Thursday, December 16, 2010

Oil: "The (not so) curious case of the 9.85m bbl crude oil draw" (and its $200 Billion hit to the U.S. economy)

Crude futures closed at $88.62 yesterday, their highest in a week. This morning the January contract is down 45 cents at $88.17.
Here's a twofer, first up FT Alphaville:
Wednesday’s weekly EIA oil inventory data is worth coming back to on Thursday.
Not only did the EIA report an exceptionally large and unexpected crude draw, it turns out the draw was the largest of its kind for this time of year since 1989.

The snaps via Reuters:

But, if you thought this was a bullish indicator for the oil market, it’s probably time to pause and reconsider.
As Stephen Schork of the Schork Report noted on Thursday, there’s not much evidence to suggest the barrels were drawn due to any real demand from the US refining system.
If anything, it seems, some of the barrels were slated for export out of the US:
It turns out that, as with last week, the breakdown is not that bullish. Of the 9.85 MMbbl draw, 91.55% (or 9.02 MMbbls) came out of the Gulf of Mexico (PADD 3). And considering that refinery utilization in the Gulf was more or less unchanged at 90.3%, and mogas inventories in the region fell 1.02 MMbbls, it does not seem those barrels were in high demand at refineries. On the other hand, crude exports rose 6.32% to 2.22 MMbbls/d, their highest point recorded not just for this timestep, but for any timestep.
Of course, if you’re thinking “since when has the US been a sizeable net crude exporter?” you’d be quite right to be curious. It’s not....MORE
And from ZeroHedge, yesterday:

WTI Crude Jumps By Over $2, Wipes Out $200 Billion In Annualized GDP In Under Two Hours
Following the earlier news from the DOE of a crude drawdown 4 times greater than expected, which happened to be the biggest weekly drawdown in 9 years, WTI has exploded by over $2 in the last two hours, and is once again threatening to take out the important $90 psychological barrier. What is the impact of this on the US economy? Oh just $200 billion in GDP. With a minus sign in front. And so, a substantial portion of the "benefit" from middle class tax cut extension has been eliminated almost entirely in just under 2 hours.
To wit:
Investors -- certainly U.S. stock investors -- would be wise to keep one eye on the price of oil, currently pushing $90 per barrel. Oil traded up 10 cents to $89.29 on Monday at mid-day.

And the reason is obvious enough: once again, oil is approaching the danger zone, from a U.S. GDP growth standpoint.

No one knows precisely at what point oil begins to substantially hinder consumer spending and slow commercial activity -- but this much is known: every $1 per barrel rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year.
This is all good though: it merely means the administration will battle future deficits by providing a $200 billion gasoline consumption subsidy. After all as democrats and republicans now agree, the only way to battle deficits is to spend much more.

That's what a short squeeze looks like.