Publications: Notes at the Margin

End-of-Year Thoughts (December 30, 2019)


This report presents our view of the end-year market situation. The issue is complete with the usual summary statistics on excess returns to storage, open interest, and refining margins appended at the end.


Here are some end-year thoughts.

  • Investors have not embraced the rise in spot crude prices. Forecasts of future crude prices derived from the BP Prudhoe Royalty Trust (BPT) continue to anticipate very modest year-over-year increases.
  • IMO 2020 has not yet had a significant impact on prices. This does not mean the impact will be absent. As we learned in 2008 with the rapid shift to ultra-low-sulfur diesel, effects can be delayed until inventories are drawn.
  • The first losers from IMO 2020 could be US crude producers. Many tanker owners will rely on low-sulfur fuel because they did not install scrubbers. The cost of shipping oil from the US to Asia will spike as prices of very low-sulfur fuel rise. Producers will see prices offered for US crude decline to offset the higher shipping costs.
  • The impact of higher shipping costs is apparent in the excess returns to storage. Excess returns point to a very tight Brent-associated market but not such a tight US crude market.
  • The economic model used to describe fracking may be wrong. After watching frackers for several years, it is becoming apparent to us that there is little difference between frackers and farmers. We note the parallels below. Sadly, for investors, neither industry generates significant profits.


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