Tag Archives: Oil

Reuters: Lehman cuts oil demand forecast

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Lehman cuts oil demand forecast

by Richard Valdmanis

(Reuters) Investment bank Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) said Wednesday it slashed its forecast for 2008 world oil demand growth due to a steeper-than-expected slowdown in energy consumption in the United States and other OECD countries.

Lehman added it believes the oil market is “approaching a tipping point” with prices expected to decline to an average of $90 a barrel in the first quarter of 2009.

“We now forecast annual oil demand for 2008 at 86.3 million barrels per day, a growth of 790,000 bpd from 2007. The growth has been revised down from projections of 1.5 million bpd in December,” Lehman said in a research note titled ‘Demand Demolition’.

If true, and non-Saudi supply remains about flat, Saudi production might fall to about 9 million bpd and the price would still remain wherever the Saudis set it.

There has been some talk that the Saudis may have agreed to lower prices after the last round of meetings with US officials. Could be, but with their output running within a million or two bpd of their total capacity, it seems doubtful they would do anything to increase demand before they have the excess capacity to meet it. But there could be other factors (including the US 7th fleet and concerns about a united Iran/Iraq threatening them) that might be influencing their decision. Only time and prices will tell. Should be more clear in a week or so.


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Crude sell off

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Seems like a sale ahead of possible Congressional action to limit ‘speculation’.

Not sure how big the dip might be, but yet another buying op as the choice remains – pay the Saudis their asking price or shut the lights off.

The price only goes down if the Saudis cut price, or if there is a supply response of more than 5 million bpd that dislodges them from being swing producer.


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US Energy Consumption as % of GDP

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US Energy Consumption as Percent of GDP

Interesting how the price hikes get us back to the 1970s ratio. One of the arguments that it was different this time around was that crude is a lower percentage of GDP than it was then.

The pass-throughs to the rest of the price structure are just getting started, and I expect them to persist well past the peak in crude prices.

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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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Saudi Iran OIL Update

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Saudis say they will pump more if markets want more.

They post prices to their refiners and then fill all orders at their posted prices.

Their posted prices and spreads have also been moving in their favor lately.

Can it be more clear that the Saudis are ‘price setters?’

And with excess capacity very near zero, Russia and Iran are also price setters, and anyone else with more than a million bdp of output.

Price goes to the higher of where any of the price setters set their prices.

And the FOMC now knows this and will give the possibility of continuous price increases a lot more weight in their decisions.

Good luck to us!

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Re: Demand destruction

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(an email exchange)

On Thu, Jun 19, 2008 at 10:38 PM, Russell wrote:
>   
>   
>   SUV sales may be falling off the cliff in the US, but in China, they are red hot.
>   Sales of the large vehicles in China rose by 40% in the first four months of this
>   year. That is twice the growth rate for the Chinese passenger car market.
>   
>   Its no surprise why: The costs of petrol and diesel in China is as much as 40%
>   cheaper than US levels (which are nearly half of European prices).
>   
>   China, the second-biggest fuel consumer after the U.S, has been encouraging
>   SUV purchases via subsidized fuel.
>   
>   That now appears to be changing: The Chinese government will “increase
>   gasoline and diesel prices by 1,000 yuan ($145.50) a ton, the National
>   Development and Reform Commission said,” according to a Bloomberg report.
>   This represents a 17% price increase for gasoline and 18% for diesel. China is
>   also scheduled to raise jet-fuel prices by 1,500 yuan a ton (~25%).
>   
>   The response in Crude futures was immediate: Crude Oil fell almost $5, spurring
>   gains in the broad averages.
>   
>   Demand Destruction is now clearly upon us. Its a cliche, but its true: The best
>   cure for high prices are high prices.
>   
>   

Yes, but…
   
This also means rationing by price which means only the world’s richest get to drive SUV’s and the lower income groups have to take the bus.
   
Distribution of consumption gets skewed towards the top.
   
Interesting that much of the political left wants higher prices to discourage consumption, as its counteragenda regarding their distributional desires.

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Re: Some crude facts

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(an email exchange)

On Wed, Jun 18, 2008 at 4:24 PM, Bob wrote:
>   
>   Warren,
>   
>   Do you have any view as to why the Saudi feel a high current oil price is in
>   their best long-term interests?

Not sure it is. They may have a political agenda of destabilizing the west.

The other possibility is that they know they have the only excess capacity, and are trying to get the price up cool demand so that they have a bit more ‘slack’ to deal with real supply shocks.

>   Obviously they make more money in the short run with a higher price, but all oil
>   consuming countries will:
>   
>   1. Reduce consumption
>   
>   2. Legislate higher fuel economy requirements on new vehicles
>   
>   3. Accelerate development of alternative fuels (wind, solar, mining H3 from the
>   moon, etc.)
>   
>   4. Expand domestic production (given that high cost oil extraction methods are
>   viable)
>   
>   5. Expand domestic production (e.g., Bush & McCain seeking access to outer
>   continental shelf)

Yes, and that would mean Saudi exports would fall, which also might be a good thing for them if they plan on increasing domestic consumption.

>   I would assume the objective function (in an operations research sense) would
>   be to maximize the total revenue earned on the sale of all oil in their
>   possession.

Yes, though the current King is probably over 80 years old and may have other agendas, as above.

>   It would seem to me the current effort to push up the prices could be
>   short-sighted for it may backfire if it brings more supply online, generates
>   research which produces a breakthrough in alternative energy development, or
>   radically reduces demand.
>   
>   Bob
>   

Yes, might be the case. But sure seems like that’s what they are doing!

warren

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Competing for fuel

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Here’s what I see happening at the macro level:

The US, for all practical purposes, was able to successfully compete for the world’s fuel supply such that nearly everyone in the US could afford to drive.

Now other populations/regions of the world where almost no one could afford to drive are increasing their ‘wealth’ and competing with us for fuel.

In these nations, like China, India, Brazil, much like in the west, the majority of the ‘wealth’ flows to the top.

These people at the top are increasingly able to afford to outbid us for fuel as they bid up the price.

Our lowest income individuals get outbid first, and it works its way up from there as total world fuel output stagnates.

This process continues as their wealth increases and a larger number of their ‘rich’ outbid our ‘poor.’

A small percentage of their much larger populations gaining wealth means a larger percentage of our smaller population gets out bid.

And rising fuel prices/declining real terms of trade further foster this effect.

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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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