Crude Talk

"Patient, passive money" pushes futures past fundamentals, Kloza says

CHICAGO -- Anyone trying to analyze the soaring price of crude--which broke $110 for West Texas Intermediate (WTI) this week, the highest since 2008--has got to factor in financial traders and the "patient, passive money" that the commodity is currently attracting, an oil analyst told about 400 attendees at the NACS State of the Industry Summit yesterday in Chicago.

Tom Kloza (pictured), chief oil analyst with Oil Price Information Service (OPIS), Wall, N.J., described an "immense amount of participation" in the purchase of crude contracts in recent years, mostly from [image-nocss] algorithmic traders, hedge funds and 401(k)'s. He called them "massive, passive" investors willing to "park" millions of dollars for an extended period of time.

An indication of this is how much of the action and media attention goes to WTI trading on the NYMEX vs. overseas trading with Brent crude oil futures (that are more closely tied to actual supply). "It's not connected to real price," he said. "But the [NYMEX] is...where most of the action is."

The markets currently are "bullish" on crude, in part because investment banks are painting a picture of impending supply shortages, Kloza said, showing examples of charts published by two such sources.

What exists, he said, is a "disconnect" between these projections and the motoring public. He said these so-called projections theorize that the nation's motoring public will react only when crude gets into the $130 to $180 per barrel range, with gasoline averaging $4.50 to $5 per gallon.

Kloza disagreed. "Gasoline is magical," he said, explaining that gasoline prices are on consumers' minds on a daily basis. "It's news, sports and gas prices. People pay attention to it."

Anyone who believes people won't be driving less is "not paying attention," he said. "Demand destruction," as he called it, has been evident in just the past year. "They don't realize the emotional, magical effect of gas."

He did predict that gasoline would go higher going into the spring, possibly rising over $4 per gallon nationally, with refinery turnarounds and other seasonal events about to take place.

Then almost as an unexpected caveat, Kloza suggested the idea of "catastrophic insurance," saying, "at any moment, anything could hit...[unrest could reach] Saudi Arabia...I could be the first to predict $7 gas or $330 crude."

If fuel buyers bought any given amount of crude for 2013 delivery at $100 per barrel, it might act as a cushion for any unpredictable series of circumstances. "It's like Jenga," he said, referring to the game of small, stacked rectangles of wood that players pull out one at a time trying not to make the tower fall. "There are 10 magical pieces, that if you take out, it collapses."


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