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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (8476)	2/23/2004 1:29:50 PM
From: ild	Read Replies (2) \| Respond to of 110194

Date: Mon Feb 23 2004 13:25 trotsky (crude oil backwardation) ID#377387: Copyright © 2002 trotsky/Kitco Inc. All rights reserved it is not true that crude is ALWAYS in backwardation - in fact, contango is the NORMAL state of affairs. however, it has been in backwardation for over 3 years now. as WilE has said, backwardation indicates a shortage in the here and now - as well as an expectation that prices will be lower in the future, in fact so much lower that storage and opportunity costs will be more than recouped. normally, when a market goes into backwardation, one can expect further upward pressure in prices in the short term, followed by lower prices in the medium to long term. this has not been the case with crude oil over the past three years however - the 'short term shortage' somehow never ended. there is however a perennial consensus that it WILL end - there are plenty of oil bears on Wall Street in fact. their latest gamble was the supposed flow of Iraqi oil - but methinks there is far less oil leaving Iraq now than under Saddam ( i don't believe the official data - the oil pipelines get blown up twice a week, so how do they get it out? recall that Iraq is STILL importing fuels from neighboring states ) . oil inventories in the West are so tight now that any appreciable supply disruption could send prices into orbit - oil demand is remarkably unelastic , especially in the short term. meanwhile, the futures contracts continue to confidently predict a fall in prices a few months down the road. consider in this context that OPEC's swing producer Saudi Arabia is extraordinarily vulnerable , in a technical sense. for instance, there is a network of customized pipelines in Saudi Arabia that would be very difficult to replace ( i.e. it would take some time to manufacture the spare parts ) if it should be damaged by the axis of evildoers. those are of course only holding still to the extent that the Saudis are paying them off...a situation that is difficult to judge from afar.