World demand still projected to increase.
Crude Oil Rises From 13-Month Low on European Bank Rescue Plan
by Gavin Evans
The International Energy Agency, an adviser to 28 nations, on Oct. 10 cut its forecast for global oil demand for 2008 to 0.5 percent, the lowest since 1993. Demand next year will rise by 700,000 barrels a day to 87.2 million, 440,000 barrels fewer than the Paris-based agency projected a month earlier.
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While demand has been falling, it’s only down about 500,000 bpd year over year. World demand is growing faster than that and is still forecast to grow by about 1 million bpd in 2009, last I heard.
This means the demand for Saudi crude will stay more than high enough for them to continue to be swing producer/price setter.
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The Saudis will ‘meet demand’ but at their price. So the question remains as to what their price is. With their production (to meet demand) nearing their max capacity, seems they want higher prices to try to cool demand so as not to lose control of price on the upside.
But we can only guess!!!
The death of OPEC
by Douglas McIntyre
Saudi Arabia walked out on OPEC yesterday. It said it would not honor the cartel’s production cut. It was tired of rants from Hugo Chavez of Venezuela and the well-dressed oil minister from Iran.
As the world’s largest crude exporter, the kingdom in the desert took its ball and went home.
As the Saudis left the building the message was shockingly clear. According to The New York Times, “Saudi Arabia will meet the market’s demand,” a senior OPEC delegate said. “We will see what the market requires and we will not leave a customer without oil.”
OPEC will still have lavish meetings and a nifty headquarters in Vienna, Austria, but the Saudis have made certain the the organization has lost its teeth. Even though the cartel argued that the sudden drop in crude as due to “over-supply”, OPEC’s most powerful member knows that the drop may only be temporary. Cold weather later this year could put pressure on prices. So could a decision by Russia that it wants to “punish” the US and EU for a time. That political battle is only at its beginning.
The downward pressure on oil got a second hand. Brazil has confirmed another huge oil deposit to add to one it discovered off-shore earlier this year. The first field uncovered by Petrobras has the promise of being one of the largest in the world. That breadth of that deposit has now expanded.
OPEC needs that Saudis to have any credibility in terms of pricing, supply, and the ongoing success of its bully pulpit. By failing to keep its most critical member it forfeits its leverage.
OPEC has made no announcement to the effect that it is dissolving, but the process is already over
Top Stocks blogger Douglas A. McIntyre is an editor at 24/7 Wall St.
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Report Faults Speculators For Volatility in Oil Prices
by Iathe Jeanne Dugan
As crude-oil prices sink back toward $100 a barrel, dueling reports soon will be released weighing in on whether, and how much, investors are to blame for the gyrations in oil prices.
Washington lawmakers and a money manager, stepping up an attack on commodities investors, will unveil a report Wednesday that they say shows speculators are to blame for this year’s rise and fall in oil prices, which have swung by some 50%.
Several Democratic senators intend to use the findings to bolster an energy bill, which includes measures to scale back how institutions can invest in index funds that track commodities markets. These institutions now hold $220 billion in commodities, up from $13 billion in 2003, according to the report, co-authored by hedge-fund manager Michael Masters.
In mid-July, pension funds and other big institutions “began a mass stampede for the exits” of a range of commodities, the report said, partly as a result of several bills that would force a cutback in these investments. In one commodities fund, investors sold futures contracts linked to about 127 million barrels of crude oil.
Prices dropped roughly 20%, or $29 a barrel, according to the report, which is titled “The Accidental Hunt Brothers,” after the Texas family that manipulated the silver market nearly three decades ago.
Democrats are promoting the report on the eve of a report from the main futures-market regulator, the Commodity Futures Trading Commission. The report is expected to offer fresh data that help answer questions about the depth of financial speculation in the oil markets.
The CFTC report will provide results from its data sweep, requiring Wall Street dealers who trade on behalf of institutional investors in the commodities markets to reveal much more about the instruments they sell to them to get exposure to commodities prices.
The derivatives that Wall Street “swaps dealers” package for such clients, which allow them to invest in baskets or indexes of a mix of commodities, aren’t traded directly on futures exchanges and until now the CFTC’s publicly available, weekly trader reports haven’t required Wall Street firms to disclose their clients’ off-exchange trading activities.
The CFTC report will soon be made final; the agency is expected to either discuss or release the results by Thursday, when its officials are likely to participate in a hearing by the House Agriculture Committee convened to “review dramatic movements in agriculture and energy commodity markets.”
Some critics of the agency expect the CFTC to minimize speculators’ impact, in order not to contradict its past assertions that financial participants didn’t appear to be driving up oil prices.
Bets in the Billions
At the center of the debate is the impact of tens of billions of dollars that have poured into indexes that track futures contracts. Under futures contracts, investors promise to pay a certain amount in the future for crops, oil and other commodities.
These contracts, traded on markets such as the Chicago Mercantile Exchange, help farmers and others hedge against price fluctuations. Speculators buy futures contracts to make bets on price direction. It is a third group that is at the center of the controversy — institutions such as pension funds and college endowments, which pour money into indexes that track the futures market.
The reports are part of a battle between Washington and Wall Street over how money is channeled into commodities. The issue took on urgency as food and gas prices soared and after the CFTC in July revealed that more than half of all oil trading came from speculators.
This undermined earlier contentions by the CFTC that speculators weren’t influencing oil prices, and prompted lawmakers to ask the CFTC’s inspector general to investigate how the agency gathers its numbers.
Wednesday’s report said moves by speculative investors have been largely responsible for the oil-price moves of recent months. It will be released by Sen. Byron Dorgan (D., N.D.), Sen. Maria Cantwell (D., Wash.), and Rep. Bart Stupak (D., Mich.), who contend that without controls, these investors could run prices back up. The 50-page report seeks to dispel arguments by some big investors, bankers and economists that oil prices were due to supply and demand.
Crude-oil prices have swung by roughly 50% this year, from about $90 a barrel to more than $145. Tuesday, oil for October delivery settled at $103.26 a barrel, down $3.08, or 2.9%, on the New York Mercantile Exchange.
The recent oil selloff came after several senators proposed laws to curb investments they say drove up the price of gas and food, a notion heralded by Mr. Masters and derided by many economists. Critics said Mr. Masters is trying to buoy his own investing portfolio, which is laden with transportation-related stocks, and lawmakers are trying to show they are addressing high gas prices.
Between January and May, the report said, the price of crude oil rose nearly $33 a barrel, as institutional investors pumped more than $60 billion into commodities through funds that track indexes, the report said.
Meanwhile, the idea that investors are driving up prices is gaining some credence. European Central Bank President Jean-Claude Trichet last week told attendees at a Frankfurt conference that speculation had contributed to the oil-price shock that has hindered global growth. The two presidential nominees, among others, have attacked the trend.
One of the biggest champions of the antispeculation movement is Mr. Masters, 42 years old, who lives in St. Croix and manages Masters Capital Management LLC. The firm reported holdings of about $600 million in a recent regulatory filing, down about half from year end.
Mr. Masters won’t comment on the firm’s holdings; about 10% are in airlines, autos and other transportation companies that would benefit from lower oil prices. He said profits have been about flat this year.
‘Index Speculators’
Mr. Masters stumbled into the spotlight after sending an email to acquaintances earlier this year, complaining that institutions were driving up the price of fuel, food and metals. They are “index speculators,” he wrote — using a term coined by the report’s co-author, Adam White, the head of a research and trading firm — and had to be stopped.
The email found its way to an aide to Sen. Joseph Lieberman (I., Conn.) and ricocheted to other legislators. Mr. Masters soon testified before Congress, and began informally advising legislators.
“You may be the most powerful guy in Washington right now,” Sen. Claire McCaskill told Mr. Masters at a June hearing about the impact of investments on oil prices.
Mr. Masters gained admiration from farmers, crop distributors and others who invited him to speak around the country. But he has drawn ridicule from some economists and others, who question his analysis and say he isn’t a commodities expert and is trying to boost his own portfolio.
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The Saudi production increase tells me world demand was up, even at the higher prices.
Yes, US demand was down 800,000 bpd vs last year, and yes other world demand may fall.
Only when demand for Saudi output falls sufficiently will they be dislodged from being swing producer and price setter.
That is not to say they won’t continue to disguise their role as best they can, and allow volatility as various world inventory positions (cash and futures) are being liquidated, as is probably the case currently.
Saudi output is also getting very near capacity of maybe 11 million bpd.
If demand goes above that they lose control of price on the upside.
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My current assessment is that the crude sell-off has caused the USD’s strength.
Lower crude prices make the USD ‘harder to get’ as oil producers get fewer USD for the same volume of crude (and product) exports to the US.
Likewise, this also brings down the US trade gap which is about half directly related to oil prices, so nonresidents have fewer USD to meet their USD financial asset savings desires.
Crude has been brought down by technical selling, which also brought with it technical buying of USD as trend following trading positions were unwound.
The crude market has gone into contango as would be expected with a futures sell off and tight inventories.
Tighter US credit conditions made the USD ‘harder to get’ while increased deficit spending makes the USD ‘easier to get’ resulting in GDP muddling through at modest rates of growth.
The Russian invasion probably helped the USD today.
Eurozone credit quality erosion with the onset of intensified economic weakness may be triggering an exit from the euro. The lowest risk euro financial assets are the national governments which carry similar risk to US States, and are vulnerable in a slowdown that forces increasing national budget deficits that are already in what looks like ‘ponzi’ for credit sensitive agents.
Eurozone bank deposit insurance is not credible and therefore the payment system itself vulnerable to an economic slowdown.
With the Russian army on the move, public and private portfolios may not want to hold the debt of the eurozone national governments that they accumulated when diversifying reserves from the USD.
I expect the Saudis to resume hiking crude prices once the selling wave has passed. I don’t think there has been an increase in net supply sufficient to dislodge them from acting as swing producer. And I also expect them to continue to spend their elevated revenues on real goods and services to keep the west muddling through at positive but sub-trend growth.
And the Russian invasion will linger on and help support the USD as a safe haven in the near-term
Comments about this post from email:
MIKE:
Again, its very likely you have permanently damaged demand at prices that are still over 100-
It’s possible the growth of crude consumption has slowed, but I still think it’s doubtful if consumption had declined enough to dislodge Saudi price control. July numbers still not out yet.
in addition asset alligators around the world are actually or synthetically short the dollar after 8 years of dollar selling…
Agreed. The question is the balance of the technicals, and if the CBs no longer buying USD has been absorbed by others.
For now, yes, short covering has mopped up the extra USD sloshing around from our trade gap, but it’s still maybe $50 billion per month that has to get placed. Not impossible for non-government entities to take it but it’s a tall order.
The Russian invasion helps a lot as well. That could be a much more important force than markets realize. Looks like a move to further control world energy supplies. A middle-eastern nation could be on the bear’s menu. I doubt the US could do anything about a Russian takeover of another neighbor. Certainly not go to war with Russia. and they know it.
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(an email exchange)
>
> On Thu, Aug 7, 2008 at 7:15 AM, Scott wrote:
>
> crude moves further in backwardation.
>
Right, indicating futures buying subsiding and inventories not above desired levels for commerce.
>
> CL vs brent now 160 over vs 120 under 2 weeks ago!
>
Also indicating any excess inventory is gone, thanks!
Might be near the end of the second Master’s sell off.
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(an email exchange)
>
> On Wed, Aug 6, 2008 at 4:45 PM, Craig wrote:
>
> It seems that the ‘right’ price for them to set oil at is not
> necessarily the highest price possible.
>
All the 911 passports were Saudi; so, they might have other agendas.
>
> If I were them it would seem like the best policy to maximize
> the total value of their oil holdings over the life of those
> holdings. By cranking the price up ‘too high’, they incent
> substitution and potentially kill their sales in the long term.
>
Right, classic monopoly analysis.
> It would seem their goal would be to keep the price as high
> as they could w/o setting off a chain of
> substitution/invention/philosophy which would move the world
> meaningfully away from oil (or towards increased oil exploration
> or towards invading them). There is also the little matter of
> how much money do they really need (a somewhat silly question
> but this situation does create an embarrassment of riches/market
> dislocations in excess of where a rational accumulation might lie).
>
Yes, understood.
>
> It looks to me that on the highs they got everybody’s attention.
> There may still be political responses towards
> innovation/substitution/conservation at these levels, but it seems
> likely that at or above the old highs, US folks will be making their
> next car a hybrid, beating their government to get prices down
> (including pluggables/nuclear – a long term threat to Saudi
> dominance) and the like. Then there’s China’s slowdown and food
> riots. I’d have thought quietly bleeding the world would be better
> business than actually setting it on fire.
>
Yes, but again, it’s their ‘political choice.’ There is no ‘market price’.
Also, with only 1.5 million bdp in total excess capacity, it might be too close to the line for them, and they might want to get prices high enough to build their excess capacity by a million or two bpd.
Otherwise they risk losing control of price on the upside, as happened a couple of years back when output briefly hit 10.5 million bpd when the funds were buying intensely enough to cause builds of physical inventory and a large contango as storage went to a premium.
>
> Of course, even if this is all true, they may be looking at it
> differently.
>
Worst case for us is they understand that they can hike all they want if they spend the extra revenues on imports of real goods and services. This keeps foreign GDPs muddling through in positive territory as they exact ever higher real terms of trade and they increasingly prosper at our expense.
And out leaders think more exports and less consumption is a good thing and are encouraging more of same.
Almost seems from the data this is exactly what they are up to?
Think they read my blog???
:)
warren
>
> Craig
>
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Russel asks:
Any reason why the Saudi’s are allowing the price of oil to slide?
Just a guess. The futures liquidations were large enough such that holding spot prices up and letting futures free fall would have made it obvious the Saudis are price setter.
There also could be some liquidation of physical inventory going on in which case they would have to let inventories fall before resuming control of prices, or else actually buy in the spot markets which is out of the question of course.
It’s like if some pension fund had a hoard of NYC subway tokens and decided to sell them ‘at the market’. The price would go down from the current $2 price until that selling pressure abated. Then the price would go back to whatever NYC was charging.
So most likely they just let this inventory liquidation run its course, and then work prices higher again.
Much like happened in Aug 2006 with the massive Goldman liquidation and again in a smaller way at year end back then.
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Looks like it was a likely substantial contributor to the last run up and the subsequent quick sell off. ‘Demand destruction’ isn’t yet anywhere near enough to dislodge the Saudis from setting price as swing producer:
REFILE-SemGroup a small factor in oil price drop -experts
by Matthew Robinson and Robert Campbell
(Reuters) SemGroup’s collapse from the 12th biggest U.S. private firm into bankruptcy was only a small factor in the $23 per barrel drop from oil’s record high over the past two weeks, energy experts said on Thursday.
The Tulsa-based company declared bankruptcy this week after racking up $2.4 billion in losses shorting crude oil futures on the New York Mercantile Exchange, including a $290 million loss owed to SemGroup by a trading firm affiliated with former Chief Executive and co-founder Thomas Kivisto.
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