Publications: Notes at the Margin

The Apparent Failing of KILL (October 21, 2024)

 

A 1996 Newsweek article began with this line:

 

KILL! SAYS THE SIGN IN the oil-trading room at Mobil's Fairfax, Va., headquarters. KEEP INVENTORIES LOW AND LEAN.[i]

 

The KILL slogan summed up what Mobil traders were thinking almost thirty years ago. The Newsweek piece focused on the world oil industry’s restructuring, with the author, Michael Hirsh, chronicling the refinery closures and layoffs sweeping through it then.

 

Missing from his analysis was any suggestion that traders understood that low inventories led to backwardation that boosted spot prices and refining margins. The Mobil traders, though, were well aware of this. Indeed, by that year, many leading trading firms knew of it.

 

Four years later, as crude prices declined toward $10 per barrel, the Saudi oil minister, Ali Naimi, showed his understanding of the relationship. Naimi pushed oil-exporting countries hard to reduce production to force global inventories down. His strategy worked. Stocks fell, and prices rose.

 

OPEC+ repeated this tactic in 2020 after the March price war drove prices way down. The member countries—along with, according to the Federal Trade Commission, some US producers—cut output to diminish inventories and boost backwardation and prices, once again proving the KILL strategy’s effectiveness.

 

In recent months, however, the approach seems to have failed. This failure was made evident by the distillate market data. Initially, we planned to focus this report on diesel, gasoil, and heating oil markets. However, as we prepared our analysis, we noted the apparent reluctance of oil industry firms (refiners, marketers, and maybe traders) to hold inventories. If this tentative finding proves correct, then the prospect for oil prices going forward is grim. Indeed, the oil market might now be on the path that took US spot natural gas prices to around $15 per barrel in oil equivalents.

 

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