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Countdown to $50 oil (4)

by HiD Fri Sep 8th, 2006 at 08:06:21 AM EST

As always with apologies to Jerome for teasing him with the title.

And with the agreement up front that $100 is only matter of time.  The question I'm asking is what will the path look like over the next 3 months.

World Oil markets are piling up bearish news in the last few days and prices are dropping pretty hard.  The true tin hatters out there see collusion designed to help Republicans, but I'm not buying it. http://www.eurotrib.com/comments/2006/9/6/213625/6185/4#4

So what could make oil drop into the $50's in the next few weeks?


First, remember where we were.  The last time I wrote one of these, June, front month WTI was $69.5.  Today we are at $67.5.  Basically we had a spike in July August due to BP's giant cockup being uncovered in Alaska, saber rattling at Iran and the Lebanese invasion.  In the wet oil market, crude remained in contango (front cheaper than deferred) implying plenty of real supply.

Only the BP situation pulling 200 MBD of crude off the market was a fundamental issue.  The rest adds to the fear or risk premium but that can evaporate pretty easily if traders get their nerve back.

What are the bearish inputs to price?

Political/News

Iran sanctions looking to be benign.  Bushco has no credibility left with the world for military action and no military might left over.  Russia is telling him to piss off on serious sanctions.  Unlikely that the flow from the AG will be interrupted.

Lebanon cooled off.  

Mexico hasn't erupted in strikes/violence over their bitterly contested elections.  

Nigeria news has been light.

Hurricane Season has not hit the USG.  Repairs continue unabated.  Shell has their Mars platform back to 190 MBD which is above the level before Katrina/Rita for example.  Started up ahead of schedule in May.

BP announcing a plan to have the entire ANS field back up by November.  If it's at all safe, it will be approved as Alaska's govt is utterly dependant on the oil tax revenues.

Ultra deep water USGC find of 3-15 billion bbls.  While the oil is 5 years away and only likely to produce around 1 MMBD, it gives the back end of the market some downward pressure.  

Real Physical Data -- the important issue when politics/news is benign.

Stock Levels are high -- US crude stocks are above 330 million.  Not too high but very comfortable heading into the low demand fall period.  

Mogas stocks are very high for September at 206 million bbls.  Moreover, stocks built this week in a period where we normally draw stocks.  This is a period when heavy summer demand draws stocks down to more like 190 MM bbls.  Having an extra 16 in tanks and a build has scared the speculators out of the mkt.  Mogas cracks have collapsed from $16 in June (July/July crack) to $2 on 9/8 (oct/oct).  Gasoline is actually contango to December (mostly because crude is as well and cracks are at minimum).  Gasoline is pricing as a byproduct to distillate at these levels.

Heating oil/diesel stocks are very high.  This week the EIA reported 139 million bbls in tank.  That's huge for this time of year.  Thats more of a late Oct/early Nov level before consumers start filling tanks for winter.  

This could really hurt the HO complex.  The crack on heat is still excellent for a refiner at $12/bbl (they used to be happy with $3-6).  Jan Crack is $15 so speculation is for tight supply/cold winter.  So refiners will be rapidly moving to max distillate and trying to sell those cracks forward.  

The heating oil price easily could puke just like gasoline just did.  The trade will start sell down the cracks to jump in front of the refiners and the speculators will trim their positions.  If we then get a mild Nov/Dec, we could have a rout like we just had in mogas.

If so, with both main products down, refiners will cut runs piling up crude even faster.  If OPEC is slow to respond, we could easily have a very sloppy crude market very quickly.  

So there's a route to WTI in the $50's.  World events could easily wash away this scenario so don't bet the farm.

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the thing that surprise me the most has been the drop of 19% of oil importation by Australia in july.

i would never though that oil consumption could be so elastic.

by fredouil (fredouil@gmailgmailgmail.com) on Fri Sep 8th, 2006 at 09:02:04 AM EST
I don't think the Aussies have more than about 5 refineries.  You may have one in shutdown.  I'd check on that before I concluded a 19% drop.

I'd also look at rolling 3 month averages.  Any one month can be misleading.  Why the oil biz turns on it's head over weekly stats I never understood.

by HiD on Fri Sep 8th, 2006 at 05:09:48 PM EST
[ Parent ]
Neither have I.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Sep 8th, 2006 at 06:02:05 PM EST
[ Parent ]
Talking about stats, it's the games played on the LME that I love.

People shift piles of metal across the white line in a warehouse - so it's "off-warrant" - and all of a sudden LME stocks are down and the price rockets.

Best Market there is.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Sep 9th, 2006 at 10:56:17 AM EST
[ Parent ]
In the old days, people alleged that trader refiners would hold out VLCCs of crude just so they'd miss the deadline for API/DOE reporting.......a 2 million bbls swing can make a difference as you well know.

there were a couple of players I'd believe it of.

If was even worse when the API's came out a day before the DOEs.  No legal requirement to tell the API the truth.

by HiD on Sun Sep 10th, 2006 at 01:32:45 AM EST
[ Parent ]
I also agree with the fundamental premise of Jerome's arguments--oil prices are going higher, due to increasing demand and limited opportunities for increasing supply.

In addition there is going to be significant variation in the price of oil over short term periods due to the unstable nature of many of the countries that produce oil and the political volatility that results.  And this political disruption accompanied with the view that the world's oil supply is diminishing, leads to incredible volatility in pricing, and the tempation to forecast off of prices that are artificially high.

But I think there is a tendency to over react, and forecast a much more rapid increase of prices than is likely to happen.  After all, isn't this the 2nd year, or is it 3rd, where Jerome has predicted a year end oil price of $100 per barrel?  I would think that your $50 year end price is equally as likely as Jerome's $100.

I would expect annual prices to go up steadily.  But within each year there will be enormous volatility.

But the increasing prices of oil, and the expectation that those prices will increase, will result in some significant changes in the energy industry.  First, higher prices will lead to less per capita usage of oil--as is true in most products.  Using the US as an example, at $1.50 per gallon, 12,000 annual miles of driving, and 18 miles per gallon, and two cars in the family--the average American family spent $2000 per year on gasoline.  The median family, if my memory is correct, makes roughly $44,000 per year, and I would imagine the tax burden (all taxes) would be roughly $9,000, so after tax the family has $35,000.  So gasoline represents 5.7% of after tax income.  At $3.00 per gallon, gas is 11.4% of income.  (I realize all of these numbers can be argued with, how many have two cars, what's the avg miles per year, tax rates vary, etc--but I think this analysis is in the ballpark).  This is a big enough increase to change buying habits.  The SUV is nice, but we can't afford it.  for some, public transportation is now an option,,,for others car pooling--cut mileage in 1/2 by carpooling and get rid of the 2nd car--save another $1000 a year in insurance, repair, etc.  People will be creative and change,,,some tomorrow, some next year--but people will change their spending habits on oil, and energy.

Second, more fuel efficient cars will come into demand,,,so driving will be more productive.  Manufacturers will put more premium on fuel efficiiency, and new technology will lead to more efficient cars.

third, other existing energy technologies than oil will be chosen for many applications.

Fourth, new technologies will be developed to replace oil.  Current technologies will be improved.

Fifth, new oil will be found, and more costly oil will be drilled,,,and now sold at a profit with higher prices.  This won't be enough to "save" oil, but it will mitigate otherwise explosive price increases in oil.

Fundamentally, people will just change due to the economic need to change, and the new opportunities to be successful by developing products and concepts that either use energy more efficiently, or provide sources of energy that are less expensive.

So it will certainly be an interesting and rocky time--but people responding to change coupled with human creativity will, IMHO, prevent the catastrophic forecasts we sometimes see.

by wchurchill on Sat Sep 9th, 2006 at 12:13:58 AM EST
Lots of the recent investment (ethanol, tar sands, etc.) is based upon the long term expectation of high oil prices. If prices drop to $50 many of these projects become uneconomical.

It will be interesting to see who has the most political power in the upcoming tug of war. Uneconomic technologies can compete if governments give them tax incentives and/or raise taxes on fossil fuels (even indirectly).

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sun Sep 17th, 2006 at 11:54:10 AM EST


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