The 6 month strip is now roughly at 47.50. FEB crude is 10 cents shy of 43.00. Energy equities are likely to have started watching FEB crude earlier this week, and have also likely been watching the 3 month and 6 month strips.
All of the dramatic price action in expiring JAN oil starting this week as it tanked below 40.00 was not, and should not, be regarded as "the price of oil." It was really an abandoned contract in a time of high inventories at Cushing and a super-contango along the strip.
Remember, NYMEX oil prices are always dragged in the direction of any gross excess or gross tightness. Gross excess of Heating Oil in JAN 2007 caused the whole complex to be pulled down. Now, crude oil inventories at high levels at Cushing OK are doing the job.
We have an antiquated system for pricing oil. It has at least as much to do with local infrastructure as anything else. If gasoline or heating oil builds up too high in NY harbor, then everyone in the country will "enjoy" some cheap prices until it clears. So too with Cushing OK. This is why, for example, after the hurricanes of 2005 price collapsed because crude built up at Cushing and at the LOOP as all the refineries were down and could not take oil.
However, this is all short-term. Historical work has shown that OECD inventories, not US inventories, are what really drives the global price of oil underneath the ebbs and flows of supply and demand. Accordingly, note that FEB Brent is trading at a premium of 1.50 to FEB NYMEX. What that tells me is that Europe is not experiencing a storage problem, and that the supply/demand balance at delivery points is in better shape.
The high inventories at Cushing, combined with the NYMEX discount to Brent, is telling the world "don't send us any more oil."
And that's what will happen, but, with a lag.
As for the energy equities, the price of oil and ng is practically washed free of their action. They are now trading as an asset class like other equities, in a context of interest rates and the value of their future stream of income.
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