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A modest rise in consumption for next year means the Saudis/OPEC remain firmly in control of price.

Global oil consumption is likely to average 86.1 million barrels a day in 2010, the IEA said in an Oct. 9 monthly report, raising next year’s forecast for a third consecutive month. The agency expects demand of 84.6 million barrels a day this year. The IEA’s next monthly report will be issued on Nov. 12.

It will be up to members of the Organization of Petroleum Exporting Countries to satisfy the bulk of the world’s increasing need for oil as conventional production in countries outside the group peaks next year, the IEA said.

“Most of the increase in output would need to come from OPEC countries, which hold the bulk of remaining recoverable conventional oil resources,” the agency said in the report.

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No signs of a recovery here yet.

Yes, there’s conservation, efficiency gains, and some substitution but a lot of it is people driving to work.

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The Levy Economics Institute of Bard College
Public Policy Brief
No. 103, 2009

FINANCIAL AND MONETARY ISSUES
AS THE CRISIS UNFOLDS
James K. Galbraith

Beginning page 9:

Warren Mosler picked up on the theme of human resource
utilization and full employment in a particularly useful way.
Mosler suggested that stabilization of employment and prices is
akin to a buffer stock—something to which surpluses can be
added when demand is low, and drawn down when it is high.
Normally, a buffer stock works on a price signal: the authorities
agree to buy when market prices are below the buffer and to sell
when they are above. In this way, prices stabilize at the buffer
price. The Strategic Petroleum Reserve is potentially a good
example, though political decisions have prevented it from being
used as it should be.

The problem with most commodity buffers is elasticity of
supply: create a buffer stock in wool, and suddenly it pays to raise
sheep. But this problem is cured if the buffer stock is human
labor, which cannot be reproduced quickly. A program that provides
a public job at a fixed wage for all takers functions exactly
like a buffer stock, stabilizing both total employment and the
bottom tier of the wage structure. People can move in and out of
the buffer as private demand for their services varies. Meanwhile,
the work done in the buffer—the fact that people are working
rather than receiving unemployment insurance—helps keep the
buffer “fresh.” Private employers like hiring those who already
work, and will prefer hiring from the federal jobs program rather
than from among those who remain unemployed.

The point is: the problem of unemployment is easily cured,
without threat of inflation. It is merely sufficient to provide jobs,
at a fixed wage, to whoever wants them, and to organize work
that needs to be done. Such work should be socially useful and
environmentally low impact: from child care to teaching and
research, to elder care to conservation to arts and culture. Where
possible, it should contribute to global public and knowledge
goods. It should compete as little as possible with work normally
done in the private sector; for instance, by serving those who
cannot afford private sector provision of teaching and care. The
point is not to socialize the economy but to expand the range of
useful activity, so that what needs doing in society actually gets
done. The barrier to all this is simply a matter of politics and
organization, not of money.

The effect, nevertheless, would be to raise all private sector
wages to the buffer-stock minimum (say, $8/hour in the United
States), while eliminating the reserve of unemployed used to
depress wages in low-skilled private sector industries. There will
be no pressure to raise wages above the buffer threshold, since private
employers providing higher wages can draw on an indefinitely
large workforce willing, for the most part, to move from the
buffer to the private sector in return for those wages. Hence, the
program is not inflationary. There is therefore no excuse for waiting
a year or two years on the assumption that unemployment
will cure itself, and every reason to believe that at the end of such
a policy of “hopeful waiting,” the discovery will be made that the
problem has not been cured.

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This chart shows demand for gasoline is still down year over year, even with substantially lower prices.

It is also another indication of the ’soft spot’ in demand that may have hit a couple of months ago.

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Looks like the temporary storage is moving into likely cheaper land based storage.

And much is probably already sold forward into the contango, as forward buying causes spreads to widen to the point where someone buys it spot and sells it forward for enough of a markup to cover storage costs and provide a desired return on capital.

By setting price and letting quantity pumped adjust, the Saudis/OPEC provide an incentive not to store crude and over time that policy should cause the contango to move to backwardation.

On the other side, passive commodity strategies by investors do the reverse, so at the moment it looks like they are in control.

There is a kind of oceanic traffic jam out there among very large crude carriers (VLCCs), with something like 7% (according to Lloyd’s) of them storing crude oil off the coast of Europe, Asia, or North America in anticipation of higher prices later this year. Such are the joys of contango — higher forward prices making it profitable to store petroleum for future sale — but it is a huge gamble. If the people contracting for such VLCCs are wrong, their carrying costs mount and it becomes likely that they just dumb the product on the markets, further depressing prices.

Check the following figure (from EA Gibson) of the current storage situation for both petroleum and clean products, like gasoil:. While crude sea storage has declined from its peak earlier this year, clean products are floating out there is ever larger amounts.

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With any kind of meaningful recovery the saudis will be able to increase price substantially without fear of demand falling off.

Right now they are just setting the hook.
Letting the world economies stabilize and financial markets recover before making their next move, while no conservation efforts of consequence are being put in place by the consumers.

DOEs: Industrial Demand Rises Above 2008!

We have been discussing the industrial demand for oil products as a leading indicator to identify signs for a recovery in Industrial Production. However, we were not as optimistic to think that demand would surge to surpass the prior years’ level of demand in the near-term. We were looking for signs of stabilization. So, this week, we highlight this point that reinforces our belief that U.S. oil demand appears to have bottomed and you should start to see more coincidental indicators of industrial demand.

Broadly speaking, Total Product demand in the U.S. continues to rebound and has risen to 19.287 Mbpd from the trough of 17.697 Mbpd at the end of May ‘09. Inventory levels continue to be an overhang and much attention is being paid to stocks at Cushing that remain lofty. However, we are demand focused and see continued and substantial improvement. In addition, year-over-year comparisons will be favorable into the later part of 3Q09.

For Industrial demand for oil products, we use residual, asphalt, propane, propylene, waxes, still gas, etc. We believe that these are “leading” and should be closely watched as the industry goes thru a period of restocking. The next data points we believe investors should see in coming months are increases in power generation and also increases in distillate demand. Both of which are “coincidental” indicators of demand in our opinion.

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Looks like the Saudis are back in the driver’s seat regarding price.

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Today’s news- rising oil/declining dollar means costs of materials and replacement costs rising.

The only inflation risk comes with rising oil costs which are back up over 71 dollars this am, up from low 60’s last week.

Rising consumption overseas in general seems to be driving up prices here as we compete with a billion new consumers for scarce resources.

Commercial Real Estate - Make Up Your Own Mind

By Malay Bansal

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Looks like we are leveling off around unchanged year over year.

Consumption started falling off after GDP went negative in the second half of 08 so the year over year comps should show higher consumption for the second half of 09.

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Looks like demand is steady at current prices which seem to be where they currently want prices to be.

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>   
>   (email exchange)
>   
>   Warren, Seems like we’ve seen a tiny repeat of what happened during
>   the ( Mosler coined) Mike Masters inventory liquidation last summer.
>   That is, crude oil drops and takes everything else down with it all driven
>   by the fear of increased scrutiny regulation on commodity speculation.
>   Do you agree? NY Times article a few days ago.
>   

Yes, also the fact that it’s done it for the last few years about this time gets the specs going in that direction as well. If there’s nothing ‘fundamental’ going on this year it could quickly reverse as Saudis hold price and let quantity adjust.

Also, lower crude makes dollars harder to get overseas (our oil bill goes down) which tends to firm up the dollar.

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Yes, as previously discussed, announcing a term structure of Fed funds levels would be far more effective in bringing rates down than securities purchases.

But that closes the door to rate hikes for that period of time, which is exactly what markets discount with the current term rate structure.

Especially with crude and commodities going up and the dollar going down, as markets discount that at some point the Fed will react to that ‘imported inflation’ with rate hikes.

Meanwhile the current ‘mercantalist’ Fed is fine with a lower dollar hoping it will help the US export its way to trend GDP growth rather than get there by domestic debt and consumption. Or at least reduce the marginal propensity to import that they fear could drain demand and abort the recovery. Unfortunately the preference for exports over domestic consumption translates to a lower standard of living via a reduction in real terms of trade.

That’s what was happening last year about this time when the great Mike Masters inventory liquidation hit and it all went bad. This time around there isn’t any excess inventory to break prices and cap utilization/employment is way down and still falling some, and rest of world economies appear too weak to absorb substantial US exports.

And the Saudis are back in control of crude prices after a very surprisingly small fall in world consumption given the size and scope of the international slowdown.

BoE’s Barker says rates could stay low for “quite some time”

MPC member Kate Barker told the Leicester Mercury newspaper that there
remained question marks over the sustainability of the recovery and that
interest rates “could stay low for quite some time”. Ms Barker echoed
Paul Tucker’s comments yesterday in saying that it would take some
months yet for the MPC to judge how robust the turnaround in activity
was: “The really important question is (whether) there’s a pick up in
the economy and if people can sustain that so it continues on to autumn.
That would be one of the most encouraging signs,” she said.

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I’ve also hear reports that pension funds have been adding to passive commodity strategies:

The green shoots will grow slowly

by David Robertson

May 25 (Business 24/7) — By the middle of this month, copper prices were 60 per cent up on the start of the year and platinum was up by a third. The rebound has been driven by a conviction that these metals were oversold and as construction demand (copper) and automotive demand (platinum) pick up, the price of the metals will return to more sensible levels. However, I bring bad news. Industrial demand is not returning nearly as fast as the London Metal Exchange or London Stock Exchange would have us believe – and that means we are still some way off from seeing a return to the sort of growth levels achieved prior to 2008.

Two things are currently distorting metal prices: Chinese stockpiling and speculation. The Chinese have taken advantage of the low price of metals to fill their warehouses and this has been mistaken for a dramatic ramp up in “real” industrial demand. I have no doubt that Chinese demand from factories and construction companies has increased recently but at nothing like a rate that would support a 60 per cent surge in copper prices.

Speculation has also played a significant role in boosting prices as investors have piled into commodities, partly because they have been fooled by Chinese demand and partly because a lot of people are already thinking about where to stash their cash in the event of rampant inflation next year.

Last week Investec, the South African bank, highlighted the impact speculation was having on market-traded metals by focusing on commodities that are not easily traded. For example, ferrochrome, which is used to make stainless steel, actually fell 13 per cent in price between the first and second quarter of this year and it is off 63 per cent from its high at the end of last year. Manganese contract prices are off 70 per cent and the steel makers are pushing for a 45 per cent cut in iron ore contract prices.

There is no “hot money” in these commodities so they give us a better guide to real industrial demand – and clearly there is little to get excited about yet. As a result, I expect to see a repeat of last year’s oil bubble: everyone will shortly wake up and realise that the shoots are not quite as green as had been hoped and prices will fall back by 20 to 30 per cent (again).

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No reason to expect it won’t happen if they want it to happen.

Saudi Arabian Oil Minister Naimi Says Oil to Reach $75 a Barrel

by Adam L. Freeman

May 23 (Bloomberg) — Saudi Arabian oil minister Ali al- Naimi said the price of oil will climb to $75 a barrel when demand picks up.

“We’ll get there eventually,” al-Naimi told reporters in Rome today where he will attend meetings with energy ministers from the Group of Eight industrialized nations. “The trick is keeping it between $70 and $80. It will be achieved as demand rises and the fundamentals are better than they are now.”

To reach that goal, Naimi said he will recommend OPEC members “stay the course” at their meeting in Vienna on May 28. Saudi Arabia is the biggest and most influential member of the Organization of Petroleum Exporting Countries, which produces about 40 percent of the world’s oil.

The group is likely to keep daily output quotas unchanged at 24.845 million barrels at the Vienna gathering, according to a Bloomberg survey.

Crude oil for July delivery rose 62 cents to settle at $61.67 a barrel at 2:45 p.m. on the New York Mercantile Exchange yesterday. The July contract increased 8.2 percent this past week. Oil is up 38 percent this year.

Naimi said oil should keep at about $75 a barrel “because that is what is desired for the world economy.”

Saudi Arabia produced less than its quota of 8 million barrels a day last month, according to a May 13 OPEC report. The Saudis produced 7.9 million barrels of OPEC’s 25.3 million- barrel daily output.

Naimi said last month that helping to keep oil prices at $50 a barrel was his country’s contribution to the world economy, which is fighting the worst recession in six decades. Since he made those comments in Tokyo on April 25, crude prices have climbed more than 20 percent to above $60 a barrel.

Exceed Ceiling

The 12 members of OPEC, which overshot their ceiling by 410,000 barrels last month, will update their policy on oil output at this month’s meeting. At the last summit on March 15, the group decided to leave quotas unchanged and adhere to its earlier commitment to restrict supply by a total of 4.2 million barrels a day from levels in September 2008.

Naimi said his country “very recently” started production at the Nuayyim oil field and it pumping 100,000 barrels a day. He added that even though Saudi Arabia has opened new production global markets don’t need the product.

“The problem is the market, that the demand is only in one place — Asia and that’s all.”

The group’s production rate rose during April, and most members are still producing more than their quota, a report from the OPEC Secretariat in Vienna showed earlier this month.

OPEC cut its 2009 forecast on May 13 and now estimates daily oil demand will fall by 1.57 million barrels, or 1.8 percent, to 84.03 million barrels of oil a day this year.

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Looks to me like it didn’t fall all that much with high prices or the recession and has begun to firm.

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Largest year over year drop in a while after hovering around flat year over year.

Might be why Saudis decided to cut prices recently.

I’m looking for consumption to increase as GDP stabilizes and then return to positive territory as global automatic stabilizers and proactive fiscal policies add net financial assets.

Crude Oil Rises After Unexpected Decline in U.S. Jobless Claims

by Mark Shenk

April 16 (Bloomberg) — Daily fuel demand averaged over the past four weeks was 18.7 million barrels, down 5.2 percent from a year earlier, according to the department.

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This should keep a lid on crude prices, as Saudis decide to set lower prices:

Saudi Arabia cuts oil prices for US, Europe for May

by Timothy Coulter and Diana ben-Aaron

Apr 6 (Tehran Times) — Saudi Aramco, the world’s largest state-owned oil company, cut its official selling prices for all grades for customers in the U.S., Northwestern and Mediterranean Europe.

Saudi Arabia slashed the U.S. price of its Arab Heavy Crude the most, cutting it by $5.50 a barrel to $4.85 below the price of the West Texas Intermediate grade made in the U.S., the state oil company said in a faxed statement today. That wiped out its April price premium of 65 cents more than WTI, the first time Saudi heavy oil traded for more than the U.S. benchmark in at least 10 years.

Saudi Arab Light Crude was reduced by $4.15 a barrel in the U.S. and will sell for $2.25 less than WTI, Saudi Aramco said. Its April price was $1.90 more than WTI.

In Northwest Europe, Saudi light crude will be priced at $4.05 less than the IPE benchmark, a cut of $1.60 from a $2.45 discount last month, according to the statement. Heavy crude from Saudi Arabia for Europe declined $2.10, putting it $5.80 below the IPE equivalent.

Mediterranean, Asian Prices

Oil for Mediterranean destinations also cheapened, with Saudi light oil declining 90 cents to $3.05 below the IPE benchmark, and heavy oil falling $1.75 to $5.55 below the Brent weighted average equivalent as listed on IPE.

Saudi Arabia increased Asian prices for light grades. Saudi Arab Light Crude will sell in Asia for 80 cents more than crude from Dubai and Oman, a reduction of 10 cents from the 90 cent- per-barrel premium last month. The Saudi heavy crude price was cut $1.20 to fall $1.85 below Dubai/Oman crude.

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Seems to be leveling off at levels that are comfortable for them as they set price and let quantity adjust.

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The problem is suboptimal output and employment which is evidence of a lack of aggregate demand.
 

Less important what caused the drop in aggregate demand

• The end of the subprime expansion in 2006 reduced the demand for housing
   
• The wind down of the one time Q2 2008 fiscal adjustment (Q2 2008 GDP was up 2.8%)
   
• The Mike Masters inventory liquidation that began in July 2008 added supply from inventories, reducing output and employment
   
• A shift in the propensity to spend due to the pro cyclical nature of credit worthiness

 

My proposals for restoring aggregate demand:

• A full payroll tax holiday - This tax is taking $1 trillion per year from workers and businesses struggling to make ends meet $1,000 per capita in revenue sharing for the States (approx. $300 billion total).
   
• Federal funding for a $8 per hour full time job for anyone willing and able to work that includes federal health care.
   
• Caveat - Unless our demand for motor fuel is cut in half, restoring aggregate demand will also empower the Saudis to set ever higher prices for crude oil which will cause our real terms of trade and standard of living to deteriorate.
   
• Political options for reducing imported fuel consumption:
   
  • Regressive - utilizing allocation by price (Carbon tax, fuel taxes)
     
  • Closer to neutral - mandating higher fuel economy requirements for new vehicles, offering incentives to trade up to more fuel efficient vehicles
     
  • Progressive - substantially reducing speed limits to discourage driving and advantage public transportation

 

Redirect banking to serve public purpose

• Ban banks from all secondary markets.
   
• Allow bank lending only to serve public purpose.
   
• Do not use the liability side of banking for market discipline.

 

Analysis of current situation

• Our leaders believe they must first ‘get credit flowing again’ to restore output and employment.
   
• Unfortunately the reverse is the case; restoration of output and employment will restore the flow of credit.
   
• Government is removing about $1 trillion per year in payroll taxes from employees and employers who can’t meet their mortgage payments and wondering what is causing the financial crisis.
   
• All moves to date by the Treasury and Federal Reserve have only served to shift financial assets between the public and private sectors. Nothing has directly added to aggregate demand.
   
• Therefore the economy has continued to deteriorate, with only the ‘automatic stabilizers’ slowly adding financial assets and income to the private sector, as the counter-cyclical deficit rises.
   
• The rate of federal deficit spending (not counting TARP and other shifting of financial assets that does not directly alter demand, as above) now exceeds 5% of GDP and seems to have begun moving the economy sideways.
   
• The new fiscal package starts taking effect in April. While modest in size, it isn’t ‘nothing’ and will further support GDP.
   
• Employment will not grow until real output of goods and services exceeds productivity growth.
   
• Fuel prices are already moving higher.

 

Conclusion

• Leadership that doesn’t understand how the monetary system works has needlessly prolonged the recession and delayed the recovery.
   
• They have put a premium on ‘confidence’ as the President spends countless hours in front of the TV cameras, when in fact loss of ‘confidence’ means only that federal taxes can be lower for a given level of federal spending:
  

  lower confidence = less private sector spending = less aggregate demand = lower taxes or higher federal spending to sustain output and employment

• The headline USD trillions they have directed towards the financial sector has accomplished little or nothing beyond burning up expensive political capital and credibility.
   
• They are in this way over their heads, and it’s costing us dearly.
   

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Year over year gasoline demand (in gallons) was down a bit this week still looks to be working its way higher since December.

Year over year changes are now very small, indicating little or no ‘demand destruction.’

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