Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
Gold Exodus to Reverse - 22nd Sep 18
Bitcoin Trader SCAM WARNING - Peter Jones, Dragons Den Fake Facebook Ads - 22nd Sep 18
China Is Building the World’s Largest Innovation Economy - 21st Sep 18
How Can New Companies Succeed in the Overcrowded Online Gambling Market? - 21st Sep 18
Golden Sunsets in the Land of U.S. Dollar Hegemony - 20th Sep 18
5 Things to Keep in Mind When Buying a Luxury Car in Dubai - 20th Sep 18
Gold Price Seasonal Trend Analysis - Video - 20th Sep 18
The Stealth Reason Why the Stock Market Keeps On Rising - 20th Sep 18
Sheffield School Applications Crisis Eased by New Secondary Schools Places - 20th Sep 18
Precious Metals Sector: It’s 2013 All Over Again - 19th Sep 18
US Dollar Head & Shoulders Triggered. What's Next? - 19th Sep 18
Prepare for the Stock Market’s Volatility to Increase - 19th Sep 18
The Beginning of the End of the Dollar - 19th Sep 18
Land Rover Discovery Sport 'Approved Used' Bad Paint Job - Inchcape Chester - 19th Sep 18
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB
Silver's Relationship with Gold Reaching Historical Extremes - 16th Sep 18
Emerging Markets to Follow and Those to Avoid - 16th Sep 18
Investing - Look at the Facts to Find the Truth - 16th Sep 18
Gold Stocks Forced Capitulation - 15th Sep 18
Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - 15th Sep 18
Trading The Global Future - Bad Consequences - 15th Sep 18
Central Banks Have Gone Rogue, Putting Us All at Risk - 15th Sep 18
Gold Price Seasonal Trend Analysis - 14th Sep 18
Growing Number of Small Businesses Opening – and Closing – In the UK - 14th Sep 18
Gold Price Trend Analysis - Video - 14th Sep 18
Esports Is Exploding—Here’s 3 Best Stocks to Profit From - 13th Sep 18
The Four Steel Men Behind Trump’s Trade War - 13th Sep 18
How Trump Tariffs Could Double America’s Trade Losses - 13th Sep 18
Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - 13th Sep 18
Trading Cryptocurrencies: To Win, You Must Know Where You're Wrong - 13th Sep 18
Gold, Silver, and USD Index - Three Important “Nothings” - 13th Sep 18
Precious Metals Sector On a Long-term SELL Signal - 13th Sep 18
Does Gambling Regulation Work - A Case Study - 13th Sep 18
The Ritual Burial of the US Constitution - 12th Sep 18
Stock Market Final Probe Higher ... Then the PANIC! - 12th Sep 18
Gold Nuggets And Silver Bullets - 12th Sep 18
Bitcoin Trading - SEC Strikes Again - 12th Sep 18

Market Oracle FREE Newsletter

Trading Any Market

Crude Oil And The Dead Cat Bounce

Commodities / Crude Oil Sep 30, 2012 - 10:42 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleFUNDAMENTALS
What crisis? Nymex and ICE oil price movement shows how oil prices can be moved anywhere as long as its up, except of course when its down, where fundamentals point with stubborn determination.

Recent weeks, especially the last show that sometimes the oil bulls can get dispirited and run out of news support, and be forced to take a cut in their boundless optimism which says we really can have $130 a barrel for Brent and $125 for WTI like Goldman Sachs tells us we can - this year, in 2012. When the markets take an especially hard hit, like the recent loss of $10 off the barrel price, the dead cat bounce can take the shape of a Goldman tiger bounce - paper tiger of course.


The real underlying fundamentals are market fundamentals: oil, other commodities, currencies and government debt, equities, any "negotiable security" is now an asset play. And assets have to move up, of course except when their nominal playtime value goes down. Why oil should be specially stuck with the role of lead player in the commodity asset domain is a long story, but what counts is that energy fundamentals are a side dish. What's supply and demand got to do with it?

The European debt and Eurozone finance crises, so long running that they are now antique, can be used to prop oil prices anytime the ECB seems to have its hand near the QE faucet or Germany seems like it might open its purse strings, but with the wrong signals oil prices can plunge on European news: this week WTI crude plunged as Spanish and Greek protestors took to the streets. On the other hand, Brent stayed strong - that is weakened less than WTI - as President Obama told the world “The US will do what we must to prevent Iran from obtaining a nuclear weapon”. Oil bulls were also heartened by Benyamin Netanyahu's not so new hard-line posture on Iran at the UN general assembly.

FUNDAMENTALS ARE NEGATIVE
Every so often market players have to take a peek at what are called energy fundamentals, although this is a dangerous thing for the bulls. Recent and ongoing oil demand and supply news is bad for them; upcoming news is bad, also.

Take an old saw so old that its even more antique than Eurozone crisis. It says that "the USA is dangerously dependent on imported energy". Meaning oil, only, and vastly less than the straight majority of other OECD oil and energy importer countries. Also, shrinkingly less than other major oil and energy importers. Bloomberg News tells us that US oil production last week hit its highest level since January 1997, and the EIA says the US in Q1 2012 met 83 percent of its total energy needs from domestic production. Achieving that also means we take a trip Back to the Past, that is the highest level of energy self-sufficiency since 1991. Soon, the US will be exporting natural gas from its booming shale gas-spurred gas production: in 2006, the so-called "expert community" opined the US was at the edge of a Gas Cliff and was doomed to permanently import gas - at prices running up to, or above $16 per million BTU, equivalent to oil at $92 per barrel. So much for "crippling import dependence".
But who cares about that when Benyamin Netanyahu is thundering at the UN and Spanish or Greek protestors take to the street, one day, and the ECB hints it will buy even more Eurozone sovereign debt, the next day? Thats fundamental oil trader logic, with a lifetime of milliseconds.

Fundamentals say some awful things about 100-dollar oil, let alone Goldman's Nice Price of $130 a barrel. US natural gas prices averaged a little more than $2.50 per million BTU in Q2 2012: that prices the stuff at around $14 per barrel equivalent. Expensive energy! US coal prices, in a now languishing industry are as low as $1.60 per barrel equivalent for the cheapest black stuff. Although wind turbines are expensive, but getting less so, and solar PV arrays are expensive but getting less so very fast, the "fuel" they run on is 100% free. Expensive energy!

To be sure that is only one half of the story - the energy supply side. The demand side is also dark and threatening for overpriced oil, very threatening. World oil demand, this year, may achieve a scary feat for the oil bulls: two straight years of near perfect stagnation of global demand. The EU27 countries are now in their sixth straight year of oil demand shrinkage, recession aiding, but they are now far from the only countries where oil demand shrkinks - and shrinks. The scariest threat for the cozy, almost automatic Goldman Tiger price bounce, anytime oil falls, comes from the so-called Asian Locomative, that is China and India. Like we know this runs mainly on coal, like an old time railway loco should, but its rising oil demand was always good for the price bulls, anytime they shifted away from QE, Eurozone debt bailouts, Iran bombing or a boost to dollar depreciation as a nice set of reasons to bid up oil just as much as they can.

Oil demand growth in China and India is a lot more threatened species than Arctic polar bears. Demand growth is shrinking the same way Antarctic ice is not. China's long-term growth rate of oil imports, which hit an average of more than 9 percent a year for 1999-2009 has been slashed in half. Indian oil demand growth, these days, is close to 3.5 percent per year, not the previous 5.5 percent average,

AND WHAT IS OPEC DOING?
Opec alway overproduces, except of course when it underproduces. Most important of all, the figures on supposed national production and export supply never tally, allowing huge margins of creative interpretation, for the oil bulls. At present and for sure, however, Opec and Nopec are overproducing.

Data for Q2 2012 form the EIA shows the US imported 30 percent more crude from the Persian Gulf than a year previous, raising these imports higher than imports of Canadian crude. Alarming stuff, right? In fact EIA data also shows US domestic oil production is at a 14-year high, near 6.3 million barrels a day, and growing, while the USA's final consumption is back to 1evels of before 2005, at about 18.4 million barrels a day, and shrinking, but these numbers hide a mega shift.

The US is now a large, ever growing net exporter of refined oil products. Domestic refiners are taking crude from wherever available and turning it into diesel, gasoline and other oil products for growing demand from Latin America, Asia, Africa and even Europe, where Europe's outdated, high cost, oversupplied and mismatched refinery output - relative to European refined product demand - creates a growing market for US exports. Like we know, importing crude and refining it can yield impressive netbacks, easily covering the cost of the imports. Whether it is Opec, meaning Saudi Arabia, or Nopec meaning Russia, crude oil producers are flat out and proud of it, as long as prices stay high.

This is fine for refiners and traders as long as demand holds up. It is also good for oil producers as long as they can benefit from oil energy being priced at 5 or 7 times the price of any other energy, but all good things have to end, one day. Oil production is growing fast, outside Opec, and global oil demand is set to shrink. This is the only possible readout from present and upcoming global economic trends, and oil demand can shrink even faster than first-cut analyses might suggest. In other words the current and effected "global cap" on oil demand is most likely heading for an impossible-to-hide contraction.

When this happens is however hard to predict. It may take 3 months, and will be shaded by winter-time fuel demand growth, and it may take longer but this writing is on the wall.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules