Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Waiting For Russia And Saudi Arabia: Crude Oil Prices Will Fall

Commodities / Crude Oil Jun 26, 2012 - 12:52 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleAs of June 25, Brent and WTI grade crudes continue to show weaker price trends despite one or two previously sure-and-certain price tweakers towards the upside, that no longer work today. In fact, the biggest should-be tweaker, tropical storm Debby, itself shows how fundamentals are stacking up and driving down oil prices. When prices attain about $75 per barrel for WTI, and more for Brent, this will draw squeals, threats, promises and posing from Saudi Arabia and Russia.


Debby has played havoc in the Gulf of Mexico and shut down about a quarter of oil and gas output capacity in the GoM but this isn't what it used to be. In 2005, offshore supply from the GoM accounted for about 30% of US oil production and 17% of natural gas production. Now it only accounts for 20% of US oil production and an unimpressive, and declining 6% of US natural gas production.

Production has migrated back onshore, thanks to shale gas and shale oil, making US output much less exposed to weather risk, especially Caribbean tropical storms. Under today's conditions, US oil and gas supply are more than ample with crude supply near a 22-year high and natural gas supply at a record for this time of the year when demand tends to be low, and will only rebound if there is a weather shift to high summer heat. The US dollar is also strengthening and could sprout wings (at least for a short period) if European cliffhanging and flirting with the abyss moves to free-fall and to real world breakdown of the Eurozone: with a stronger dollar, oil prices should be weaker.

Oil prices have now fallen for about two months, with Brent crude sinking through several supposed "resistance/support levels" to around US$90.10 a barrel, compared with US$119.57 on May 1, and West Texas Intermediate at about US$79.10 today, falling from US$106.17 on May 1

To be sure, the famous "Brent premium" hangs on and hangs in, but so many fundamentals run against that antique hand-me-down of the oil trading fraternity, that its life expectancy is low: nothing prevents the premium being squeezed to a symbolic $5 in a relatively short timespan ahead. The basic explanation is simple: since Q1 2012 the world has been producing more oil while global oil demand is for the most or best set in a mould of very close to zero growth, or perhaps decline. The arguments for straight decline are rising, almost exactly tracking the decline of oil prices. According to the Energy Intelligence Group, global demand showed no recovery at all from daily demand levels of November-December 2011. Possible short-term and fragile recovery in global demand, early in Q1 2012 - which was used by the oil trading fraternity to talk prices above $125 per barrel for Brent - has surely disappeared off the radar screen

Global oil demand may have attained 90.5 million barrels per day (Mbd) early in the year, but since late April, as now recognized by the IEA, the track of decline is sure and certain. Current global demand may be less than 88.5 Mbd. At the same time, global conventional gas finds, some of it with probably appreciable condensate yield potentials, have been massive since late 2011, and the OPEC group, and Russia, are producing oil at high, or sometimes record rates. Year on year, OPEC's output has grown 10 percent during the past 12 months.

THE NEW DAWN FOR GLOBAL OIL
Totally unlike the 2008-2009 sequence of oil price crash and then rebound, which had almost zero relation to demand/supply changes and was a "purely financial event", the last time that global oil supply outstripped demand was in 2006. Compressing the price facts to where we need them, oil prices started 2006 at around US$60 per barrel and ended the year at US$60 per barrel.

An overquick conclusion from this says that oil prices, today, could be headed for $60.

It however sets the real panic-price level for Saudi Arabia and Russia, and identifies why they will take avoiding action much further up the price scale: from US$75 per barrel. Especially for Russia, where OAO Gazprom is beginning to map the contours of its coming decline - rather than looking at the future, not liking it, and saying it doesn't exist -  falling oil prices and falling gas prices can deliver a hard blow to the Putin Empire. This could possibly be to the extent of "tweaking" the tail of the Russian bear by one turn too much, making it especially aggressive.

Saudi Arabia's oil price sensitivity, claimed by Saudi braggers to be so low it doesn't exist, has climbed so high and far from the long-dead days of Saudi claims that it can live with oil at $35, that figures near US$60 or even 70 per barrel can be taken seriously. Plenty of other OPEC states, measuring their oil price sensitivity relative to their national budgets, debt servicing, and oil sector development financing, are right up at the $75 plimsoll line. Facing the producers however, the world's biggest oil consumer, the US is now sitting on more oil supplies than it has had since 1990. This coincides with the US having its weakest oil demand for 15 years - and at most only fractional growth prospects. Other OECD oil consumers are using ever less oil, especially the European group which is showing its sixth year of oil demand contraction at a 6-year average rate of 2.5% each year.

To be sure this is powerfully driven by recession, but is also aided by growing energy efficiency and accelerating changes in the energy economy, shown by the ever growing GDP output from each barrel that is spent or used.

Another acid test for "the right price" of oil is coming from the trader community itself: in highly predictable fashion, the slump in oil prices has coincided with a steep selloff in oil futures contracts over the last three months. According to the US market watchdog agency the CFTC (Commodity Futures Trading Commission) speculators have cut their net-long positions—their bets that the price will rise—to the equivalent of 136 million barrels of oil, the lowest since September 2010, and the exact opposite to the vast binge of speculative buying that preceded.

At the time, things were good for net-long speculators: there was still some mileage in the Iran nuclear crisis, despite its antique status, but above all global oil demand seemed to be recovering. The result was a six-month bull run that is now history. With the speculators out of the market, prices will tend to more easily reflect supply-demand fundamentals, not a screen shot from Goldman Sach's trading programs, with the near certain readout that oil prices can or should decline all through summer.

That however depends on how fast and how far price fall this summer.

SAUDI AND RUSSIAN REARGUARD ACTION
Current price trends are already running faster than market analysts and gurus cared to imagine, with many of their forecasts still set at Brent prices softening to around US$90 per barrel by September, and  West Texas Intermediate possibly falling to as low as US$80 by the same date. Saudi and Russian reaction will therefore tend to be jumpstarted by prices softening faster than predicted.

The unlikely alliance and unholy (or uncoranic) couple of Russia and KSA will almost certainly and quite rapidly be squealing. Their fears are easy to understand: nothing particularly prevents oil prices slumping to US$60 per barrel - consumers would find no special problems in accepting oil at that price, even if the economic benefits of cheap oil have been drastically exaggerated for decades. Cheap oil is in fact a producer problem, not a consumer problem, and both of the strange couple have problems.

Of the two biggest producers, Russia has the largest problems accepting prices much below $75 per barrel and staying there. A big cut in its oil revenues at a time when gas prices are under sure and certain threat - if a couple of years ahead - and commodity prices outside the energy sector are set to decline, spells big trouble for Russia's national finances, the economy, and Putin's now troubled and contested leadership. For Russia, a Middle East conflagration of the type that his favourite local dictator, Bashr el Assad is threatening would be a welcome oil price booster. Defending el Assad will be an interesting test for Putin: if he lets the war criminal drop, oil prices will soften even further.

More discreet but at least as worried as the world's producer countries, we have big energy: all the so-called "oil majors" are now engaged in an historic gas shift away from oil, producing more gas energy and building more energy reserves as gas, than oil. But financing this shift needs oil prices which stay firm and relatively high. Key examples concern the financing of mega projects like the Gazprom-Total-Statoil majority gas project in Russia, the Shtockman project whose fate now hangs in the balance. Without oil prices around $75, this project is likely to be abandoned or shifted far forward in time.

Right behind the Russian and Saudi moves that are predictable when WTI prices hit US$75 a barrel and before Brent prices fall to the same level, big energy corporations will also be moving to stem the price rout. Their action may take many forms but underlining how $75 oil is now "cheap", their financial performance and stock price will be heavily damaged at these prices levels, today in 2012. Below $60 really hard times are in view for these ex-oil majors making a financially perilous but abudant resource-driven shift to gas, with several predictable signs of the process.

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.


© 2005-2019 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