is the benchmark for global oil prices either directly (about 60%) or indirectly, through BFOE/WTI arbitrage for most of the rest.
[..] traders of the scale of the oil majors and sovereign oil companies do not really have to put much money at risk by their standards in order to acquire enough cargoes to move or support the global market price via the BFOE market.
[..] the evolution of the BFOE market has been a response to declining production and the fact that traders could not resist manipulating the market by buying up contracts and “squeezing” those who had sold forward oil they did not have [..] The fewer cargoes produced; the easier the underlying market is to manipulate.
[..] The Platts window is the most abused market mechanism in the world.[..]
In the early 1990s Goldman Sachs created a new way of investing in commodities. The Goldman Sachs Commodity Index (GSCI) enabled investment in a basket of commodities – of which oil and oil products was the greatest component – and the new GSCI fund invested by buying futures contracts in the relevant commodity markets which were ‘rolled over’ from month to month. The genius dash of marketing fairy dust which was sprinkled on this concept was to call investment in the fund a ‘hedge against inflation’. Investors in the fund were able to offload the perceived risk of holding dollars and instead take on the risk of holding commodities.
The smartest kids on the block were not slow to realise that the GSCI – which was structurally ‘long’ of commodity markets – was taking a long term position which was precisely the opposite of a commodity producer who is structurally ‘short’ of commodities because they routinely sell futures contracts in order to insure themselves against a fall in the dollar price. ie commodity producers are offloading the risk of owning commodities, and taking on the risk of holding dollars.
So in 1995 a marriage was arranged.
BP and Goldman Sachs get Married
From 1995 to 2007 BP and Goldman Sachs were joined at the head, having the same chairman – the Irish former head of the World Trade Organisation, Peter Sutherland. From 1999, until he fell from grace in 2007 through revelations about his private life, BP’s CEO Lord Browne was also on the Goldman Sachs board.
The outcome of the relationship was that BP were in a position, if they were so minded, to obtain interest-free funding via Goldman Sachs, from GSCI investors through the simple expedient of a sale and repurchase agreement: ie BP could sell title to oil with an agreement to buy back the oil later at an agreed price.
The outcome would be a financial ‘lease’ of oil by BP to GSCI investors and the monetisation of part of BP’s oil inventory. Such agreements in relation to bilateral physical oil transactions are typically concluded privately, and are invisible to the organised markets.
Due to the invisibility of the change of ownership of inventory, ‘information asymmetry’ is created where some market participants are in possession of key market information which others do not have. This ownership by investors of inventory in the custody of a producer has been termed ‘Dark Inventory’
I must make quite clear at this point that only BP and Goldman Sachs know whether they actually did create Dark Inventory by leasing oil in this way, and readers must make up their own minds on that.
The ‘inflation hedging’ meme gradually gained traction and a new breed of Exchange Traded Funds (ETFs) and structured investment products were created to invest in commodities. In 2005 Shell entered quite transparently into a relationship with ETF Securities which enabled them to cut out as middlemen both investment banks and the futures market casinos, and with them the substantial rent both collect.
Other investment banks also started to offer similar products and a bandwagon began to roll. From 2005 to 2008 we therefore saw an increasing flood of dollars into the oil market, and this was accompanied by the most shameless, and often completely misleading hype, and led to a bubble in the price.
There was (and still is) no piece of news which cannot be interpreted as a reason to buy crude oil. The classic case was US environmental restrictions on oil products, which led to restricted supply, and to price increases in oil products. Now, anyone would think that reduced refinery throughput will reduce the demand for crude oil and should logically lead to a fall in crude oil prices.
But on Planet Hype faulty economic logic – the view that higher product prices are necessarily associated with higher crude oil prices – was instead used as justification for the higher crude oil prices which resulted from the financial buying of crude oil attracted by the hype.
You couldn’t make it up: but unfortunately, they could, and they did.
More worrying than mere hype was that a very significant amount of oil inventory had actually changed hands from producers to investors. Only those directly involved were aware that below the visible part of the oil market iceberg lurked massive unseen ‘Dark Inventory’.
Ilargi: In a nutshell: Cook argues that QE measures from the Fed and BOE have caused large investors to flee from dollars into commodities.
This in turn has led to a price bubble through contango (forward prices are higher than spot prices), for which they are all positioned, but this will down the line inevitably lead to the opposite – backwardation -, and the bubble must burst. Severely, says Cook: to as low as $45 a barrel. Given how conservative Cook is in the numbers he uses, even that may be a high estimate.
In yet another article at Naked Capitalism, Irish journalist Philip Pilkington summarizes Cook’s point so well it seems pointless to try and improve on it:
Looking at recent market trends Cook raises concerns that we could be seeing the beginnings of the end of a bubble that began to inflate in the oil market after the crash of the previous bubble in 2008. This bubble, Cook argues, was inflated due to inflation fears after the QE programs undertaken by the Federal Reserve and the Bank of England. With the markets awash with dollar and sterling liquidity, banks and investors piled into commodities to escape what they saw to be a looming inflation.
In recent months Cook focuses on the move of the market from a position of ‘contango’ to a position of ‘backwardation’ – which he sees as evidence of a bubble deflating. While some investors read in this that the short-run demand for oil has risen, Cook points out that with the global recession grinding along there is no fundamental reason that this should be occurring. Instead Cook sees in this move a sign that the long-run demand for oil is falling as the current bubble begins to burst.
Cook thinks that the price collapse is going to be very painful – falling possibly as low as $45-$55 a barrel. In response to this OPEC will try to ramp up prices by cutting production and, most importantly for our purposes, a financial crisis of sorts will occur as inflation hedged investors see their net worth cut to pieces.
If this is as Cook says – if this is a bubble of fear and it bursts – the financial sector is going to see a huge wiping out of the profits they have been reaping from it. We have no way of knowing how much profitability is tied up in these dodgy markets – but my thinking is: a lot.
Ilargi: So far, so good. We must realize, however, that while lower oil prices seem very beneficial to many sectors of our economies, a wiping out of everyone who’s betting the wrong side of this wager is not.
And if Cook is right, a large segment of the financial world, that is: those who are not privy to the magnitude of the dark inventory, have been, and are being, manipulated to be on that wrong side. And without a new bubble to flee into to boot. Indeed, there’s a real risk the entire global oil market will cease to – properly – function.
Come to think of it, again, if Cook is right, it probably already has. Since to the extent that it still seems to function, it does so only to service the interests of those that control the dark inventory, and who squeeze those investors not “in the know”. Oil prices are thus set, in essence, by derivative contracts, not by supply and demand, which is a mere illusion. Thing is, who would know?
Needless to say, there’s another party that stands to lose big if oil prices collapse: producers. The Arab Spring may well return more powerful than ever.
Still, while I think it’s important for everyone to see and understand that, and how, manipulation sets market prices for commodities (and stocks, but that’s another story) on a daily basis, and not some free market principle, I started out trying to figure out what connects dark oil inventory and shadow housing inventory.
Michael Olenick, founder and CEO of Legalprise, and creator of FindtheFraud, has – extensively- looked at the latter:
“Shadow inventory,” the number of homes that are either in foreclosure or are likely to end up in foreclosure, creates substantial but hidden pressure on housing prices and potential losses to banks and investors.
This is a critical figure for policymakers and financial services industry executives, since if the number is manageable, that means waiting for the market to digest the overhang might not be such a terrible option. But if shadow inventory is large, housing prices have a good bit further to go before they hit bottom, which has dire consequences for communities, homeowners, and the broader economy.
Yet estimates of shadow inventory, and even the definition of what constitutes shadow inventory property, vary widely. For example, the Wall Street Journal published a Nov. 11, 2011 article, “How Many Homes Are In Trouble?” where values varied from 1.6 million (CoreLogic), [..] to between 8.2 million and 10.3 million (Laurie Goodman, Amherst Securities). [..]
…. things are actually worse than any of the prevailing estimates indicate, although Goodman is very close to the mark. Current loss experience suggests that this figure is staggering, easily in the $1 trillion range.
Why aren’t those losses more visible yet? Well, evidence suggests that servicers are stalling the foreclosure process, not taking title to and selling these houses. For the lenders, such delay likely allows them avoid the write-offs of both the negative equity as well as the worthless second liens. More generally, it keeps the trillion dollar losses hidden.
Lenders aren’t acknowledging their stall tactics, however. When people notice how slowly foreclosures are progressing from initial steps to resale, lenders point at their foreclosure fraud related dysfunction. Lenders conveniently don’t mention that such dysfunction was self-induced, instead blaming borrowers and courts. [..]
…. there are 9,800,000 houses in shadow inventory.
If these loans were taken out for the median value of a state-by-state home price, using data from the FHFA, for Q2, 2006, there is $2.3 trillion of home values at near the market peak. The mortgage balances are going to be lower than that, but given how widespread equity extraction came to be (and it is probably that the most levered homes are hitting the wall), it is not unreasonable to assume LTV ratios relative to peak values of 80%.
Loss severities on prime mortgages are running at roughly 50% and are 70% on subprime (note that with more borrowers fighting foreclosures, and given that loss severities on a contested foreclosure can come in at 200% or even higher, so using these assumption is certain to understate actual results). $2.3 trillion x 80% x 50% = $900 billion.
These losses will be distributed across the GSEs (meaning taxpayers), banks that have second liens (with the biggest losers being Bank of America, Citibank, JP Morgan, and Wells Fargo), investors in private label (non GSE) mortgage securities, and other US and foreign banks.
Balanced against this liability is some amount figure for the underlying asset, the house. Given that servicer advances, foreclosure costs and servicer fees come close to and even exceed the value of the property, comparatively little of this $2.3 trillion will be recovered in property liquidations. [..]
In support of the conclusion that banks cannot afford to recognize this shadow liability is the sharp decrease of foreclosure filings in 2011 and the seeming unwillingness of banks to move foreclosures through the system.
They file foreclosures, then let them linger, not taking homes even when every possible borrower defense is exhausted. Some of this slowdown may be due to more scrutiny of foreclosure documentation, particularly in judicial foreclosure states, but there is clearly more at work. [..]
There is other anecdotal evidence suggesting banks do not want these houses or, more accurately, do not want the write-offs that actually taking the houses would force:
• Foreclosure defense lawyers have clients who have not paid their mortgage in years, but face neither a foreclosure nor even a negative mark on their credit report. I recently received a call from a man who said he had not paid his $1.6 million mortgage in two years but his servicer has not foreclosed, and he faces no derogatory information on his credit report; he was frustrated because he is retired and just wants to move to a cottage.
This phenomenon, which apparently isn’t rare, might explain why shadow inventory reports that rely on credit reports to extrapolate shadow inventory are often dramatically lower than these calculations. [..]
• It is common for foreclosure mill lawyers to argue for delays in selling a home when nobody is representing a borrower. Judges, who want to clear their dockets, will rail at bank lawyers about the age of the case even while bank lawyers argue for yet another delay, while the other table — where the borrower, the defendant, is supposed to sit — is empty. [..]
Yes, servicers continue to prey upon ordinary Americans. But evidence suggests that they’re also preying on investors. Individual American families do not deserve to suffer these behaviors, that increase the losses while delaying the uncertainty, and neither do pension funds, European villages, municipalities, or other unsuspecting entities who actually funded these loans.
Few people are going to complain when they’re not paying their mortgage that there is no mark on their credit-report nor a foreclosure; a few of the more perplexed ones — or those that want to bring a bad mortgage to resolution — may speak out, but most remain silent.
Similarly, many investors, and surely the banks themselves, know about these figures. But as both sides spin their wheels, the problem continues to spiral out of control.
Ilargi: I think perhaps the best way to make the connection between dark inventory in commodities and shadow inventory in real estate is to look at, no surprise, what pays for it. And that leads me to what I have long since coined “zombie money”.
Zombie money is the money that seems, but only seems, to exist because of unrecognized losses. QE measures, for instance, basically serve to keep those losses unrecognized. That’s what they’re for. To make markets, and ordinary people, believe that banks are still solvent when in reality they’re not.
Funny thing is, even with all the accounting tricks that hide those losses, the entire system is still, and already, on the verge of collapse. And when it goes, the loser will be you, not the gamblers that lost fair and square. If dark inventory shows you anything, it’s that fair and square is a thing of some mythical fairy tale past. The reality for you and me is, and this is not the first time I put it like this: heads you lose, tails you die.
Zombie money pays for dark oil inventory; this is for instance why tar sands can look profitable, even as their EROEI is very low. If there’s sufficient difference between spot prices and forward prices for natural gas and oil, it makes sense to turn the former into the latter (which is all that tar sands are about). Nothing to do with energy efficiency, everything to do with market manipulation. The same goes for shale gas, and for oil shale. It will all soon give a whole new meaning to the term “unsustainable”. Promise.
Zombie money also allows, and causes, lenders, aided and abetted by governments all over, who want no part of a crashing real estate market, to keep millions of homes off the market, which in turn allows them to keep billions, if not trillions of dollars, in losses off their books. This results in hundreds of millions of people, throughout the western world, who think their homes are worth much more than they are. And then they wake up.
Dark inventory and shadow inventory keep us all from having a realistic picture of what is actually out there, what anything at all is worth. Prices are not set in any sort of “free” market; they are set in “shadow markets”, “dark markets”, in which – derivative – financial instruments rule, not the actual assets they are based on. Until they don’t.
Today’s prices are set by bets on expectations of tomorrow’s prices, and these expectations in turn are manipulated by parties that have a vested interest in making investors – and the general public – think a certain expectation is realistic; all it takes is to make that expectation sufficiently opaque, to make sure investors have access to far less information than the parties that deal and/or hold the derivative instruments.
That’s all it takes to create, out of thin air, a whole new generation of suckers and greater fools.
This creates a tremendous cognitive dissonance, a picture of the world that is entirely delusional. And that, of course, can and will not last. Even if a majority of people still wishes to think that it can. What do they know about what’s going on behind the curtain? Hardly anything at all.
And then they wake up.
- Peak oil leaves the spotlight as global economic uncertainty rules oil prices (mb50.wordpress.com)
- Seaway pipeline creates contango with oil glut (mb50.wordpress.com)
- Oil mixed (nation.com.pk)
- Naked Oil (theoildrum.com)
- The Rise Of Dark Inventory In Housing And Oil (businessinsider.com)
Enbridge Inc. and Enterprise Products Partners LP haven’t just reversed the way benchmark oil flows in the U.S. They also changed the price relationship in the futures market by creating a temporary glut in the main delivery point for crude contracts.
The reversal of the 500-mile (805-kilometer) Seaway pipeline from the trading hub at Cushing, Oklahoma, to refineries on the Gulf Coast is intended to clear a supply build-up that depressed prices of West Texas Intermediate oil traded on the New York Mercantile Exchange. The shift is attracting more oil to Cushing to meet demand once crude flows change direction. Inventories grew 6.4 percent to 32 million barrels in the past seven weeks, according to U.S. Energy Department data.
Increased stockpiles depressed crude for next-month delivery, making it less expensive than later futures so that investors have to pay more for each successive contract. January oil traded in contango, or at a discount to August crude, on Nov. 22 for the first time in a month, following the action by Enbridge and Enterprise six days earlier.
“We expect the WTI contango to increase in coming months as Cushing inventories rise in anticipation of the reversal,” David Greely, head of energy research at Goldman Sachs Group Inc. in New York, said Nov. 23 in a phone interview. “After the reversal of the Seaway, these barrels would move down to the U.S. Gulf Coast, drawing Cushing inventories back down and reducing the contango.”
Oil for January delivery gained 0.8 percent to $97.53 at 12:46 p.m. on the Nymex. That compares with $97.68 for the February contract, a premium of 15 cents, down from 20 cents on Nov. 23.
Over the past five years, oil for front-month delivery was in contango versus the contract for the next month 82 percent of the time. The front month was in backwardation, or more expensive than the next month, on 18 percent of trading days.
U.S. crude rose relative to Brent for January settlement last week on the London-based ICE Futures Europe exchange as Brent prices dropped $1.38, or 1.3 percent, to $106.40 a barrel on Nov 25. Between 2001 and 2010, WTI traded at a premium of 87 cents a barrel to Brent, according to data compiled by Bloomberg. With an influx of oil at Cushing, that flipped to a record discount of $27.88 on Oct. 14. The gap has since narrowed 63 percent to $10.38 today.
Refiners on the Gulf Coast have been forced to pay higher prices for imported oil because of a lack of transport from Cushing. Oil used on the Gulf has been linked to Brent, which is the benchmark for more than half of the world’s oil.
The Seaway line will operate with a capacity of 150,000 barrels a day by the second quarter of 2012, according to Enterprise and Enbridge. Pump modifications expected by early 2013 will boost that to 400,000 barrels.
Currently, there is 1.64 million barrels a day of pipeline capacity into Cushing and only 995,000 out, according to Martin Tallett, founder of EnSys Energy & Systems Inc., a Lexington, Massachusetts, consulting company.
Additional lines may be needed to handle increased production. Canadian output will jump 37 percent to 2.16 million barrels a day in 2015 from 1.58 million this year, the Canadian Association of Petroleum Producers said in June.
North Dakota, which produces oil from the Bakken field, almost doubled output in the past two years and pumped a record 464,129 barrels a day in September, according to the state government. Production may grow to between 1.5 million and 2 million barrels a day within five years, Katherine Spector, a New York-based analyst with CIBC World Markets Corp., said Nov. 22 at The Energy Forum in New York.
The Seaway reversal is replacing Enbridge and Enterprise’s Wrangler pipeline proposal, which would have carried as much as 800,000 barrels a day from Cushing to the coast by mid-2013, Rick Rainey, a company spokesman, said Nov. 16.
Enterprise and Energy Transfer Partners LP said Aug. 19 they wouldn’t move forward with plans to construct a separate 584-mile line from Cushing to Houston.
The State Department announced Nov. 10 it was delaying a decision on TransCanada Corp.’s proposed Keystone XL oil pipeline to study an alternative route for the $7 billion project that avoids environmentally sensitive areas in Nebraska.
Further study “could be completed as early as the first quarter of 2013,” said the department, which has jurisdiction over the line because it crosses an international border.
“Because of all the euphoria around Seaway, we’ve lost a lot of other news in the background,” said Amrita Sen, a London-based analyst with Barclays Plc. “A lot of key pipelines have actually been canceled.”
For now, January futures on the Nymex are cheaper than every contract through June, when prices turn lower than previous months. Oil for delivery in December 2012 trades at $97.58 a barrel, falling to $93.50 the following December and $91.08 in the same month of 2014.
The months closest to delivery will remain in contango until next year because of ample stockpiles at Cushing and a slowing economy, Harry Tchilinguirian, the London-based, head of commodity markets strategy at BNP Paribas SA, said Nov. 25 in a phone interview.
Oil for sale at a later date is lower, reflecting the concern of hedge funds about bullish bets when there is “uncertainty in the global economic outlook,” he said.
- Seaway Pipeline gets turned around; oil markets react quickly (mb50.wordpress.com)
- Conoco’s Brent Control (mb50.wordpress.com)
- Enbridge, Enterprise Products To Reverse Seaway Crude Oil Pipeline (mb50.wordpress.com)
- Oil in New York Surges Above $100 on Reversal of Seaway Pipeline (mb50.wordpress.com)
- Brent WTI crude spread collapses on Seaway pipeline reversal (tradingfloor.com)