Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Inflation, Central Banks, and Business Cycles - 18th Apr 15
Stock Market Correction May be Nearing End - 18th Apr 15
UK Housing Crisis, Immigration, Population Growth, Election Forecast 2015 - Video - 18th Apr 15
Q1 Corporate Earnings Risky for Stocks - 17th Apr 15
US Stock Market Getting Scarier by the Day - 17th Apr 15
Stock Market Watershed Day - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
King Dollar Hurting Stock Market Corporate Earnings! - 17th Apr 15
Production Declines Hide Bigger Crude Oil Storage Issues - 17th Apr 15
Top Three Takeaways From Today’s OPEC Crude Oil Report… and How You Can Profit - 17th Apr 15
How to Profit from Australia's Healthiest Biotech Stocks - 17th Apr 15
What Is Really Driving Gold Price? - 17th Apr 15
Will Ever More Boomers Selling Retirement Assets Change Investment Prices For Decades? - 16th Apr 15
Won't Be Contagion with 'Grexit' Greece Euro-zone Exit - 16th Apr 15
Sharp Decline in USD/CAD and Its Consequences - 16th Apr 15
Blackstone is like Apple, Google, Hermes, Boeing - 16th Apr 15
The Most Dangerous Financial Headline I've Seen Since the 2008 Crisis - 16th Apr 15
Is Legal Tax Avoidance Extinct in the UK? - 16th Apr 15
Why Russia Will Send More Troops to Central Asia - 16th Apr 15
More Thoughts on the Current Crude Oil Market - 16th Apr 15
U.S. Treasury Secretary Warns Greek Exit Will Cause Enormous Disruption and Hardship - 16th Apr 15
The Hottest New Place to Find Stock Dividend Income in Q2/2015 - 15th Apr 15
How to Escape the Pensions Squeeze - 15th Apr 15
Water Crisis Game Changing Water Revolution - 15th Apr 15
The Drying of California - Corporate Farms Control of Water - 15th Apr 15
OPEC Going Broke, Dumping U.S. Dollars. Is That Good Or Bad? - 15th Apr 15
OPEC Just Confirmed It’s Losing the Oil War - 15th Apr 15
Four Uranium Companies Poised to Profit from the Growth of Nuclear Power - 15th Apr 15
Stock Investing Tread Softly… and Carry a Big Risk-Management Calculator - 15th Apr 15
Crude Oil Price Technical Outlook - 15th Apr 15
Important Bitcoin Price Action - 15th Apr 15
UK House Prices, Immigration, Population Growth and Election Forecast 2015 - 15th Apr 15
Peter Schiff on U.S. Dollars, Drachmas and Debt - Video - 14th Apr 15
The Ultimate Middle East Dilemma: Time For Us To Stop Intervening? - 14th Apr 15
Greece Debt Default and Drachma By End of April? - 14th Apr 15
Coming to Terms With the American Empire - 14th Apr 15
The Ball is in the Stock Market Bulls Court - 14th Apr 15
Tech Stocks Bubble: Different this time? - 14th Apr 15
Stock Market Sixth Sense - 14th Apr 15
Separating Gold and Silver Stocks Saints from the Sinners - 14th Apr 15
Conservatives Bribe Labour Voters by Extending Right to Buy to Housing Association Tenants - 14th Apr 15
Stacking Silver = Simple Solution - 13th Apr 15
Why Markets Ignored Weaker Payrolls - 13th Apr 15
Tory Attack on Ed Milliband Backfires as Labour Takes Opinion Polls Lead - 13th Apr 15
A "Digitalized" Stock Profit Play Mr. Spock Would Love - 13th Apr 15
New Credit Crunch Underway: Can Recession Be Far Behind? - 13th Apr 15
Western Interest in Gold Continues to Decline - 13th Apr 15
Stock Markets Breaking Out Worldwide - Buy the Dips Ride the Trend - 13th Apr 15
Silver Price set up to get Whacked Again - 13th Apr 15
Gold Price Dome Cap, Fall Below $1000 Likely - 13th Apr 15
Stock Market Accumulation or Distribution - 13th Apr 15
BLS Economic Propaganda, Truth – The Cure for Cognitive Dissonance - 12th Apr 15
A Case for Monetary Independence - 12th Apr 15
Drought and the Failure of Big Government in California - 12th Apr 15
Stocks Bull Market Continues - 11th Apr 15
Why the American Consumer Will Never Be Back - 11th Apr 15
End Of Islam, Hinduism And Christianity And Rise Of The Age Of Humanism, Spirituality And The Universal God - Sanadhana Dharma - 11th Apr 15
Gold And Silver Nothing Of Substance Going On. Fiat “Dollar” Controlling? - 11th Apr 15
The Most Dangerous Financial Headline I’ve Seen Since 2008 - 11th Apr 15
Alibaba Pggybank Investment Will Make You a Millionaire - 11th Apr 15
Ghosts In The Machine - Population Growth vs Food Production - 11th Apr 15
Gold-Futures Short Covering Rally - 11th Apr 15
Is Bitcoin Price Going down Some More? - 11th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Historic Bubble

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.


© 2005-2015 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