Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Worse than Watergate - Release the Memo - Investigate Uranium One - 23rd Jan 18
CAT Stock Bouncing after JPM Upgrade How High and How Long Can This CAT Jump? - 23rd Jan 18
Why Banks Will Be Slammed In The Next Crisis—And That May Be Good News - 23rd Jan 18
Medicare Premiums Are A Shared Pool - Coming Changes That Will Transform Retirement - 23rd Jan 18
Charged Atmosphere of Heavy Police and Security Presence at Sheffield Street Tree Felling Protests - 23rd Jan 18
Pension Crisis And Deficit of £2.6 Billion At Carillion To Impact UK - 22nd Jan 18
Two Factors for Gold That You Don’t Want to Miss - 22nd Jan 18
Why You Must Own Silver in 2018 - 22nd Jan 18
This Could Be The Hottest Mining Stock Of 2018 - 22nd Jan 18
Stock Index Trend Trade Setups for the SP500 & NASDAQ - 22nd Jan 18
Stock Market Deceleration / Distribution - 22nd Jan 18
US Markets vs Govt Shutdown: Stock Markets at all time highs - 22nd Jan 18
Land Rover Discovery Sport - 1 Month Driving Test Review - 22nd Jan 18
Why should you use high-quality YouTube to mp3 converter? - 22nd Jan 18
Silver As Strategic Metal: Why Its Price Will Soar - 21st Jan 18
Stocks, Gold and Interest Rates Three Amigos Ride On - 21st Jan 18
Why Sometimes, "Beating the S&P 500" Isn't Good Enough - 21st Jan 18
Bunnies and Geckos of Sheffield Street Tree Fellings Protests Explained - 21st Jan 18
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

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