Category Archives: Oil

Crude oil demand revised up

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This means Saudis/Russians will continue to be price setters for at least the next few quarters.

IEA Lifts 2008 World Oil Demand Growth Forecast

By Reuters | 14 Dec 2007 | 05:32 AM ET

World oil demand will grow more quickly than expected next year fueled by the Middle East and proving resilient to record-high prices, the International Energy Agency said on Friday.

The IEA, adviser to 27 industrialized countries, said in its monthly Oil Market Report that demand will rise by 2.1 million barrels per day (bpd) next year, up 200,000 bpd from its previous forecast.

“A lot of this demand is in the non-OECD countries, where we don’t have any downgrades in economic growth forecasts,” said Lawrence Eagles, head of the IEA’s Oil Industry and Markets division.

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Senate energy bill keeps biofuels alive

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Senate approves $650M alternative energy billBy MARC LEVY

HARRISBURG, Pa. – Builders of wind farms, owners of coal-fired power plants and buyers of hybrid cars and solar panels would be among those who benefit from a $650 million compromise bill approved Wednesday by the state Senate to promote cleaner energies and conservation.

The measure was approved 44-5 on the Senate’s last day of business for the year. It calls for tax credits, rebates, loans and grants over a decade or more in an effort to cut electricity bills and pollution and make Pennsylvania a destination for a booming renewable and cleaner energy industry.

(snip)

The Senate also passed two biodiesel bills Wednesday. One would require that biodiesel be added to each gallon of diesel sold in Pennsylvania in increasing amounts as in-state production of biodiesel reaches certain levels. The other would raise the in-state biodiesel production subsidy from 5 cents to 75 cents a gallon _ at a cost of about $5 million _ and expand an existing rebate program on purchases of gas-electric hybrid vehicles to other vehicles that burn alternative fuels.

This retains the link between fuel and food as we ‘burn up our food supply’ as we turn it into fuel. Makes fed’s inflation fight that much tougher, as the monetary system will get used whatever fuel can be produced will get used.

“This is a wonderful start and is a great way to end our calendar year with what I think is a great success under our belt,” said Sen. Mary Jo White, the Venango County Republican who was a sponsor of all three bills.

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UST ASW update

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(an interoffice email)

>
>
> 16bp day for 2yr spreads today:
>
>
>
> The market went into the fed announcement expecting perfection
>
> 25-50bp cut and 50bps on the discount window.
>
>
>
> Spreads were 6 lower on the day in the 2yr sprds and 3 lower in tens before
> the Fed.
>
> Needless to say the market was disappointed…
>
> Spreads moved back to the wides in the front end
>
> and now are repricing an expectation of extended financial market /
> financing turmoil

Hi,

Looked to me like the post fed moves were unwinds of all sorts, and didn’t fit any other theme, so I’ll be watching for reversals after things settle down tomorrow am.

Interesting that the markets were shocked that the Fed cared about inflation. I read the speeches as saying they do care a lot, but the media glossed over those parts and didn’t even report those references.

And also interesting that interest rates went lower in response to the Fed caring about inflation.

Also, the strong yen vs the pound and euro, for example, was the reaction to ‘stress’ type of move we saw beginning in August.

While the FOMC didn’t do much to alleviate stress per se, they didn’t actually *do* anything to make it worse, either, and there were signs it was running its course, with the year end issue the remaining
hurdle. I’ll be looking for signs the NY Fed is working on that tomorrow and watching to see if 3 mo libor comes back down over the next few days.

The CPI and PPI are expected to be off the charts Thursday and Friday, and the media could start harping on inflation, blame the Fed for high oil prices, questioning whether a half point in the funds rate over the last few months was worth a $20 increase in the price of crude, and continue pushing that theme if crude goes up as I expect it will, as Saudis continue to (irregularly to hide what they are doing) hike posted prices and let the quantity they pump vary. (and Russia
probably doing same as well.) At 120 crude, retail gasoline should be pushing $4 and food up as well via the biofuel connection, and the media attack on the Fed for letting the inflation cat get out of the bag can elevate expectations rapidly, with tips breakevens and Michigan expectations numbers elevating rapidly.

So far, higher crude means lower yields, as it is anticipated the economy will weaken and the Fed doesn’t care about inflation. If/when that changes- as evidenced by higher crude causing higher interest rates even with risk to gdp- tensions and stresses move up several notches, as anyone working through the 70’s and 80’s should recall.

Given the coming inflation numbers, a segment of the mainstream will start to point out that the ‘correct’ fed funds rate is about 7% with inflation at about 4. To them a neutral real rate would put the ff rate at 6, so it will take 7 to be restrictive. They will argue headline cpi is the rate to use, as food and energy are trending and sustaining the higher levels, along with import and export prices rising at more than 5% rates, and therefore this group will give greater weight to core moving up to headline as happened in the 70’s when crude trended upwards for an extended period of time. And should crude continue to move up, this initially small group of mainstream economists will grow, and CNBC will help promote this ‘scare story’ as it attracts more and more viewers.

Hoping things don’t go that way but concerned they will. Looking forward to reactions to the data later this week and what commodity prices do from here.

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Dec 11 balance of risks update

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Labor markets remain stronger than expected, right up through this morning’s Manpower survey for next quarter. Inflation risks remain elevated, with estimates of 1.5% PPI and 0.6% CPI the consensus for Thursday and Friday, and CPI core moving higher as well. While several funding spreads have widened vs. fed funds, absolute rates for reasonable quality mtgs. and corp. bonds are down- what the Fed calls an ‘easing of financial conditions’ for this component. And removing the stigma from using the discount window will ease year end issues.

A 0.25% fed funds cut and 0.50% discount rate cut are priced in for today’s meeting, and more cuts are priced in for future meetings. At the same time the balance of risk as highlighted below, with those cuts priced in, seems tilted towards inflation.

Conclusion:

Those closest to the Fed expect a 0.25% cut in the fed funds rate and a 0.50% cut in the discount rate. They see the Fed’s motivation as fear of the balance of risks swinging sharply back towards ‘market functioning risk’ if the Fed doesn’t deliver the cuts already priced in. It’s a case of ‘let’s put to bed the market functioning issues first, and then move on to other issues.’

Data Highlights:

  • ECONOMY – SHOW ME THE WEAKNESS!
  • EMPLOYMENT – better than expectations right up through today:
    • ADP employment strong.
    • Payrolls up 94,000- above expectations.
    • Unemployment rate 4.7% – down slightly.
    • Weekly claims very slightly higher.
  • HOUSING – exceeds expectations:
    • Mortgage applicationsstrong and trending up.
    • New home sales 728k vs. 750k expected, and 716k previous month.
    • Existing home sales 4.97million vs. 5million.
    • Permits 1.178m vs. 1.200million expected, previous month revised to 1.261million from 1.226million.
    • Pending home sales up 0.6% vs. down 1% expected. Previous month revised to up 1.4% from up 0.2%.
    • Housing starts 1.229 vs. 1.117 expected.
    • NAHB housing index 19 vs. 17 expected.
  • AND THE REST is still showing no sign of weakness:
    • CEO survey positive.
    • Q3 GDP revised up to 4.9%.
    • Personal income and spending up .2%, (.1% less than private forecasts), real spending flat.
    • Total vehicles sales over 16 million and unchanged.
    • Factory orders up 0.5% and 0.3%, above expectations.
    • October construction spending down 0.8%, vs. up 0.2% for September, year over year down 0.6%, somewhat below expectations.
    • Durable goods – 0.7% vs. up 0.3% expected but previous month revised from 0.3% to up 1.1&.
    • Capacity Utilization 81.7 vs. 82 expected.
    • Industrial production was down 0.5% vs. up 0.1% expected.
    • Retail sales ex autos up 0.2% in line with expectations, core up 0.1%.
    • Sep trade balance -56.5 vs. -58.5 expected.
    • Consumer confidence down- too many people watching CNBC.
  • INFLATION RISKS HIGHER:
    • CPI consensus (Dec 14): 4.1% YoY from 3.5%, core 2.3% YoY from 2.2%.
    • December Michigan inflation expectations up- one year 3.5% from 3.4%, five year 3.1% from 2.9%.
    • October PCE deflator up 2.9% YoY, vs. 1.8% pre Oct 31 meeting .
    • October Core PCE up 0.2%, up 1.9% YoY, vs. 1.8% pre Oct 31 meeting.
    • OFHEO home price index down 0.4%, first decline since 1994, but still up YoY.
    • Import prices up 1.8% vs. 1.2% expected, YoY up 9.6% vs. 9% expected.
    • Prices received up in all the reported surveys (ISM, Purchasing Managers, region feds, etc.).
    • Prices paid all up except Phil Fed survey prices paid down slightly.
    • Although the net percentage of firms raising selling prices slipped to 14% in November from 15% in October, the percentage of firms planning to raise prices rose to 26% from 22%. The NFIB noted, “There was no significant progress on the inflation front.”
    • 10 year TIPS floater at 1.85% shows expectations of Fed only keeping a real rate of less than 2% for the next ten years.
    • 5×5 TIPS CPI break even rate is down to 2.42% vs. 2.49% October 31.
    • Crude oil is at $89, down from $94 at the last meeting, and vs. about $55 last year.
    • Saudi oil production up, indicating higher demand at the higher prices.
  • MARKET FUNCTIONING/FINANCIAL CONDITIONS – little movement but markets muddling through the ‘Great Repricing of Risk’:
    • Bank loans up, commercial paper down.
    • Assorted losses and recapitalizations but no business interruptions.
    • S&P index down about 1% since October 31, but remains up about 8% for 2007, and substantially up from the inter meeting lows.
    • 3 month FF/LIBOR spread is 73 bp, wider since October 31.
    • Mortgage rates down, jumbo mortgage spreads are wider but off the widest levels.
    • Mortgage delinquencies up, probably within Fed forecasts.

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Fed expected to lower rates despite raging inflation – MarketWatch

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And the risk is headlines could get much worse after they cut.

For example:

‘Oil prices rise as Fed rate cuts drive down the dollar’

‘Fed cuts rates, driving up gas prices, to bail out banks’

MarketWatch article – Fed expected to lower rates despite raging inflation

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Saudi oil production rose last month

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2007-11-30 Saudi Oil Production

Saudi production rose last month, meaning demand for their output increased even at the higher prices. They are acting as ‘swing producer’ and let output vary to meet actual demand. By definition, therefore, markets are ‘well supplied’ at their price. To avoid controversy, they deny this policy, but in fact they have no choice as a point of market logic.

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Surprise! CEOs Aren’t Too Worried About Economy

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Fed says they watch this closely:

Surprise! CEOs Aren’t Too Worried About Economy

U.S. chief executives’ view of the economy improved in the fourthquarter, although they have become far more concerned about energy prices than they were a year ago, according to a survey by the Business Roundtable.

The group said its quarterly CEO Economic Outlook Index rose to 79.5 in the quarter, from 77.4 in the third quarter. It is below the 81.9 reading in the fourth quarter of 2006. Anything above 50 indicates growth.

The reading suggested that, even with the United States two years into a housing slump and with businesses facing a credit crunch and high energy prices, CEOs are expecting a controlled slowdown in growth, a Roundtable official said.

“America’s CEOs are expecting the economy to continue in a pattern of softer growth,” said Harold McGraw, chairman and chief executive of McGraw-Hill Companies, who also chairs the Business Roundtable.

“People keep waiting for shoes to drop and you do have a housing recession and you do want to watch if there could be any spillover effect from that, which we have not really seen,” McGraw said on a conference call with journalists.

“CEOs are getting a little bit more comfortable that we are slowing down a little bit as an economy,” he added. “But there aren’t huge dark clouds out there. But again, we have to pay attention to the consumer and the consumer behavior patterns.

The cost of health care and energy topped their list of cost worries, with twice as many CEOs citing energy as their main worry than a year earlier.

Oil prices hit record highs near $100 last month before falling back below $90 on concerns a slowing economy would crimp demand. U.S. light crude oil futures were trading at $87.56 Tuesday.

High energy prices and slowing growth are taking a toll across the economy. Delta Air Lines warned Wall Street Tuesday that those factors would take a toll on its results, while rival Southwest Airlines Co said it was cutting back capacity growth plans.

CEOs expect U.S. gross domestic product to rise 2.1 percent next year. It was their first forecast of 2008 GDP.

Fifty-one percent of respondents did not expect to change their capital spending plans over the next six months and 45 percent — a plurality of respondents — expect their company’s U.S. employment toremain flat.

The survey, conducted between Nov. 5 and Nov. 20, took the pulse of 105 of the group’s 160 member companies. Collectively, Roundtable members generate $4.5 trillion in annual revenue.

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FT.com – Oil – Rise in costs puts pressure on returns

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Oil – Rise in costs puts pressure on returns RISE IN COSTS PUTS PRESSURE ON RETURNS By Javier Blas in Abu Dhabi
Published: December 4 2007 01:08

Exploration companies need oil prices of $70 a barrel to match the returns they made at $30 a barrel just two years ago because of the sharp increase in costs and higher government licence fees, according to analysis by a leading consultancy. The research, from Wood Mackenzie, the Edinburgh-based oil consultants, helps explain why non-Opec oil production is failing to accelerate its annual growth significantly in spite of record prices. Oil prices have been above $70 a barrel only since September.

This article can be found at: http://www.ft.com/cms/s/11ca6bb6-a1cd-11dc-a13b-0000779fd2ac,dwp_uuid=81

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Saudis are Necessarily in Position of Price-Setter

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Published November 16, 2007 in the Financial Times

From Mr Warren Mosler.

Sir, Adrian Binks’ letter “Oil price conspiracy theories get in the way of facts”(November 14) is precisely the response indicated in my letter (November 12); in this case from an energy information service. While Mr Binks’ statements are indeed factual, the institutional structure outlined, which the Saudis initiated, leaves more than sufficient room for the Saudis effectively to set prices and meet the demand at that price.

Note that their current production level of about 8.5m barrels per day is down about 2m bpd from just a few years ago. If they were simply producing based on capacity and selling the resulting output at “market” prices, their output would be higher and the price of crude much lower.

Furthermore, if they were not acting as swing producer, it would be far more difficult to organize general Opec production levels.

Regarding Russia, Mr Binks’ statement that “the Kremlin proposed that an oil exchange be established at St Petersburg to set the price of Russian oil, although this has not yet come into being”, is indicative that President Vladimir Putin is well aware that Russia is indeed a “price-setter”, and I suggest that it is an error to underestimate his progress in this direction.

To address Mr Binks’ conclusion: this is not a “conspiracy theory” and not precisely a “price-setting cartel”. It is, rather, a point of logic describing a case of “imperfect competition” where (at least in the short run) a given supplier’s output is sufficiently large and flexible, and demand sufficiently constant, that the supplier is necessarily in the position of “price-setter”.

Warren Mosler,
Chairman,
Valance & Co,
St Croix,
USVI 00820

Copyright The Financial Times Limited 2007

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Oil Price Conspiracy Theories Get in the Way of Facts

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Published November 14, 2007 in the Financial Times

From Mr Adrian Binks.

Sir, Warren Mosler (Letters, November 12), reveals the level of hysteria that affects even intelligent western economists when it comes to oil prices.

First, economists need to understand the facts. Saudi Arabian crude oil is sold at prices directly linked to market values. Sales to Asia are linked to the price of Oman and Dubai crude, with exports to Europe based on ICE Brent futures prices, and sales to the US ultimately linked to West Texas Intermediate crude price levels. The Saudis set monthly differentials to these benchmark market prices that reflect the different quality of their crude, taking into account their customers’ refinery configurations.

Mr Mosler is equally confused when he writes that President Vladimir Putin “seems to have gained control over pricing of Russian oil”. Most Russian crude oil is sold at market-related prices. In the case of the second largest private-sector Russian producer, TNK-BP, next year’s sales will be based on the average of market assessments by Argus and Platts, two international specialist reporting agencies.

The trend within Russia is to greater market-related pricing, not less. The Kremlin proposed that an oil exchange be established at St Petersburg to set the price of Russian oil, although this has not yet come into being.

Rather than producer price setting, the cause of the upsurge in oil prices is new demand in China and India, coupled with the inability of western oil companies to invest in new low-cost reserves because of state control of crude oil extraction in key exporters. This is nothing new. Saudi oil production has been closed to western oil companies since the 1970s.

What is new is the drive for cleaner-burning transport fuels that require massive investment by the oil industry in more sophisticated refining. At the same time, there is a huge increase in product demand in markets to which western companies have little access.

These are the facts that economists in western countries should be focused on, and not conspiracy theories about price-setting cartels.

Adrian Binks,
Chief Executive,
Argus Media,
London EC1V 4LW

Copyright The Financial Times Limited 2007

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