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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 (50470)	1/20/2006 2:51:03 PM
From: Wyätt Gwyön	Read Replies (3) \| Respond to of 110194

i don't know enough to give a very educated answer, but i have my suspicions: * heavy premium for low-sulfur (sweet) crude, which seems to have peaked--there may be zero spare capacity of this type of crude (i don't know enough about the percentage breakdowns of the different grades to know how much of an effect this is--maybe small, but perhaps surprisingly large) * in 2002, spare capacity was 6mmbpd; in 2003, 2 mmbpd; the last two years, under 1mmbpd much of the time. wtrg.com * the low spare capacity, combined with rising demand, increases susceptibility to "headline" events (Gazprom, Iran, bin Laden) * producers stopped or drastically reduced hedging last year, resulting in a shift on the futures strip from steep backwardation to mild contango * the contango encourages marginal inventory holding (in backwardation, inventory is a depreciating asset; in contango, an appreciating asset), so inventory rise is not surprising. i disagree with bearish inventory analyses which do not account for the historic shift to contango. Don Coxe has made some interesting comments about this.