Tag Archives: Crude

Bloomberg: Saudi Arabia not willing to see crude at discount

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Saudi Arabia Not Willing to See Crude at Discount, Naimi Says

by Fred Pals
(Bloomberg) Saudi Arabia, the world’s largest oil exporter, is not willing to sell crude oil at a discount to the normal market price for its grades of oil, the kingdom’s oil minister said.

The country plans to increase production for a third straight month this month. Analysts including the London-based Centre for Global Energy Studies have said Saudi Arabia may need to lower its prices to find sufficient buyers.

“No,” Oil Minister Ali al-Naimi said when asked about his willingness to sell crude at a discount. “Not even for heavy crude. That is not the way the market works. We have said we don’t like high prices. We have nothing to do with where the price is today. Where is the buyer? We would be very happy to sell.”

Al-Naimi spoke to reporters today at the World Petroleum Congress in Madrid.

Right, you can have all you want at their price.

Simple monopoly.

Good luck to us – we don’t even know it’s happening.


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Re: Roach-Stagflation

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(an email exchange)

A few of things:

First, the rising wages in the 70’s led to bracket creep that put the budget in surplus in 1979 and resulted in a severe recession soon after.

This time around it is unlikely the inflation takes much of a dent out of the deficit so it’s more likely demand will be sustained to support prices. And, at least so far, Congress has acted to sustain demand and support prices with the latest fiscal package and more seemingly on the way.

Second, last time around the oil producers for the most part didn’t spend all that much of their new found revenues and thereby drained demand from the US economy. This time around they seem to be spending on infrastructure at a rate sufficient to drive our exports and keep gdp muddling through.

Third, I recall it was maybe the deregulation of nat gas that freed up a cheap substitute for electric utilities and unleashed a massive supply response as nat gas was substituted for crude at the elect power producers. After 1980 opec cut production by something like 15 million bpd to hold prices above 30 until they could cut no more without capping all their wells and the price tumbled to about 10 where it stood for a long time. This time around that kind of excess supply is nowhere in sight.

>
>   On Thu, Jun 12, 2008 at 11:59 PM, Russell wrote:
>
>   Stephan Roach is chairman of Morgan Stanley Asia, and pens
>   this missive for the FT, in which he contextualizes why the
>   Fed’s options are limited:
>
>   ”Fears of 1970s-style stagflation are back in the air. Global
>   bond markets are growing ever more nervous over this possibility,
>   and US and European central bankers are talking increasingly
>   tough about the perils of mounting inflation.
>
>   Yet today’s stagflation risks are very different from those that
>   wreaked such havoc 35 years ago. Unlike in that earlier period,
>   wages in the developed economies have been delinked from prices.
>   That all but eliminates the automatic indexation features of the
>   once dreaded wage-price spiral – perhaps the most insidious
>   feature of the “great inflation” of the 1970s. Moreover, as the
>   stunning surge of the US unemployment rate in May suggests,
>   slowing economic growth in the industrial economies is likely to
>   open up further slack in labour markets, thereby putting downward
>   cyclical pressure on wages over the next couple of years.
>
>   But there is a new threat to global inflation that was not present
>   in the 1970s. It is arising from the developing world, especially in
>   Asia, where price pressures are lurching out of control. For
>   developing Asia as a whole, consumer price index inflation hit 7.5
>   per cent in April 2008, close to a 9½-year high and more than double
>   the 3.6 per cent pace of a year ago. Sure, a good portion of the recent
>   acceleration in pricing is a result of food and energy – critically
>   important components of household budgets in poorer countries and
>   yet items that many analysts mistakenly remove to get a cleaner read
>   on underlying inflation. But even the residual, or “core”, inflation rate
>   in developing Asia surged to 3.8 per cent in April, more than double
>   the 1.8 per cent pace of a year ago…”
>
>

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Re: Pension fund passive commodity strategies

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(an interoffice email)

>
>   On Wed, Apr 9, 2008 at 4:05 PM, Pat wrote:
>
>   What about the continued allocation increases from non-end
>   users of commodities? From what I’ve read allocations by
>   pensions have gone higher even with the rising prices as well
>   as a whole host of new entrants (ETFs, HF’s, etc…) Are these
>   compounding the problem or are they the root of the
>   commodity price inflation?
>
>

passive commodities are part of the landscape for sure:

  1. put upward pressure on competitive commodity spot prices
  2. put downward pressure on the $
  3. add to gdp
  4. in general, help ‘monetize’ saudi crude price hikes
  5. put upward pressure on crude futures
  6. serves no public purpose
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Reuters: Oil Falls Below $98 on Swelling US Crude Supplies

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Supplies probably aren’t ‘excessive’ or US companies wouldn’t import so much and futures spreads would be in contango instead of backwardation, and WTI now trading above Brent is another sign inventories are back towards the tight side.

Oil Falls Below $98 on Swelling US Crude Supplies

Oil held steady around $98 a barrel on Friday, off its recent record above $101 as rising U.S. crude and gasoline stockpiles added to evidence of slowing demand in the world’s largest consumer.

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Re: energy and the dollar

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(an email)

> On Feb 19, 2008 10:03 AM, Mike wrote:

> Warren, note spec comments and dollar issues, a big hurdle to overcome
> if they go the other way …
> Mike

Hi Mike,

Agreed the dollar may have bottomed. Seems to have reached a level where exports are now growing at about 13% which maybe is the right number to accommodate the pressure from the non resident sector to slow it’s accumulation of $US financial assets.
However I continue to conclude the price of crude is being set by the Saudi’s/Russians acting as swing producer, and that there is sufficient demand to keep them in the driver’s seat. Quantity pumped keeps creeping up at current prices, with Saudis last reporting 9.2 million bpd output.

Crude at 98.70 now. Note crude goes up on news a refinery is down, when refineries are the only buyers of crude, so in fact it’s going up for other reasons (price setting by the swing producer?). Also, WTI is now ahead of Brent, indicating whatever was causing the sag in WTI vs Brent is over. WTI would ordinarily trade higher than Brent due to shipping charges.

Warren

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Calories, Capital, Climate Spur Asian Anxiety

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Higher oil prices mean lower rates from the Fed, and higher inflation rates induced by shortages mean stronger currencies abroad.

Why do I have so much trouble getting aboard this paradigm, and instead keep looking for reversals? Feels a lot like watching the NASDAQ go from 3500 to 5000 a few years ago.

:(

Calories, Capital, Climate Spur Asian Anxiety

2007-12-26 17:51 (New York)
by Andy Mukherjee

(Bloomberg) — The new year may be a challenging one for Asian policy makers.

Year-end U.S. closing stocks for wheat are the lowest in six decades; soybeans in Chicago touched a 34-year peak this week. Palm oil in Malaysia climbed to a record yesterday.

The steeply rising cost of calories may be more than just cyclical, notes Rob Subbaraman, Lehman Brothers Holdings Inc. economist in Hong Kong. Growing use of food crops in biofuels and increasing demand for a protein-rich diet in developing countries may have pushed up prices more permanently.

The wholesale price of pork in China has surged 53 percent in the past year.

“Consumer inflationary expectations may soon rise, feeding into wage growth and core inflation, but we expect Asian central banks to be slow to react, initially due to slowing growth and later because of strong capital inflows,” Subbaraman says.

If the U.S. Federal Reserve continues easing interest rates to combat a housing-led economic slowdown, a surge in capital inflows into Asia may indeed become a stumbling block in managing the inflationary impact of higher commodity prices.

Food and energy account for more than two-fifths of the Chinese consumer-price index, compared with 17 percent for countries such as the U.K., U.S. and Canada, and 25 percent in the euro area, according to UBS AG economist Paul Donovan in London.

As Asian central banks raise interest rates — when the Fed is cutting them — they will invite even more foreign capital into the region. That will cause Asian currencies to appreciate, leading to a loss of competitiveness for the region’s exports.

Carbon Emissions

On the other hand, paring the domestic cost of money prematurely may worsen the inflation challenge.

That isn’t all.

Higher oil prices will also boost the attractiveness of coal as an energy source, delaying any meaningful reduction in carbon emissions in fast-growing Asian nations such as China and India.

As Daniel Gros, director of the Centre for European Policy Studies in Brussels, noted in recent research, the price of coal — relative to crude oil — has been halved since the end of 1999. And per unit of energy produced, coal is a much bigger pollutant than oil or gas.

This doesn’t augur well for the environment.

“Given that China is likely to install over the next decade more new power generation capacity than already exists in all of Europe, this implies that the current level of high oil prices provides incentive to make the Chinese economy even more intensive in carbon than it would otherwise be,” Gros said.

Beijing Olympics

Climate-related issues will be in the spotlight in Asia next year. China’s eagerness to use the Beijing Olympic Games to showcase solutions to its huge environmental challenges will be one of the “big things to watch for” in Asia in 2008, Spire Research and Consulting, a Singapore-based advisory firm, said last week.

Even if China succeeds in reducing air pollution during the Olympics, the improvements may not endure after the sporting event ends on Aug. 24, especially since the underlying economics continue to favor higher coal usage.

A drop in hydrocarbon prices might help check emissions and global warming, Gros noted last week on the Web site of VoxEu.org.

In fact, lower oil prices may also make food costs more stable by lessening the craze for biofuels.

That will leave capital flows as Asia’s No. 1 challenge in 2008. And it won’t be an easy one for policy makers to tackle.

Capital Inflows

Take India’s example.

The $900 billion economy has attracted $100 billion in capital in the 12 months through October, with a third of the money entering the country as overseas borrowings, according to Morgan Stanley economist Chetan Ahya in Singapore.

This has caused the rupee to appreciate more than 12 percent against the dollar this year, knocking off more than three percentage points from India’s inflation index, says Lombard Street Research economist Maya Bhandari in London.

Naturally, exporters are complaining.

So why doesn’t India cut domestic interest rates? It can’t do that without the risk of stoking inflation.

Money supply is growing at an annual pace of more than 21 percent in India, compared with the central bank’s target of between 17 percent and 17.5 percent. Inflation has held well below the central bank’s estimate of 5 percent for five straight months partly because of the government’s insistence on not passing the full cost of imported fuel to local consumers. It isn’t yet time for monetary easing in India.

China has it worse. Monetary conditions there remain dangerously loose. And China may be reluctant to do much about the undervalued yuan — the root cause of its record trade surpluses and the attendant liquidity glut — until the Olympics are out of the way.

Asian economies may, to a large extent, be insulated from the subprime mess. Still, 2008 won’t be all fun and games.

(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)

–Editors: James Greiff, Ron Rhodes.

To contact the writer of this column:
Andy Mukherjee in Singapore at +65-6212-1591 or
amukherjee@bloomberg.net

To contact the editor responsible for this column:
James Greiff at +1-212-617-5801 or jgreiff@bloomberg.net

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Strong gdp and high credit losses

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CNBC just had a session on trying to reconcile high gdp with large credit losses. Seems they are now seeing the consumer clipping along at a +2.8% pace for Q4. No need to rehash my ongoing position that most if not all the losses announced in the last 6 months would have little or no effect on aggregate demand. Credit losses hurt demand when the result is a drop in spending. And yes, that happened big time when the subprime crisis took the bid away from would be subprime buyers who no longer qualified to buy a house. That probably took 1% away from gdp, and the subsequent increase in
exports kept gdp pretty much where it was. But that story has been behind us for over a year.

The Fed is not in a good place. They should now know that the TAF operation should have been done in August to keep libor priced where they wanted it. They should know by now losses per se don’t alter aggregate demand, but only rearrange financial assets. The should know the fall off in subprime buyers was offset by exports.

The problem was the FOMC- as demonstrated by their speeches and actions- did not have an adequate working understanding of monetary operations and reserve accounting back in August, and by limiting the current TAFs to $20 billion it seems they still don’t even understand that it’s about price, and not quantity. Too many members of the FOMC
are mostly likely in a fixed exchange rate paradigm, with its fix exchange rate/gold standard fractional reserve banking system that drove us into the great depression. With fixed exchange rates it’s a ‘loanable funds’ world. Banks are ‘reserve constrained.’ Reserves and consequently ‘money supply’ are issues. Government solvency is an issue.

With today’s floating exchange rate regime none of that is applicable. The causation is ‘loans create deposits AND reserves,’ and bank capital is endogenous. There are no ‘imbalances’ as all current conditions are ‘priced’ in the fx market, including ANY sized trade gap, budget deficit, or rate of inflation.

The recession risk today is from a lack of effective demand. There are lots of ways this can happen- sudden drop in govt spending, sudden tax increase, consumers change ‘savings desires’ and cut back spending, sudden drop in exports, etc.- and in any case the govt can instantly fill in the gap with net spending to sustain demand at any level it desires. Yes, there will be inflation consequences, distribution consequences, but no govt. solvency consequences.

So yes, there is always the possibility of a recession. And domestic demand (without exports) has been moderating as the falling govt budget acts to reduce aggregate demand. But the rearranging of financial assets in this ‘great repricing of risk’ doesn’t necessarily reduce aggregate demand.

Meanwhile, the Saudis, as swing producer, keep raising the price of crude, and so far with no fall off in the demand for their crude at current prices, so they are incented to keep right on hiking. And they may even recognize that by spending their new found revenues on real goods and services (note the new mid east infrastructure projects in progress) they keep the world economy afloat and can keep hiking prices indefinitely.

And food is linked to fuel via biofuels, and as we continue to burn up every larger chunks of our food supply for fuel prices will keep rising.

The $US is probably stable to firm at current levels vs the non commodity currencies, as portfolio shifts have run their course, and these shifts have driven the $ down to levels where there are ‘real buyers’ as evidenced by rapidly growing exports.

Back to the Fed – they have cut 100 bp into the triple negative supply shock of food, crude, and the $/imported prices, due to blind fear of ‘market functioning’ that turned out to need nothing more than an open market operation with expanded acceptable bank collateral (the TAF program). If they had done that immediately (they had more than one outsider and insider recommend it) and fed funds/libor spreads and other ‘financial conditions’ moderated, would they have cut?

There has been no sign of ‘spillover’ into gdp from the great repricing of risk, food and crude have driven their various inflation measures to very uncomfortable levels,and they now believe they have ‘cooked in’ 100 bp of inflationary easing into the economy that works with about a one year lag.

Merry Christmas!

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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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