Tuesday, January 12, 2016

How all the "experts" were wrong on oil and I was right.

I wrote this article almost one year ago. Jan 29, 2015.

What if oil doesn't go back up?.

"Yesterday I went over to find how much oil we had in floating storage. Because during the recession we had around 100 million barrels in floating storage. I was curious about this because we've been in contango for a few months. This is where people buy oil and store it to sell at a later date. I started wondering how much it costs to store this oil. I mean, how this could be cost effective? What if oil doesn't go back up very quickly?

In Feb of 2009 prices bottomed out at 43 bucks a barrel. If you can believe the above chart. I've read reports of oil getting to 35 bucks a barrel during that time, and this chart doesn't reflect that. By May of 2009 oil had snapped back to roughly 65 bucks a barrel. It took until Nov 2009 to get back to 85 dollars a barrel which is where oil was in the winter 2006.

Why do I bring this up? Because we are clearly floating in oil, yet the giant tankers they use to store this oil for future sale are only on third full. Self I said - how can we have the most oil we've had in 80 years, and the storage vessels are only a third full?

I think this only can be true if they don't expect a 2009 like rebound in the price of oil. If they don't want to risk storing this oil for sale later in the year, maybe they don't think oil will recover by the end of the year. In 2009 it sounded like a lot of people made a ton of money that way."

Oil prices are now lower than any time during the Great recession. Yesterday I read that one of the Fed members admitted they were wrong when they predicted low oil prices would be a boon to the economy. And I pretty much flipped out. I couldn't understand how someone like me could have figured this out and people who are being paid to know this stuff - didn't. And it isn't because I'm all that smart. I don't even have a college education. It was because I was in huge financial distress at the time.

You see - the whole time I've been alive, Silicon Valley has always been a safe haven for jobs. I've thought of moving from the state untold amount of times, but I never have because California has always been were the jobs are.

During the recession my two properties were down 50%, and I always expected Silicon Valley to pick up the slack as it had in all of the previous recessions. But everyone from California was moving to Texas for energy jobs. This was the ONLY area of growth anywhere to be seen in the US. And it was depressing. It went on so long even I told Mr S. we should just give up and move to Texas too. This was probably four years into the recession. Perhaps if my properties weren't underwater, maybe I would have eventually moved too. The people of Texas are the best. I lived there for a while. And I do love me some BBQ.

Also back during the recession traffic would always be savage around the Bay Area yet the economy still stayed in a dire shape. People clearly were NOT spending money, but they were driving places. Mr S. and I would be aghast at the disconnect. Where are these people going I would exclaim! In hindsight, gas was cheap and it got you out of your house to distract you from the crappy economy. But low gas prices never made one single difference to the economy.

You don't have to be professionally educated to figure out the world - you just have to pay attention. Especially in the bad times.


  1. Here's the part I don't understand. Last year, the avg price per gallon of gas was 2.12 Today it's 1.96. Not much of a decrease considering the fall in oil. Yesterday, I saw a station in SF charging $3.60. Seems like the refineries aren't having to slash prices, but oil itself is under a lot of pressure. One would think that if it were deflationary pressure that was dragging down prices that the refineries would have to play ball. If drivers aren't cutting back then why does no one want to bid on oil itself? Curious and curiouser. DF

  2. Yeah, I was a little surprised when I got to Vegas. They were in the high 2's. 2.75ish. When I drove across the US a couple of months ago the whole Northern route gas was about just about that price the whole way. The Southern route, gas was actually under 2 bucks across a large swath. So I expected that same pattern.

    I don't know if this is happening right now, because I haven't checked. But what I've observed previous times it looked like oil was going to take a huge tumble - all of a sudden "unexpected maintenance" starts popping up in the refiners. This has caused a bit of a lag. It happens with such regularity it started to make me laugh how predictable it was. Like I said, I'm not sure this is happening currently.

    All I know is that you can't even set oil on fire as they have in Libya to cause a bump. Now people are predicting 10 bucks a barrel. And I think they could be right after looking at Cushing today. Everybody better find a huge rock to hide under because this is going to get crazy. A lot of people are not going to survive.

    I'm actually a little surprised at how long this has taken to filter through. More like a slow motion train wreck. I think I started talking about this Oct of 2014.