HOW OIL MARKET WORKS
THREAD FROM 2017 OPENING ON TWITTER
CRUDE OIL
With WTI crude oil creeping up to $60, here's again how oil market works.
There are 2 kinds of demand:
1) Consumption demand
2) Storage demand
The Consumption Demand is from business which makes FINAL USE of crude oil like:
- Refineries
- Plastics business
- Clothing industry
etc
The Storage Demand is from business which uses oil for Financial Purpose, NOT for Final Use
These businesses are called Intermediaries.
Their names are:
Vitol, Gunvor, Glencore, Trafigura etc, etc, etc.
They do not report their inventories, or rather they actually lie about their inventories.
So, oil is not sold from producer to intermediary, as Final Sale, it is sold as Change of Ownership from producer to intermediary.
Final Sale is when oil is consumed.
In reality, oil was transferred from underground to another underground storage onshore or offshore storage tanker.
Simply transfer of ownership, but not final sale.
These Intermediaries hold on to that oil by using it as Financial Collateral in Shadow Banking which recycles Eurodollars rehypotheticated in London, UK.
You might not remember, but there have been always rumors of "hidden oil barrels", which were always proven true.
In 2008 there were rumors of 200 million uncounted barrels.
Oil price collapsed from $120 to $40
In 2014 there were rumors of 200 million of uncounted barrels.
Oil price collapsed from $110 to $40.
Few weeks ago, IEA admitted that it had not counted 230 million barrels.
But, this time the price is $60, not $120.
So, Intermediaries are buying and NOT selling for final consumption use hundreds of millions of barrels of oil, because the oil is bonded as collateral for derivatives, rehypotheticated in London, UK.
But, 2 factors will force the intermediaries dump oil into the consumption market:
1) Margin calls from banks which have financed those purchases, as Intermediaries have no such amounts of money to buy oil themselves
2) World runs out of actual physical storage, or it is too expensive to pay for storage
3) Crude oil degrades biologically in storage (2-3 years) (this one added now, not part of twitter thread)
So, either way, Intermediaries will be forced sooner or later to dump hundreds of millions of barrels into the consumption market.
Which will make oil price collapse again, like in 2009 and 2014.
But, but, this time oil price is at $60, not $120.
When oil was $120 it collapse to $40.
Now at $60, it will collapse down to $10.
Oil could even go to $70, $80 or even $100 again.
But, but, it would mean that Intermediaries would have to store billions of barrels, not just hundreds of millions to achieve that.
The more oil is stored, the lower the priced will go once stored oil is dumped into the consumption market.
So, folks, my money is on $10 oil already.
I'll sell my short position between $10 and $20 per barrel
END OF THREAD
Comments
Post a Comment