Tuesday, May 20, 2008

Pickens and Speculative Hype

NYMEX Oil Complex Roars Higher on Speculative Hype; We Compare Hype to Reality

May 20, 2008
By John Troland, Tom Waterman
Oilintel.com


All records fell again today as speculators drove the oil markets to new heights after T. Boone Pickens added his two cents to the Goldman rally. Speculators were only too happy to oblige.

The NYMEX June crude, which expired today, along with the gasoline and heating oil contracts roared higher, setting new all time highs and settles.

There are few real reasons for today's rally other than to say this is how the commodity speculators have been playing the energy markets for about four years, and never more pronounced than since the first Goldman rally back in December drove prices to within an eyelash of $100 per barrel.

The standard reasons are as numerous as they are irrelevant. A weak dollar, demand in growth areas such as China, India and the Middle East, geo-political concerns regarding potential supply disruptions in producer countries Iran, Iraq, Nigeria and Venezuela and so on.

Today's rally began early in the morning after T. Boone Pickens was interviewed on CNBC and affirmed last week's predictions by Goldman Sachs' analysts that prices for crude would hit at least $150.00 by year's end. It should be mentioned that at one point in the interview, Mr. Pickens had to admit that he was quite long some NYMEX energy contracts such as crude oil and natural gas. As anyone that heard the full interview knows, these types of predictions are self serving, and are the root cause of current runaway prices.

It's our opinion that this is just another example of what's going on in the energy and commodity markets and yet politicians are helpless to do anything about it.

Maybe it is time for Washington to step in and put the brakes on speculative trading. We don't suggest eliminating speculation, merely limiting the amount of influence it now has. Today, Congress was holding hearings about speculation, but there were probably enough smoke and mirrors in the room to at least deflect what damage is being done as a result of a market that escalates on a whim. We don't have much confidence that Congress will get deep enough into the matter to suggest any way out. They need to hire specialists to watch the markets on a day-to-day basis for about a month and report back. Unfortunately, nobody is doing that currently.

While there is truth to the argument that oil resources need to advance in order to satisfy rising energy demand, it is has already reached the point where demand for those resources is slowing down. It is also at the point where many other alternatives are suddenly more viable.

If current fundamentals mean anything at all, the crude oil glut just continues to expand, as do gasoline supplies. The slow U.S. market is backing up gasoline in Europe, where demand is not exactly flourishing either. This is supposed to be the spring gasoline rally but it has become the diesel and crude oil rally instead. By this time in a "normal" year, there would have been many more millions of barrels of gasoline flowing into the U.S. from Europe.

While the total amount of imported gasoline is down by less than 1.0% (it's actually down 0.4%), the actual volumes are more dramatic. On average since the beginning of the year, the U.S. has imported about 4,000 barrels per day less gasoline than a year ago. In total, it's a little more than a half million barrels of gasoline that has not arrived in U.S. ports this year. Yet refiners have not been running at rates seen in normal years and gasoline stocks remain well above last year.

In total, this tells us that we're probably right about how gasoline demand is going to fall by 1.5% to possibly as high as 2.4% this year. That tells us we will need a lot less crude oil this year as well.

Diesel inventories are admittedly low in Europe, parts of Asia and South America due to an extended spring maintenance season in all regions of the world. In the real world of oil, that is a temporary situation as refiners will surely start building excess distillate supplies if for no other reason than they are worth more than gasoline at the moment. What is not true is that demand for diesel is soaring. Quite the contrary, diesel demand is slowing down perhaps faster than gasoline, which will shorten the period where there is a perceived tightness.

Here in the U.S., there are cargoes slated for export to various locations, particularly Europe and South America, as refiners, faced with lower profit margins at a time when margins should be the highest of the year, are purposely churning out more diesel.

Are gasoline inventories in danger? Highly unlikely given the fact that U.S. supplies are still well above last year while demand will be under year ago totals.

Sunday, May 18, 2008

Goldman Sachs Revision

Oil Higher On Goldman Sachs Revision
May 16, 2008
By John Troland, Tom Waterman
OilIntel.com

The June NYMEX crude, RBOB gasoline and heating oil contracts are expected to open higher this morning as it appears the large hedge funds and financial trading house have returned to the buy side of the market in front of the weekend. We believe that after yesterday's volatile trading session where prices jumped early, collapsed at midday and rallied hard late in the day, speculators have returned not to balance positions but to make another run at record prices.

To the best of our knowledge there is little market moving news to have prompted a sharp move higher other than the usual hype and fear mongering about supplies being inadequate to keep up with demand, plus another market-moving prediction by none other than Goldman Sachs.

Goldman Sachs told clients that they have revised higher its New York crude-oil price forecast for the second half of this year indicating it will average $141 a barrel in the second half of the year, up from its previous forecast of $107. The company said prices will rise further in 2009, averaging $148 a barrel, the bank said. We suppose that the firm was a little nervous about their longer-term options positions, given the fact that fundamentals are essentially toilet-bound.

So there you have it, another Goldman rally starts today as no doubt all the speculators will pile on this one and prices have nowhere to go but up.

These "geopolitical tensions" and supply constraints are bogus as OPEC supply and non-OPEC supply will rise this year and in case they haven't noticed, demand is weakening and will weaken further, especially as Asia starts to feel the effects of a global economic downturn.

One of the latest concerns mentioned is the catastrophic earth quake in China will increase demand for diesel fuel and put a greater strain on supplies that the bulls claim is at a breaking point. Our opinion is that these reasons we hear every day are just hype, used to cover up the real reason prices have risen for nearly four years.

Our first look at today's open outcry session suggests prices have a good chance of repeating yesterday's trade action with prices moving in both directions, however as the major speculative firms get to the office this morning, they will be jumping on this bandwagon.

Wednesday, May 14, 2008

Oil's Murky Math

Oil's Murky Math
by Peter Coy
Business Week
May 13th, 2008

Where are we headed: Up to $200 a barrel? Down to $80? With little good data on supply or demand, oil's next price move is anyone's guess


At around $125 a barrel, crude oil has more than doubled in price since the end of 2006. How is it possible that the vast majority of government forecasters, stock analysts, economists, traders, and journalists who follow the oil market failed to foresee this? Moreover, how can it be that even today, the bulls and bears on oil are extremely far apart, disagreeing not only on the oil outlook but even the present situation?

The answer is simple. You can't predict what oil prices are going to do even in the short-to-medium term unless you have a good handle on the forces of supply and demand. And that requires thorough and reliable data—which don't exist. Regrettably, the world oil market is no more transparent than a fragrant barrel of extra-heavy Orinoco crude. And the situation is getting worse because the world's fastest-growing oil consumer is also one of the most opaque: China.

Contradictory Predictions


The scarcity of good global data is a key reason why it's impossible to know for sure whether the next "super-spike" in oil in the coming three or four years will be up to $200 or more…or down to $80 or less. Even though the statistics aren't exact, they're all anyone has to go on, so they still have an enormous impact.

On May 13, for example, the price of crude oil rose to a record close of $125.80 on the New York Mercantile Exchange after the International Energy Agency announced its estimate that inventories of distillate fuels such as diesel and heating oil in developed nations fell 6.7% in March from a year earlier. If inventories really are shrinking, it should be bullish for prices because it indicates that production isn't keeping up with consumption. That's certainly the viewpoint of oil bulls like Matt Simmons, president of Houston investment bank Simmons & Co. International. Says Simmons: "We have lousy data, but what data we have is somewhat scary." He sees prices hitting $200 to $500 in six months to four years.

But other experts say oil inventories appear to be at least adequate. While agreeing with Simmons that the oil market is "data-famished," analyst Edward Morse of Lehman Brothers (LEH) concludes in a May 9 report that "fundamental misperceptions" have caused prices to overshoot. He thinks crude could fall to $83 by next year, a one-third drop.

No Transparency


Chalk up the poor underlying data to a combination of gamesmanship and incompetence.

Oil statistics are reasonably good for the wealthy nations that make up the Organization for Economic Cooperation and Development (OECD), although even in data-rich countries like the U.S. there are unexplained discrepancies. But the rich countries matter less and less because their production and consumption are both roughly flat.

Outside the OECD, where the growth is, countries either don't want to divulge data for strategic reasons, or haven't yet developed the systems to collect and compile the necessary numbers. The Joint Oil Data Initiative, an organization launched jointly by producing and consuming nations in 2002, is supposed to improve matters. But the group acknowledges on its Web site that "the database is still far from perfection."

China, which has grown into the world's second-biggest oil consumer after the U.S., stands out as a particular problem. Just ask Eduardo Lopez, who tries to dope out the China market as the senior demand analyst for the Paris-based International Energy Agency, an affiliate of the OECD. He says China does not report demand, leaving him and others to figure it out from data on production, trade, and inventories. What's more, he says, "there are thousands of so-called teapot refineries all over China" that are technically illegal and therefore left out of China's official statistics.

Making his job even more trying, China appears to be creating a strategic stockpile of oil, but has never acknowledged it, Lopez says. If Lopez and others are underestimating how much oil China is squirreling away, then they're inadvertently overestimating true global consumption, and vice versa if they've overestimated China's stockpiling.

Speculation, Too


Many other countries aren't much better. Lopez says Russia produces "awful data" and demand statistics are patchy in countries like India and Indonesia. On the supply side, OPEC nations don't report their output reliably, sometimes because they don't want to officially admit they're producing above OPEC's quota. That leaves the agencies relying on unofficial "tanker trackers" like Lloyds Maritime Information Services and Petro-Logistics SA, a tiny company that operates upstairs from a grocery store in Geneva, Switzerland. OPEC members also jealously guard critical data about when new fields will begin production and how quickly existing fields are declining, says Matt Cline, an economist for the U.S. government's Energy Information Administration in Washington.

What makes good information so important in the oil market is that both the supply and the demand for oil are extremely inflexible, especially in the short term. That means even a small, unanticipated shortfall in output—from, say, strife in Nigeria—or a bigger-than-expected rise in consumption can send prices through the roof. On the other hand, prices can plummet if demand growth drops because of an economic slowdown or production jumps because some delayed project finally comes on line.

One indication of uncertainty is the extreme range of bets being made in the oil options market. On May 13, bulls were willing to pay around $1.40 per barrel for a "call" option that will pay off if oil goes over $200 a barrel by next February. Bears, meanwhile, were paying about the same amount for a "put" option that will be in the money if oil goes below $84 by then. Larry Chorn, chief economist of Platts, the McGraw-Hill Companies' (MHP) energy information unit, says the actual costs incurred in producing the most expensive oil is only around $70 or $80 a barrel, meaning that about $50 of the current price represents "the market's risk premium plus speculation."

In other words, there's a big slab of unknown built into the price of oil. Lots of people will confidently predict where prices are headed next, but most of them, including the bulls, have been wrong more than once. Truth is, the world is almost as starved for information as it is thirsty for oil.

Thursday, May 8, 2008

Barclays Raises 2008 Crude Oil Forecast

Barclays Raises 2008 Crude Oil Forecast to $116.90
By Christian Schmollinger and Sophie Tan
May 8 (Bloomberg)


Barclays Capital raised its forecast for U.S. crude oil prices this year by 16 percent, citing stronger demand from China and the Middle East and declines in production at non-OPEC countries.

Barclays increased its average estimate for West Texas Intermediate, the physical grade for oil futures traded on the New York Mercantile Exchange, to $116.90 a barrel from its previous prediction of $100.80.

``Non-OPEC supply remains weak and continues to under perform dramatically relative to consensus expectations,'' Barclays said in a May 7 report, led by commodity research analyst Paul Horsnell.

China, the world's fastest-growing major economy, has more than doubled oil use since New York crude dropped to this decade's low of $16.70 a barrel on Nov. 19, 2001. Record prices have failed to stem rising consumption in developing nations.

Crude futures for June delivery in New York rose $1.69, or 1.4 percent, to settle at $123.53 a barrel yesterday, the highest close since trading began in 1983, on signs that the U.S. economy is improving and may spur energy demand.

``We are in a phase during which the nature of the fundamentals is being revealed by the ascent of prices,'' the report said.

Supply Response

The supply response from oil-producing nations outside of the Organization of Petroleum Exporting Countries has been weak, with Russia ``having been added to the already-significant list of supply disappointments,'' the report said.

The drop in oil demand in the 30 developed nations, including the U.S., Japan and Germany, represented by Paris- based Organization for Economic Cooperation and Development ``has not been consistently large enough to bring global demand growth much below 1 million barrels a day,'' the report said.

``Non-OECD demand growth remains robust, most particularly China, Middle East and India,'' Horsnell said. ``The decline in OECD demand started in 2005 hasn't accelerated significantly.''

Alternative energy sources aren't being developed fast enough to stop fossil fuel prices from going higher and Barclays estimates the new investment flow into commodity indexes during the first quarter is $2 billion, which has gone mostly into agriculture and precious metals, not energy, the report said.

``Biofuels look set to be smashed against political rocks, oil sands lack scale and are being enveloped in carbon and other issues,'' the report said. ``There is no evidence for the price rise this year being due to speculation, exchange rates or flows of funds into commodities.''

The push to increase biofuel usage as a means to reduce carbon emissions has driven prices for staple foods such as rice and wheat to records as farmers convert more land to grow palm and soy beans to benefit from government subsidies.

Global food prices rose 57 percent in March from a year earlier, according to the United Nations. The World Bank says civil disturbances may be triggered by rising food prices in 33 countries. Rice, the food staple for half the world, has more than doubled in the past year.

Tuesday, May 6, 2008

Murti Says Oil Likely to Reach $150-$200

Goldman's Murti Says Oil `Likely' to Reach $150-$200
By Nesa Subrahmaniyan
May 6 (Bloomberg)


Crude oil may rise to between $150 and $200 a barrel within two years as growth in supply fails to keep pace with increased demand from developing nations, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a report.

New York-based Murti first wrote of a ``super spike'' in March 2005, when he said oil prices could range between $50 and $105 a barrel through 2009. The price of crude traded in New York averaged $56.71 in 2005, $66.23 in 2006 and $72.36 in 2007. Oil rose to an intraday record of $122.49 today on speculation demand will rise during the peak U.S. summer driving season.

``The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,'' the Goldman analysts wrote in the report dated May 5.

A report yesterday showed U.S. service industries expanded in April, signaling higher energy use. The Institute for Supply Management said its index of non-manufacturing businesses, which make up almost 90 percent of the economy, grew for the first time since December. China is increasing refining capacity and boosting imports to meet rising demand for the Olympic Games.

U.S. gasoline demand typically climbs going into the summer season when Americans take to the highways for vacations. The peak-consumption period lasts from the Memorial Day weekend in late May to Labor Day in early September. Monthly fuel sales were the highest during August in five of the last six years, according to data from the Department of Energy.

China Consumption

China, the world's fastest-growing major economy, has more than doubled oil use since New York crude oil dropped to this decade's low of $16.70 a barrel on Nov. 19, 2001. Record prices have failed to stem rising consumption in developing nations, with demand led by China, India and the Middle East.

Price forecasts for spot U.S. benchmark West Texas Intermediate crude oil for 2008 to 2011 were revised higher by Goldman. The 2008 price estimate was raised to $108 a barrel from $96, the 2009 forecast to $110 from $105, and 2010 to 2011 estimates are projected at $120 from $110, the analysts including Murti and Brian Singer said, citing slowing supply growth in Mexico and Russia, and low spare production capacity in OPEC.

Deutsche Bank AG Chief Energy Economist Adam Sieminski, who forecasts oil averaging $102.50 next year, today said Asian demand and limited extra supply will keep pushing oil to record levels. There's a ``huge risk'' that prices will rise to a level, perhaps $200, ``when demand finally collapses because ordinary people can no longer afford to burn as much energy as they are burning now,'' Sieminski said in an April 25 report.

Threats to Supply

Oil has also rallied amid a dispute between the U.S. and Iran regarding the Persian Gulf oil producer's plan to develop nuclear energy.

In Nigeria, Africa's biggest oil exporter, militants have attacked oil installations and kidnapped workers since the beginning of 2006, forcing Royal Dutch Shell Plc to halt output.

In Venezuela, production has slumped to about 2.34 million barrels a day from almost 3 million barrels a day in 2002, according to Bloomberg's estimates, before President Hugo Chavez fired almost 20,000 workers who had closed the state oil company in an attempt to overthrow the government.

Iraq's oil production has yet to reach levels attained before the U.S.-led invasion of 2003 as the country struggles with sectarian fighting and attacks on its energy infrastructure.

Mexico's production has fallen below 3 million barrels a day since October as Petroleos Mexicanos, the state-owned oil company, failed to compensate for a 30 percent drop at Cantarell, its largest field, which accounts for 40 percent of output.

OPEC Capacity

``There are supply constraints with many producers, especially from non-OPEC struggling to find new reserves and China and Middle East demand keeps growing,'' said Victor Shum, senior principal at energy consultant Purvin & Gertz Inc. in Singapore. ``The fundamentals are prompting investors to get into oil in a big way and all that points to higher prices.''

Spare production capacity of the Organization of Petroleum Exporting Countries is low and the group's exports may fall because of ``lackluster'' supply growth and rising domestic consumption in member countries, the Goldman analysts said.

``Non-OPEC supply is struggling to grow, with notable declines being seen in Mexico and Russia showing signs of rolling over following an extended period of rapid growth,'' said Goldman, the world's biggest securities firm by market value.

Prices are also poised to gain as major oil-exporting countries restrict foreign investments, limiting supply growth, while demand from developing countries, or ``non-OECD'' nations is rising on economic expansion and power shortages, prompting higher demand for gasoil and fuel oil, the Goldman analysts said.

`Super-Spike'

Crude oil for June delivery was trading at $122.18 a barrel, up $2.21, on the New York Mercantile Exchange at 12:22 p.m. Futures yesterday rose to $119.97, the highest closing price since trading began in 1983.

``The core of our super-spike view has been that a lack of adequate supply growth coupled with price-insulated non-OECD demand growth'' is leading to higher prices, the analysts said. That could result in a ``sharp correction in oil demand,'' the Goldman analysts said.

Crude oil's increase above $100 a barrel was partly because of the dollar's decline against the euro, which boosted oil prices because it made commodities cheaper for buyers outside the U.S. and attracted investors as a hedge against inflation. Oil in New York touched $100 a barrel on Jan. 2.

The U.S. currency has declined more than 5 percent against the euro so far this year.

Members of OPEC, which supply more than 40 percent of the world's oil, have said supplies are adequate and blamed speculators for pushing prices up to records. The producer group won't consider raising output before it meets in September as the market is well supplied, Qatari Oil Minister Abdullah al-Attiyah said on May 2.

There's a fundamental misperception that so-called speculators are driving prices to unjustified levels, the Goldman analysts said. ``Unfortunately, we do not think the energy crisis will be solved by finding and punishing the big bad speculator.''

Commodity investors, the Goldman analysts wrote, are ``helping to solve the energy crisis'' by speeding up the process for oil companies to spend more on energy projects and at the same time encourage efficiency.