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Trading Lessons

Reality Blows Crude Oil Price Seriously Off Course

Commodities / Crude Oil Jul 13, 2014 - 04:47 PM GMT

By: Andrew_McKillop

Commodities

Friday the 13th For Oil Came On Friday 11th July
In classic fashion market operators and manipulators gave a false signal to hopeful speculators, by nudging up oil prices on the Nymex, ICE and other oil markets, on Thursday 10th July. Then the market riggers crushed them, Friday 11th, with a 2.2% one-day crash of prices. To be sure we have to wait for Monday 15th trades to see if the new canonical oil price of $100-per-barrel can be set back in place like Humpty Dumpty, and will hold.


Chances are, it won't. Two-percent-daily price cuts can slash oil back to where it belongs at about $80 per barrel, quite fast.  Marketwatch was forced to comment, 12 July, that US WTI and ICE Brent futures dropped below $101 a barrel and $107 a barrel on Friday to mark a fourth weekly loss and their lowest close in two months. It added that “worries continued to fade over near-term threats to Iraqi oil production and Libyan production came back online”. It of course did not add that OPEC states are producing more than 35 million barrels a day! It said nothing about the real state and prospect of world oil demand – unlike the Mickey Mouse “vision” of booming demand growth published by the IEA.

Friday 11 July, West Texas Intermediate crude for August fell $2.10, or 2%, to settle at $100.83 on the New York Mercantile Exchange, a day after the Suckers Rally that nudged up prices before the big dip. Based on the most-active contracts, prices have not closed below $101 since May 12. The weekly loss on oil was roughly 3.1% compared with gold, which in 2014 to date, is the best-performing asset.

For amusement, we could ask Goldman Sachs how they viewed the year's prospects for gold in April or May! For sure and certain, GS will soon be diluting and backtracking on its “cast iron certitude” that oil prices in 2014 could (they mean should) reach $125 a barrel by December.

Why Is Oil So Expensive?
Ask Goldman Sachs or the IEA. Ask them why, also on Friday 11 July, US natural gas prices struggled to hold minuscule gains in recent trading, for a weekly loss of 5.9%, to end at $4.15 per million BTU. This prices clean-burning natural gas in the US at exactly $24.07 per barrel equivalent. We can then ask why Goldman Sachs and the IEA seem to think Americans feel fine with natural gas at $24 a barrel - but also feel fine with oil at $100 a barrel? Their psychologists can maybe advise them how to treat their serious problem – but not an economist.

To be sure they can import coal from South Africa and Australia, including shipping costs, at a princely $29 per barrel equivalent – bu they can also buy the coal from US producers at as low as $15 per barrel equivalent. They do have a choice! With oil, they supposedly do not have a choice, but here again Goldman Sachs, the IEA, and the “energy market maker banks” rooting for high-priced oil can advise us all why the price sticks so high. Oil is a “rare and precious fluid”, we suppose.

Stuck so high, it has to fall. This is Newtonian physics based on action and reaction being equal and opposite, it well fits the overpriced oil equation.

The IEA claims to have post-Newtonian quantum physics thinking on its side. It says that “by about 2045 or 2055” the world must totally abandon all fossil fuel to Save The Planet. The global warming crisis, if you didn't know. So why worry about high oil prices?

Another question. Why worry about low oil prices either, if you want its production to wither and shrink to nothing? When the price falls, production will fall, right?

In the meantime bizniss is bizniss. The IEA with an approving nod from Goldman Sachs, the oil majors, OPEC and Russia will be talking up oil prices! On Friday 11 July, it did what it could to stem the rout for oil prices in a report saying that Iraqi production fell by 260,000 barrels a day in July to date, after violence in the north of the country, but increased supply from Saudi Arabia, Iran, Kurdistan, Nigeria and Angola offset the decline to leave OPEC production broadly steady at a claimed 30 million barrels a day, excluding Angolan and Iraqi output, and excluding temporary and unprogrammed losses of production capacity in member states (estimated at over 2.5 Mbd).

The IEA's Friday 11 July report was styled by the IEA as “providing confirmation of traders’ beliefs that the market isn’t as tight as they previously feared, but no more than that,” Matt Parry, senior oil analyst at the Paris-based IEA told newswires in an email. Nice logic! Keep the high-priced party going.

Little Room For Complacency-Plenty For Fantasy
The claim by all vested interested in extreme-high oil prices is “no room for complacency”. They are obliged to make the false claim that the world oil supply / demand system hangs on a knife blade at all times, but we have to admit it is fantastic that among the most tireless workers of this policy line we find the IEA. This entity as noted above, wants us to abandon all fossil fuels by about 2050 (to save the planet as Al Gore has instructed, from his aviation kerosene-fueled Gulfstream jet)!

Obviously that abandonment of fossil energy includes oil – so we can move around on bicycles and feel free to breathe the green air in our eco-liberated cities. When oil is fully abandoned, we could ask the IEA (or Goldman Sachs) what the rational market price for oil would be?

Zero demand. Zero price.

The oil abandonment (or renounciation) model is obviously and firstly predicated on oil prices rising so high “in normal market daily trading” that sensible and intelligent consumers will simply abandon the black fluid. Due to this model being the only one on offer, we are not allowed alternate models, where the oil price drops so low that nobody produces the stuff anymore.

This model however exists. World demand for bakelite, for example, is rather weak and not too many producers are in the market, these days. The ever-falling prices for cellphones do not do much for sales of producers like Samsung. The market is saturated.

The IEA's stress-based, crisis-borne model or paradigm wants us first to bear and support oil prices of for example $150 - $200 a barrel (well above the production cost of high quality whiskies or the best rum), and then suddenly renounce the black fluid.

Levered up by the exorbitant price of oil – but certainly not world coal or natural gas in the US – the magic Low Carbon energy transition  also promoted by the IEA would take place. Too bad for any surviving oil producers! This fantasy model has nothing to do with any preceding historical transition in global energy economics and we can surmise is simply an expedient designed to rationalize and support extreme high oil prices.

Its lifetime is obligatorily counted. On Friday 11 July, oil trading signaled the real world trend.

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.

© 2014 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 advisor.

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