Best of the Week
Most Popular
1.Gold Price Crash Through Key Support, Crude Oil in Freefall - Clive_Maund
2.Marc Faber Warns Japan's Bond-Buying Program is a Ponzi Scheme - Bloomberg
3.Silver Price and Powerful Forces - DeviantInvestor
4.Stocks Bear Market Catastrophe as Stocks Flash Crash to New All Time Highs - Nadeem_Walayat
5.Marc Faber Warns Not to Hold Any Gold in the U.S. - GoldCore
6.U.S. Housing Market San Francisco at Critical Mass - Harry_Dent
7.Global Scramble For Silver - Coins “Hard To Get,” “Premiums Likely To Jump” - GoldCore
8.Major World Stock Market Indices Analysis: SPY, QQQ, DAX, FTSE, CAC, HSI - Michael_Noonan
9.Japan's kaput?! - Axel_Merk
10.Tesco Empire Strikes Back, £5 off £40 Discount Voucher Spend Explained, Exclusions Warning! - Nadeem_Walayat
Last 5 days
Currency Wars, the Ruble and Keynes - 21st Nov 14
Stock Market Investor Sentiment in The Balance - 21st Nov 14
Two Biotech Stocks Set to Double on One Powerful Catalyst - 21st Nov 14
Swiss Gold Poll Likely Tighter Than Polls Suggest - 21st Nov 14
Gold's Volatility and Other Things to Watch - 21st Nov 14
Australia Stock Market and AUD Dollar Analysis (ASX200 and AUDUSD) - 21st Nov 14
New Algae Research May Have Uncovered an “Energy Forest” Under the Sea - 21st Nov 14
The Cultural and Political Consequences of Fiat Money - 20th Nov 14
United States Social Crisis - No One Told You When to Run, You Missed the Starting Gun! - 20th Nov 14
Euro-Zone Tooth Fairy Economics, Spain Needs to leave the Euro - 20th Nov 14
Ebola Threat Remains a Risk - New Deaths in Nebraska and New York - 20th Nov 14
Stock Market and the Jaws of Life or Death? - 20th Nov 14
Putin’s World: Why Russia’s Showdown with the West Will Worsen - 20th Nov 14
Making Money While The World Burns - 20th Nov 14
Why This "Quiet Zone" Is Now Tech Stocks Biggest Profit Sector - 20th Nov 14
My Favorite Stock McDonalds Just Got Kicked Off My “Buy” List - 19th Nov 14
European Economies in Perpetual State of Shock, What's Scarier Than Deflation? - 19th Nov 14
Breakfast with a Lord of War and Nuclear Weapons - 19th Nov 14
The U.S. Economy’s Ebb and Flow - 19th Nov 14
What You Need to Know Before Investing in Alibaba - 19th Nov 14
Forget About Crude Oil Price Testing 2009 Low - 19th Nov 14
What Blows Up First? Part 5: Shale Oil Junk Bonds - 19th Nov 14
Bitcoin Price Did We Just See an Important Slump? - 18th Nov 14
How to Profit From Oversold Crude Oil Price - 18th Nov 14
Stock Valuations Outrunning Profits Growth - And the Band Played On - 18th Nov 14
ECB Buy Gold Bullion? Japan's Monetary Policy Dubbed "Ponzi Scheme" - 18th Nov 14
Gold, Silver, Crude and S&P Ending Wedge Patterns - 18th Nov 14
How High Could USD/JPY Go? - 18th Nov 14
On Obama and the Nature of Failed Presidencies - 18th Nov 14
Globalism Free Trade Immigration Connection - 18th Nov 14
An Epiphany From Hell - Buy Gold and Silver - 18th Nov 14
Too Difficult to Get a U.S. Home Loan - 18th Nov 14
Has the Gold Bear Trap Been Set - 18th Nov 14
Gold Price and Miners Soar on Huge Volume - 17th Nov 14
Cameron Says Second Global Economic Crash is Loomin, Japan in Recession - 17th Nov 14
How to Play the Stock Market 2014 Year-End Rally - 17th Nov 14
What The Fed Has Wrought, Who Needs Wage Earners Anyway? - 17th Nov 14
Stock Market Indexes Fluctuate Along Record Levels - Will Uptrend Continue? - 17th Nov 14
Stock Market Trend Deceleration Tends To Precede Corrections - 17th Nov 14
Stocks Bull Market Set to Continue After Consolidation - 17th Nov 14
The World Is Run By Fools, And We Let Them - 17th Nov 14
Gold Price Golden Bottom? - 17th Nov 14
Gold Dragons Grand Strategy - 16th Nov 14
Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - 16th Nov 14
Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - 16th Nov 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Dramatic Stock Market Selloff

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.


© 2005-2014 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

Free Report - Financial Markets 2014