The Oil Contango

Enrico has been studying the oil futures market, and learning a lot.  Well, he must confess, everything he knows about this, he has learned in the last two weeks.

Oil futures are a contract to take delivery or make delivery of oil at a specified date in the future.  Unlike options, the buyer or seller of the contract is obliged to fulfill it.  “Take delivery” can mean settling with cash or with a longer dated future contract.  In other words, if one contracts to buy 1000 barrels of oil on March 15, 2009, at $44 per barrel, and the spot price for oil at that time is $40 per barrel, the buyer of the contract can simply pay the seller of the contract $4,000, and be done with it.

Normally, you’d expect the price of oil in the future to be roughly the sum of today’s spot price, plus the cost of storage of the oil until that point in the future.  In other words, if the spot price today is $40, and it costs $1 per barrel per month to store it, you’d expect the futures price one month hence to be very close to $41.  The reason for this is simple to understand:  if the future price is much higher than this, everyone will buy oil and store it to make a risk-free profit.  This ought to force the prices back to the point of this equilibrium.

It is typical that oil futures are higher than the spot price.  This is called a “contango” market, from a Latin root word which also gives us “contingent,” denoting the contingent future delivery aspect of the futures contract.

Well, right now, the spot price for West Texas Intermediate is about about $41.70, and the price of the futures contract that settles roughly mid March 2009 is about $47.  This is a SUPER contango.

As best Enrico can determine, the problem is that all available oil storage in North America is completely full.  Thus, the normal market mechanism to bring these two prices closer is going haywire.  It does, of course, still reflect the sum of the spot price and the price of storage, but the price of storage has become comparatively astronomical, even if you can find it.  People are renting tankers to store oil.  It is a no brainer:  buy at $41, sell at $47, make $5-6 per barrel in one month.  IF you can find storage.

Enrico guesses that another issue may be that the usual suspects who use their capital to perform this public service of market efficiency may be temporarily absent from the market due to an embarrassing but purely temporary problem of liquidity.  These days when the phone rings on Wall Street you can be sure it is either a margin call or a call to come identify the body of another trader who has somehow tumbled to his death from a great height.

Here’s another oddity:  until 2007, the price of North Sea Brent, which is the Europe-traded comparable grade of crude to West Texas Intermediate, was typically a few dollars a barrel cheaper than WTI.  Right now there is a $6 premium for Brent.  This is very strange, because oil can be shipped to the market delivery point for Brent for waaaaay less than $6 per barrel.

Enrico frankly doesn’t know what’s going on, exactly.  Certainly this is an odd situation.  Usually, these types of oddities are resolved with a relatively high degree of drama.  Enrico is NOT suggesting some kind of trading maneuver.  He thinks he’d be taken out and shot if he did that.

But it is certainly interesting.

The pleasures of well seasoned firewood

Enrico really enjoys his smoking porch.   He has an outdoor fireplace.  There is nothing so enjoyable as a fire of well seasoned oak.  The cats and the toy schnauzer also seem to recognize the virtues of a blazing fire on these nights when the artic blasts overwhelm the warm moist gulf air.  The domestic beasts don’t seem to value the cigar smoke so much, but of course, they are chattel animals and so their views must be weighed appropriately in the balance.  Enric does not insist that they smoke.

Enrico recommends Stanley, who runs a firewood stand on the feeder of the Sam Houston Parkway, just south of  Baseball USA.   Stanley lives in Columbus, Texas, and is willing to deliver orders of a face cord or more.  His phone number is 713-560-3262.

You can also drop by his stand and load up all you can carry.  His operation is on the east side of the Sam Houston parkway, just north of Hammerly, just south of the entrance to Baseball USA.

Cautiously gratified by appearance of rational thought and open mind

Enrico is down with his favorite ratsocrat columnist.  He is cautiously gratified by Obama’s apparent lack of stunningly hilarious hypocrisy and by his apparent lack of mindless adherence to the typical ratsocrat tactic of looting the treasury to keep the nation’s sans-culottes in perpetual peonage by making them wards of the state.

Ok, so it took him a while to get disgusted with all the tax cheats parading through his office, and he still hasn’t kicked Geithner to the curb, but he’s coming around.

The “stimulus” package passed by Madame Squeaker’s HoR (what an apt acronym!) was simply a dump truck loaded up with every single ratsocrat spending scheme from the past twenty years.  I heard Madame Squeaker being intervewed by a right-wing media personality, can’t remember which one, who asked her to explain how the provision for spending on a program to prevent sexually transmitted diseases was a stimulative response to the recession.  Madame Squeaker said “I will tell you EXACTLY how it is stimulative!” and then launched into a lengthy discussion of the merits of preventing STDs, and NEVER EVER mentioned any argument of any kind regarding the economic, recession-busting necessity of this scheme.

So, Madame Squeaker is just a friggin’ moron.  She’s the kind of moron who believes everyone else is as moronic as she.  Why couldn’t she just say, “Well, of course, a plan to prevent STDs is not in any meaningful way stimulative, but we won the election, and we believe in this program, and so what’s your point, you right-wing dog?”

Then, Enrico would be forced to write a gushingly fawning review of Madame Squeaker, instead of pointing out her obvious intellectual shortcomings.

But, there is reason to be optimistic that President Obama may be inclined to objectively assess the economic, recession-fighting merits of individual programs in the bill.   How about that?

Finally, I must reiterate, in reference to my favorite ratsocrat columnist, that I have never in my life read any writings on any topic that as clearly evoke the writer’s urgent need of a sound rogering.

Pressure on the Eurozone

The FT reports that the Dutch Finance Minister has gone public with criticism of the UK government’s recent cut in its value-added tax rate, equivalent to a sales tax, from 17.5% to 15%.  While the UK technically has the right to do this, this move puts a lot of pressure on the other EC countries to do the same.  Although the UK is not on the euro, this move also raises the prospect of euro countries competitively manipulating tax rates.  What other levers can an individual European country pull?  If the Euro currency survives until 2011, I guess we can conclude it is pretty secure, but the next two years are going to be a painful test of the single Euro currency.

By the way, it is so hilariously and totally in keeping with national stereotypes that it is the Dutch minister who is complaining to all who will listen about this move by the UK.  You will never be kept in the dark about a grievance being harbored by a dutchman.

The inevitable relocation of Barack Obama to the land of reality

There is an inherent built-in protection in our system against the wilder brand of presidential campaign rhetoric:  eventually the successful candidate has to face Executive Branch employees, both his own appointees, and career civil servants, and give them orders to, for example, abolish the IRS, or abolish the Department of Commerce, or close the Gitmo prisons, or end the practice of rendition.

“Well, Mr. President, I hear you say you want to close the Gitmo prisons, but here are a few problems we have to deal with…”

I really like this analysis of new President syndrome.  It could easily be tweaked to apply to Bush 43.

The LA Times reported yesterday that Obama signed an executive order authorizing the CIA to continue rendition.

The London Times reported a couple of weeks ago that Obama authorized drone missile strikes in Pakistan, which apparently nailed 15 suspected terrorists.  This was one of his first actions as President, taking place about 3 days after his inauguration.

I haven’t heard Obama talk much lately about increasing taxes on the evil rich.   It just isn’t practical.  It would result in the Treasury getting less revenue, and it would prolong the recession.  Obama isn’t stupid, and he understands that these outcomes will hurt his chances for re-election.

Good riddance to Tom Daschle

Enrico is stoked that at least one tax cheat has been eliminated from Obama’s cabinet.  The notorious scumbag Tom Daschle is out.

Maybe Daschle is a victim of being the second tax cheat to come under scrutiny, and Obama decided that one tax cheat could be an innocent mistake, but two tax cheats begins to look like carelessness.  Maybe Rahm Emanuel sees Daschle for the passive aggressive psycho that he is.  Maybe Obama had heartburn over the somewhat bigger amount of tax cheating, avoided taxation which apparently reaches six figures.

Daschle was the psycho innovator who decided during the Bush administration that the ratsocrats should be entitled to block judicial nominees, by voting against cloture.  Enrico found this stance highly objectionable.  The president is entitled to nominate whomsoever he chooses to the courts, and the Senate is entitled to vote yea or nay.  By gentleman’s agreement, at this time, 60 votes in the Senate were (and still are) required for cloture.  It is very rare for Senators to vote against cloture on bringing appointments for the courts to the floor.  Under Daschle’s regime, it was SOP for the ratsocrats.

His innovative technique brought the Senate to the brink of the nuclear option, a rules change to require only a simply majority for cloture.

Enrico made the maximum allowable contributions to the campaign of John Thune, and, thank god, Thune defeated Daschle, and the Senate was rid of this poxy infestation.

Daschle is corrupt on so many levels that he really belongs in the pokey, and I hope that’s where he winds up.  It wouldn’t surprise me at all to hear that Obama’s team has detected Daschle’s pattern of larceny and payoffs, and decided that they don’t need this kind of trouble.

Good riddance to this scumbag!  You’ll look good in an orange jumpsuit!