Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24
RECESSION When Yield Curve Uninverts - 8th Sep 24
Sentiment Speaks: Silver Is Set Up To Shine - 8th Sep 24
Precious Metals Shine in August: Gold and Silver Surge Ahead - 8th Sep 24
Gold’s Demand Comeback - 8th Sep 24
Gold’s Quick Reversal and Copper’s Major Indications - 8th Sep 24
GLOBAL WARMING Housing Market Consequences Right Now - 6th Sep 24
Crude Oil’s Sign for Gold Investors - 6th Sep 24
Stocks Face Uncertainty Following Sell-Off- 6th Sep 24
GOLD WILL CONTINUE TO OUTPERFORM MINING SHARES - 6th Sep 24
AI Stocks Portfolio and Bitcoin September 2024 - 3rd Sep 24
2024 = 1984 - AI Equals Loss of Agency - 30th Aug 24
UBI - Universal Billionaire Income - 30th Aug 24
US COUNTING DOWN TO CRISIS, CATASTROPHE AND COLLAPSE - 30th Aug 24
GBP/USD Uptrend: What’s Next for the Pair? - 30th Aug 24
The Post-2020 History of the 10-2 US Treasury Yield Curve - 30th Aug 24
Stocks Likely to Extend Consolidation: Topping Pattern Forming? - 30th Aug 24
Why Stock-Market Success Is Usually Only Temporary - 30th Aug 24
The Consequences of AI - 24th Aug 24
Can Greedy Politicians Really Stop Price Inflation With a "Price Gouging" Ban? - 24th Aug 24
Why Alien Intelligence Cannot Predict the Future - 23rd Aug 24
Stock Market Surefire Way to Go Broke - 23rd Aug 24
RIP Google Search - 23rd Aug 24
What happened to the Fed’s Gold? - 23rd Aug 24
US Dollar Reserves Have Dropped By 14 Percent Since 2002 - 23rd Aug 24
Will Electric Vehicles Be the Killer App for Silver? - 23rd Aug 24
EUR/USD Update: Strong Uptrend and Key Levels to Watch - 23rd Aug 24
Gold Mid-Tier Mining Stocks Fundamentals - 23rd Aug 24
My GCSE Exam Results Day Shock! 2024 - 23rd Aug 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Crude Oil Prices - Goldman Revises Down

Commodities / Crude Oil Oct 18, 2012 - 11:28 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleIce sheets retreating due to global warming often suddenly stabilise for “decades to centuries” no matter that the warming is still going on, scientists of the British Antarctic Survey and partner research institutions have found. It would seem that current predictions of sea level rises to be expected on a given timescale with a given amount of global warming will need to be revised - downwards. System stability is much higher than previously thought - or hoped by global warming hysterics.


In fact more closely related to this news than it might at first seem, Goldman Sachs analyst David Greely in a recent mea culpa from GS allowed punters to know that Goldman has been exaggerating with its oft-repeated claims that "the right price of oil" in 2012 is $125 for WTI and $130 for Brent. In his October review of oil market fundamentals published by Goldman Sachs, Greely said in brief coded language that oil markets are "cyclically tight but structurally stable".

He went on to say that GS now sees long-dated Brent crude oil stabilizing around $90/bbl, a price level which is a whopping $40 lower than previous GS forecasts. The new forecast could or might save face for GS, and just as important a large number of customer plays on rising oil prices going forward.

The famous Brent premium feeding huge volumes of arbitrage trades at an unreal mark-up from WTI to Brent - hitting highs up to $25 a barrel - has disappeared from the Goldman oil price Muppet show. Greely said that he sees a return to the oil pricing regime that characterized the crude oil market in the 1990s when long-dated Brent crude oil prices were anchored at $20/bbl, and although he made a point of not mentioning it, a year average oil price of $11.90 in 1998, or in 2012 dollars about $16.80 per barrel that same year. At the time, in those halcyon years, the Brent-WTI mark up counted for toast, the premium-and-discount was nearly zero.

HELLO TO OPEC, GOODBYE TO ARBITRAGE TRADES
In a very interesting exhibit of oil trader schizophrenia and double talk from high paid oil analysts, Goldman Sachs now tells us that rising OPEC spare capacity is no longer a mortal threat to global security, the triumph of Al Qaeda and a guarantee of high oil prices - but the exact opposite. In Greely's words OPEC spare capacity anchored longdated prices in the 1990s, which were low, and future oil prices will be anchored not only by growing OPEC capacity but also by "substantial growth in crude oil supplies from US shale, Canadian oil sands, and global deepwater provinces".

Making a point of keeping his chitchat off the subject of world oil demand - which is very close to straight line and can decline, not only in Europe but also in Asia - Greely has to talk his way around the fact that US WTI grade crude is a low-price snip relative to Brent, "but nobody seems to have noticed".  The Goldman Sachs flight plan for oil prices soaring to $130 a barrel for Brent and just a little less for WTI - - now backtracked very officiallly by GS to a $110 forecast for Brent crude in Q4 2012 - - still needs to tell us all why, at present, Brent grade crude should cost $25 more, each barrel, than WTI.

We get an amusing series of 100% US-based inner sanctum rationales from the GS oilspin doctors. In breif these say that WTI prices have traded at an increasing discount to Brent because barrels delivered to the Cushing, Oklahoma Nymex oil pricing base point and terminal for physical deliveries (of the few percent of all paper contracts taken to delivery) cannot be onward transported south to the US Gulf Coast for refining. The pipeline and rail transport capacity, even truck transport and maybe a few barrels given a ride in the back of a pick-up vehicle, are just not up to the task. What is needed is the Big Thing of the Seaway pipeline expansion, ramping up from its current capacity of 150 000 barrels/day to its new capacity of 400 000 b/d in early 2013. Conversely and in the meantime, the addition of substantial new rail loading and unloading capacity in 2012 has created excess capacity to move Bakken crude, from the north, to the Gulf Coast and especially to the Pacific coast.

Bakken crude, which is very low or zero sulphur, even lighter and easier to refine than WTI, commands a premium against WTI and depresses its price as Bakken's mostly shale-based crude output increases. Goldman has no option but to believe that less Bakken crude will flow south into Cushing, preventing Cushing inventories from building too much as the major nearest refining point for crude, BP’s Whiting refinery undergoes further conversion to handle heavier crudes. Basically and logically, WTI demand should rise because more of it can be refined, with a certain and massive downward hit on the unreal Brent-WTI premium that Greely now forecasts as making LLS (light low sulphur) crudes, in the US, trade at a $2 per barrel discount against Brent by the second half of 2013.

The current WTI-Brent spread (18 October 2012) is minus $20.50 per barrel.

This coming crash of the premium and its related, nice-for-traders arbitrage plays, makes it necessary also for Goldman Sachs to back off regarding the premium/discount which will operate the rest of 2012. Greely says "We expect the WTI-Brent spread to remain volatile in 2012, but to narrow to minus $4/bbl in early 2013".  The only hope for arbitragists will come, Greely thinks, if Bakken crude is increasingly shipped to the US east coast, by rail because the pipeline capacity does not presently exist. Only under that fragile assumption can the arbitrage trade be saved, but even then it will be downsized to a Brent premium against WTI of no more than $6 per barrel "by the end of 2013".

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.


© 2005-2022 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