Analysis of current economic conditions and policy
Wednesday Morning Oil SitRep
Brent front month future back to $90, as SoH reopening down, Bab el Mandeb traffic estimates down … a bit before 8am CT.
By October 1st odds.
Note that refined petroleum prices were already rising, as of yesterday:
2 thoughts on “Wednesday Morning Oil SitRep”
Macroduck
Just a notion about volatility. Inventory is often described as a “buffer”, by which is meant a buffer against wiggles in supply. In normal operation, a shelf full of cornflakes means you can keep selling cornflakes between deliveries from the cornflake factory. No need for short-term price adjustments to match demand to supply.
When inventories are low, the buffer is reduced. You can think of it as supply at the point of sale being more variable without inventory to smooth things out. You see where this is going? The one-day price swings on the brent price chart are historically quite large these days:
if returns to normal by October 1 means it is shut down until then (rather than say 35% of previous), then we are in a world of hurt. I have been surprised by the cost of gasoline and oil until now. it is elevated, but nobody, and I mean nobody, is pricing in physical scarcity. I thought we would hit physical scarcity in July, and was wrong. but I cannot imagine any scenario where the straights (both) are shut down until October and physical scarcity does not occur. the world is unprepared for what is to come, I am afraid. October means the gulf has been shut down for half a year.
Just a notion about volatility. Inventory is often described as a “buffer”, by which is meant a buffer against wiggles in supply. In normal operation, a shelf full of cornflakes means you can keep selling cornflakes between deliveries from the cornflake factory. No need for short-term price adjustments to match demand to supply.
When inventories are low, the buffer is reduced. You can think of it as supply at the point of sale being more variable without inventory to smooth things out. You see where this is going? The one-day price swings on the brent price chart are historically quite large these days:
https://fred.stlouisfed.org/graph/?g=1XMjN
if returns to normal by October 1 means it is shut down until then (rather than say 35% of previous), then we are in a world of hurt. I have been surprised by the cost of gasoline and oil until now. it is elevated, but nobody, and I mean nobody, is pricing in physical scarcity. I thought we would hit physical scarcity in July, and was wrong. but I cannot imagine any scenario where the straights (both) are shut down until October and physical scarcity does not occur. the world is unprepared for what is to come, I am afraid. October means the gulf has been shut down for half a year.