Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

The terrorist attacks in Paris were bound to ripple through the oil market. But ripple is all they did -- and investors should focus on the brevity of the impact, rather than the impact itself.

The chart at the right shows just how quickly the fear premium rose up and then dissipated in the oil futures market:

The Panic Trade
Bloomberg
Intraday times are displayed in ET.

It bears more than a passing resemblance to this chart from early October:

We've Been Here Before
Bloomberg
Intraday times are displayed in ET.

Back then, the price spiked in part because Russian jets, like French jets today, were letting loose in Syria. Just as quickly, the market recognized that, while conflict in the Middle East always carries the risk of escalation, Syria isn’t a big oil supplier, especially now. Thoughts of Cold War confrontation gave way quickly to more prosaic concerns, like the implications of September’s weak U.S. payrolls numbers. 

This time around, there wasn’t any particularly bearish economic news to take oil down again. All the market had to do was remember the crushing weight of inventories pressing down on prices. U.S. supply is rolling over ever so slowly, and the International Energy Agency said on Friday that record stockpiles of around 3 billion barrels in the developed world “offer an unprecedented buffer against geopolitical shocks or unexpected supply disruptions.” 

At this point, the bigger worry for oil investors isn’t whether there will be enough supply, but whether there is enough storage capacity around to absorb unused barrels. Take a look at this chart:

Oil's Steep Hill to Climb
Bloomberg

That shows the premium at which the West Texas Intermediate 12-month futures contract is trading above the front month. The wider that spread, the more bearish the signal, as demand for oil in the near term is clearly depressed relative to barrels to be delivered further out. Notice that the premium is getting back to where it was in August, when spot prices dipped below $40 a barrel.

Why is demand for barrels so weak? Because the refiners that buy them aren’t making as much money from processing them. The 3:2:1 crack spread -- a proxy for refining profit margins -- has collapsed since the summer as growth in gasoline demand has started to slow after the initial burst provided by lower prices. The chart below tells the story:

Cracked
Bloomberg

The oil market has been bound up with geopolitics and the threat of conflict for a century. More prosaic factors of supply and demand prevail today, though. The fleeting nature of Monday’s fear trade, despite the shattering events of Friday and their aftermath, is the real story here.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net