The old adage used by Wall Streeters from time immemorial, "Don't fight the Fed", proved itself quite succinctly today with RBOB October futures finishing up .0625. The highly anticipated speech by Fed Chairman Bernanke appeared to leave the door open for another round of quantitative easing to help counter higher US unemployment. This added more support to risk-appetites and fueled more gains in the crude oil market.
Ben Bernanke has been on a mission to keep asset prices from falling since the fall of Lehman Brothers in September of 2008. Being a life long student of the cause and persistence of asset depreciation during the "Great Depression", Mr Bernanke is willing, more than willing, to pump up commodity prices through quantative easing policies, to keep the US economy from sliding back into a deep recession. Traders will do well to not fight the power that the Federal Reserve wields.
Speaking at the Fed’s annual gathering in Jackson Hole, Wyoming, Mr Bernanke offered no direct promise of further intervention. But by spelling out the feeble state of the economy, the Fed’s intention to be forceful and its range of policy tools, he raised expectations of action in September.
“Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions,” said the Fed chairman on Friday.
The clearest hint that Mr Bernanke is ready to do more came from his disappointment with the economy’s progress. He noted some recovery over the past few years but said that improvement in the labour market has been “painfully slow”. He said “unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time”.
By midday, the S&P had rebounded from a drop after Mr Bernanke's comments, and closed up 0.5 per cent. The 10-year Treasury note rose, pushing its yield 5 basis points lower to 1.58 per cent, as markets decided Mr Bernanke’s comments did signal further easing. Mr Bernanke argued that the Fed’s forecasts of future interest rates – it anticipates rates staying low at least until late 2014 – illustrated its resolve in supporting a recovery.
In one possible hint of future policy, he said that the current late-2014 date “is broadly consistent with prescriptions coming from a range of standard benchmarks”, but that “a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods”. That could imply a Fed policy of extending the forecast date into 2015 while making clear that it reflects a change in the central bank’s intentions rather than any downgrade to the economic outlook.
The old adage is to be ignored at the risk of your own trading profitability, "Don't fight the Fed".
Friday, August 31, 2012
Sunday, July 29, 2012
Drought Driving Ethanol and Gas Prices Higher
The worst U.S. drought in half a century has fueled a 50 percent surge in corn prices to a record of more than $8 a bushel, heightening fears of a food crisis. Even as the crop wilts, the farm economy has rarely looked healthier thanks to high property prices, widespread accessibility to insurance and a four-year commodity boom.
And a renaissance in domestic oil output in North Dakota and Texas is eating into dependence on foreign crude. Supporters of motor fuel made from U.S. grain have long used the foreign oil addiction as an argument for the Bush-era mandate, known as the Renewable Fuels Standard, or RFS.
Poultry, beef and pork producers complain the RFS, which requires petroleum blenders to use 13.2 billion gallons of corn ethanol this year or face fines, is also behind the rise in corn prices.
And a renaissance in domestic oil output in North Dakota and Texas is eating into dependence on foreign crude. Supporters of motor fuel made from U.S. grain have long used the foreign oil addiction as an argument for the Bush-era mandate, known as the Renewable Fuels Standard, or RFS.
Poultry, beef and pork producers complain the RFS, which requires petroleum blenders to use 13.2 billion gallons of corn ethanol this year or face fines, is also behind the rise in corn prices.
The higher corn prices go the more it boosts prices for one of their top expesnses: animal feed. So the industries are pushing the Environmental Protection Agency to waive the mandate this year.
But even with growing numbers of Midwestern counties declared disaster areas by the government, no ethanol opponent can yet make the case the EPA has said is necessary to grant a waiver: that implementing the mandate itself is causing "severe harm" to the economy of a state, region, or the country.
"Severe economic damage is a very high bar," said Mark McMinimy, a senior policy analyst at Guggenheim Washington Research Group, part of a financial services company.
Texas Governor Rick Perry discovered that for himself in 2008 when drought boosted grain prices and the meat industries pushed him to petition the EPA to waive the mandate. The agency turned him down, emphasizing that future petitions would have to demonstrate implementation of the mandate itself was causing the economic harm, not just contributing to it.
"I really don't see at this point what basis the administration would use to issue a waiver," McMinimy said.
U.S. Agriculture Secretary Tom Vilsack told a press conference at the White House on Wednesday the drought will spike crop prices. He also said beef and pork prices might rise late this year after rising in the short-term as ranchers and poultry farmers shrink herds and cull flocks.
But he also reiterated his agency's prediction last week that the corn crop could still be the third largest on record due to wider than normal plantings across the country this year.
In 2007 George W. Bush signed the RFS into law. It required 9 billion gallons of ethanol from corn in 2008, when Perry asked for the waiver. In 2015, the mandate peaks at 15 billion gallons requiring that level through 2022.
The mandate -- run by the EPA under the Clean Air Act -- was also embraced by President Barack Obama even before he hit the campaign trail for re-election and pushed an "all of the above" strategy on energy. Obama's blueprint lays out a future for oil, natural gas and wind and solar, but also for biofuels including ethanol made from corn.
Three of the swing states in the election, Ohio, Michigan, and Iowa, are top corn growing states, where voters might be dismayed by a move to take an important market for the grain off the table.
It is highly unlikely the mandate will be removed with these crucial swing states in play.
There is no doubt the severity of the drought has driven corn prices higher. This in turn lifts ethanol producers cost higher, resulting in higher ethanol prices and ulitmately higher ethanol blended gas prices higher.
But even with growing numbers of Midwestern counties declared disaster areas by the government, no ethanol opponent can yet make the case the EPA has said is necessary to grant a waiver: that implementing the mandate itself is causing "severe harm" to the economy of a state, region, or the country.
"Severe economic damage is a very high bar," said Mark McMinimy, a senior policy analyst at Guggenheim Washington Research Group, part of a financial services company.
Texas Governor Rick Perry discovered that for himself in 2008 when drought boosted grain prices and the meat industries pushed him to petition the EPA to waive the mandate. The agency turned him down, emphasizing that future petitions would have to demonstrate implementation of the mandate itself was causing the economic harm, not just contributing to it.
"I really don't see at this point what basis the administration would use to issue a waiver," McMinimy said.
U.S. Agriculture Secretary Tom Vilsack told a press conference at the White House on Wednesday the drought will spike crop prices. He also said beef and pork prices might rise late this year after rising in the short-term as ranchers and poultry farmers shrink herds and cull flocks.
But he also reiterated his agency's prediction last week that the corn crop could still be the third largest on record due to wider than normal plantings across the country this year.
In 2007 George W. Bush signed the RFS into law. It required 9 billion gallons of ethanol from corn in 2008, when Perry asked for the waiver. In 2015, the mandate peaks at 15 billion gallons requiring that level through 2022.
The mandate -- run by the EPA under the Clean Air Act -- was also embraced by President Barack Obama even before he hit the campaign trail for re-election and pushed an "all of the above" strategy on energy. Obama's blueprint lays out a future for oil, natural gas and wind and solar, but also for biofuels including ethanol made from corn.
Three of the swing states in the election, Ohio, Michigan, and Iowa, are top corn growing states, where voters might be dismayed by a move to take an important market for the grain off the table.
It is highly unlikely the mandate will be removed with these crucial swing states in play.
There is no doubt the severity of the drought has driven corn prices higher. This in turn lifts ethanol producers cost higher, resulting in higher ethanol prices and ulitmately higher ethanol blended gas prices higher.
The right thing to do is to relax the ethanol mandate immediately. However, it is doubtful any reduction in the mandate will come before the November Presidential elections.
Congratulations to all ethanol blenders who locked in large negative ethanol differentials to RBOB on their contracts earlier in the year!
Friday, June 29, 2012
German Chancellor Angela Merkel to the Rescue
What a day in the energy markets! RBOB rocketed up .15. HO even higher at .1577. Brent crude and West Texas Intermediate bettered them all rising 7.5%. The catalyst for today's momentum was German Chancellor Angela Merkel reversing her stance on euro rescue funds being used to funnel monies directly into euro zone banks.
So have all the world's problems been solved? Are we to expect global growth to kick into high gear?
In my opinion, there are four glaring holes in the Summit’s announcements. First, it’s clear that given the language contained within the statement, any bank recapitalization plan by the European Stability Mechanism (ESM, which replaces the EFSF, the European Financial Stability Facility) is not a guarantee; it is a possibility if strict conditions are met. Secondly, and staying on the ESM, these changes now must be ratified by all 17 Euro-zone members; and Germany still needs to ratify the first agreement. So the ESM is far from being activated. Third, the idea of direct bank recapitalization will not sit well with tax payers in the European core. And finally, fourth, the bailout mechanisms, in my opinion, are doomed to fail once Italy and Spain tap them. Once these countries tap the funds, the burden falls onto the healthier countries, and we’ve already seen that Germany will be hard to convince to contribute more funds.
So have all the world's problems been solved? Are we to expect global growth to kick into high gear?
In my opinion, there are four glaring holes in the Summit’s announcements. First, it’s clear that given the language contained within the statement, any bank recapitalization plan by the European Stability Mechanism (ESM, which replaces the EFSF, the European Financial Stability Facility) is not a guarantee; it is a possibility if strict conditions are met. Secondly, and staying on the ESM, these changes now must be ratified by all 17 Euro-zone members; and Germany still needs to ratify the first agreement. So the ESM is far from being activated. Third, the idea of direct bank recapitalization will not sit well with tax payers in the European core. And finally, fourth, the bailout mechanisms, in my opinion, are doomed to fail once Italy and Spain tap them. Once these countries tap the funds, the burden falls onto the healthier countries, and we’ve already seen that Germany will be hard to convince to contribute more funds.
If there’s a positive to this Summit, it would be that seniority was removed from the ESM. This means that private bondholders, who were forced to take a haircut on Greek loans, won’t experience the same pain; this should help Spanish yields recover. They have thus far, with the Spanish 2-year note yield falling to 4.267% and the 10-year note yield falling to 6.393%.
All that being said, with peak hurricane season just one month away, I believe the bottom is in and hedgers are now able to ease up a little on seeking down side protection on crude and refined products.
Saturday, May 19, 2012
The Rain in Spain Will Fall Mainly on Energy Futures
In these perilous economic times, Greece, Portugal and Spain are likely to be left to take the Doctor's advice given in Shakespeare's "MacBeth".
Macbeth:
Canst thou not minister to a mind diseas'd,
Pluck from the memory a rooted sorrow,
Raze out the written troubles of the brain,
And with some sweet oblivious antidote
Cleanse the stuff'd bosom of that perilous stuff
Which weighs upon the heart?
Doctor:
Therein the patient
Must minister to himself.
The irritation of the eurozone with Greece is at extreme levels. After all, 80 per cent of Greeks say they are in favour of staying in the euro, but then they fail to elect politicians prepared to implement the agreed programme. This drives creditors crazy. Increasingly, the latter are inclined to accept Greek exit, even welcome it. But they should be careful what they wish for.
A departure would create severe dangers. The danger of contagion is obvious. The long-run danger is more subtle. But the euro zone either is an irrevocable currency union or it is not. If countries in difficulty leave, it is not. It is then an exceptionally rigid fixed-currency system. That would have two dire results: people would not trust in its survival and the economic benefits of the single currency would largely disappear.
These perils are not of concern to the euro zone alone. Taken as a whole, this is the world’s second-largest economy, with the largest banking system. The risk that a bigger euro zone upheaval would cause a global crisis is real. As frightening is the likelihood that euro zone crises would become permanent features of the world economy.
If Greece leaves, the euro zone will have to change fundamentally to make survival less painful and therefore more credible. If that is impossible, as many suppose, irrevocability must be seen as a mirage, which would in turn guarantee the repetition of large crises. It also destroys the economic arguments for the currency union by undermining financial integration and rendering long-term investments dependent on access to the entire euro zone economy far riskier. It is a nightmare.
Greek exit then would create a choice between big moves to a stronger union and a future of endless crises. It is a choice the dominant creditor nation, Germany, must make – among big steps to integration that horrify many of its people, a future of horrible crises or a horrible break up right now. No good choices exist. But the euro zone must become a stronger union or it will disappear.
Greece is cooked. In four weeks Grecians will wake up to find themselves without a currency. The drachma will be revived. Until the transition from the euro to the drachma completes, Grecians will find themselves in a barter economy.
Portugal is the next bowling pin to tumble. Unfortunately for Spanish banks that hold $65 billion in Portuguese debt, Spanish banks will find themselves in a severe liquidity crisis having to absorb this enormous loss.
Forward thinking Europeans are already preparing for the worst. Runs are being made on Euro bank assets. Not the type of bank runs we remember from the depression with bank customers lining up demanding cash. Modern bank runs are performed online with a mouse and a click, removing cash via withdrawals or purchases of bonds.
This week European Union leaders will meet on Wednesday May 23rd to strategize short term stop gaps for the banking contagion that will spread with the fall of the Grecian economy. Failure to back stop Spanish banks will accelerate downward momentum in crude, gas and heating oil futures.
Macbeth:
Canst thou not minister to a mind diseas'd,
Pluck from the memory a rooted sorrow,
Raze out the written troubles of the brain,
And with some sweet oblivious antidote
Cleanse the stuff'd bosom of that perilous stuff
Which weighs upon the heart?
Doctor:
Therein the patient
Must minister to himself.
The irritation of the eurozone with Greece is at extreme levels. After all, 80 per cent of Greeks say they are in favour of staying in the euro, but then they fail to elect politicians prepared to implement the agreed programme. This drives creditors crazy. Increasingly, the latter are inclined to accept Greek exit, even welcome it. But they should be careful what they wish for.
A departure would create severe dangers. The danger of contagion is obvious. The long-run danger is more subtle. But the euro zone either is an irrevocable currency union or it is not. If countries in difficulty leave, it is not. It is then an exceptionally rigid fixed-currency system. That would have two dire results: people would not trust in its survival and the economic benefits of the single currency would largely disappear.
These perils are not of concern to the euro zone alone. Taken as a whole, this is the world’s second-largest economy, with the largest banking system. The risk that a bigger euro zone upheaval would cause a global crisis is real. As frightening is the likelihood that euro zone crises would become permanent features of the world economy.
If Greece leaves, the euro zone will have to change fundamentally to make survival less painful and therefore more credible. If that is impossible, as many suppose, irrevocability must be seen as a mirage, which would in turn guarantee the repetition of large crises. It also destroys the economic arguments for the currency union by undermining financial integration and rendering long-term investments dependent on access to the entire euro zone economy far riskier. It is a nightmare.
Greek exit then would create a choice between big moves to a stronger union and a future of endless crises. It is a choice the dominant creditor nation, Germany, must make – among big steps to integration that horrify many of its people, a future of horrible crises or a horrible break up right now. No good choices exist. But the euro zone must become a stronger union or it will disappear.
Greece is cooked. In four weeks Grecians will wake up to find themselves without a currency. The drachma will be revived. Until the transition from the euro to the drachma completes, Grecians will find themselves in a barter economy.
Portugal is the next bowling pin to tumble. Unfortunately for Spanish banks that hold $65 billion in Portuguese debt, Spanish banks will find themselves in a severe liquidity crisis having to absorb this enormous loss.
Forward thinking Europeans are already preparing for the worst. Runs are being made on Euro bank assets. Not the type of bank runs we remember from the depression with bank customers lining up demanding cash. Modern bank runs are performed online with a mouse and a click, removing cash via withdrawals or purchases of bonds.
This week European Union leaders will meet on Wednesday May 23rd to strategize short term stop gaps for the banking contagion that will spread with the fall of the Grecian economy. Failure to back stop Spanish banks will accelerate downward momentum in crude, gas and heating oil futures.
Friday, April 27, 2012
Where Have All the Onion Futures Gone?
One of the few vegetables that I have always detested is the lowly bulbous root better known as the onion. I am not sure why, but since as early as I can remember, I have fought hand and tooth resisting having to eat any dishes with onions as an ingredient. Little did I realize there was also a group of onion growers in Michigan that had an even stronger dislike for onion futures speculators.
Back in 1958, onion growers convinced themselves that futures traders (and not the new farms sprouting up in Wisconsin) were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.
And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April.
The volatility has been so extreme that the son of one of the original onion growers who lobbied Congress for the trading ban now thinks the onion market would operate more smoothly if a futures contract were in place.
"There probably has been more volatility since the ban," says Bob Debruyn of Debruyn Produce, a Michigan-based grower and wholesaler. "I would think that a futures market for onions would make some sense today, even though my father was very much involved in getting rid of it."
Commodities futures speculators provide the liquidity that make futures markets viable hedging vehicles. Speculators bid up commodities futures prices or bid them down depending upon underlying fundamentals of supply and demand. Efforts to control commodities prices should be focused on underlying supply and demand driving commodities prices. Speculators will ensure that commodities prices neither rise to high or fall too low.
Back in 1958, onion growers convinced themselves that futures traders (and not the new farms sprouting up in Wisconsin) were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.
And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April.
The volatility has been so extreme that the son of one of the original onion growers who lobbied Congress for the trading ban now thinks the onion market would operate more smoothly if a futures contract were in place.
"There probably has been more volatility since the ban," says Bob Debruyn of Debruyn Produce, a Michigan-based grower and wholesaler. "I would think that a futures market for onions would make some sense today, even though my father was very much involved in getting rid of it."
Commodities futures speculators provide the liquidity that make futures markets viable hedging vehicles. Speculators bid up commodities futures prices or bid them down depending upon underlying fundamentals of supply and demand. Efforts to control commodities prices should be focused on underlying supply and demand driving commodities prices. Speculators will ensure that commodities prices neither rise to high or fall too low.
Saturday, March 24, 2012
Central Banks and Higher Energy Prices
Higher energy prices continue to dominate news coverage. Republicans are blaming Democrats for unfriendly domestic and offshore drilling regulations. Democrats are blaming Republicans for failure to support alternative energy funding. Missing in most of the conversation is the fact that central banks throughout the world are pumping trillions of dollars into markets in an effort to prevent deflationary pressures from taking hold.
There are lots of reasons for oil prices to be going up, of course. Demand is rising in the emerging markets, where growth is still strong. There has been a cold snap across Europe, increasing demand for heating oil. There is tension with Iran, and a revolt in Syria that may soon turn into a civil war. Russia has a tense presidential election this weekend: turmoil there might hit what is now the world’s largest producer of oil, if not yet the largest exporter.
But the main reason is one that is rarely mentioned. The world is being flooded with printed money. In reality, oil is not expensive. It is money that is cheap.
Central banks are fast getting locked into a destructive cycle. They print money to try and pump up demand. Commodity prices rise, which then takes demand out of the economy again.
Worse, it constantly distorts the global economy, draining money from manufacturing nations like Italy or France, and pumping it into resource-rich countries like Russia or Saudi Arabia. Since the manufacturing countries are usually more productive, and more democratic, that hardly makes much sense.
Crude oil futures generally will be on the bid whenever daily excess supply slips below 5,000,000 barrels per day. We are currently at an estimated excess supply of 2,500,000 barrels per day. Reports that Iran oil production is falling helped to drive NYMEX reformulated gas futures up .05 in 5 minutes on Friday.
When fear of tighter supplies meets continued central bank money printing, traders will be reluctant to short energy futures. However, should central bankers turn off the money spigot, fear of the market going down will return and WTI crude futures should be able to find a comfortable home under the three figure handle.
There are lots of reasons for oil prices to be going up, of course. Demand is rising in the emerging markets, where growth is still strong. There has been a cold snap across Europe, increasing demand for heating oil. There is tension with Iran, and a revolt in Syria that may soon turn into a civil war. Russia has a tense presidential election this weekend: turmoil there might hit what is now the world’s largest producer of oil, if not yet the largest exporter.
But the main reason is one that is rarely mentioned. The world is being flooded with printed money. In reality, oil is not expensive. It is money that is cheap.
Central banks are fast getting locked into a destructive cycle. They print money to try and pump up demand. Commodity prices rise, which then takes demand out of the economy again.
Worse, it constantly distorts the global economy, draining money from manufacturing nations like Italy or France, and pumping it into resource-rich countries like Russia or Saudi Arabia. Since the manufacturing countries are usually more productive, and more democratic, that hardly makes much sense.
Crude oil futures generally will be on the bid whenever daily excess supply slips below 5,000,000 barrels per day. We are currently at an estimated excess supply of 2,500,000 barrels per day. Reports that Iran oil production is falling helped to drive NYMEX reformulated gas futures up .05 in 5 minutes on Friday.
When fear of tighter supplies meets continued central bank money printing, traders will be reluctant to short energy futures. However, should central bankers turn off the money spigot, fear of the market going down will return and WTI crude futures should be able to find a comfortable home under the three figure handle.
Saturday, February 25, 2012
The Developing Crude Bubble
Well folks it is that time of year again when gas prices are making headlines. Turn on the TV and you are sure to find a story on rising gas prices and what should be done to combat this phenomenon. Even President Obama has been addressing the issue to deflect any implications that his administration is to blame for the pain at the pump. The underlying fundamentals of supply and demand combined with speculative trading have driven prices higher. These same fundamentals and speculative trading will also cap the price rise and eventually bring prices crashing lower.
The main seasonal drivers for increased gas prices January through April are: shifts by refiners in their product mix percentage to an increase in distillates production with a decrease in mogas production and a shift in refiners production of higher winter RVP gas to lower summer RVP gas. Hedge funds are well aware of these supply issues with gas production and pile into RBOB futures and options pushing gas futures higher, which ultimately pushes spot cash gas markets higher.
These seasonal supply fundamentals have been exasperated this year by additional price drivers. Israeli/Iranian tensions, the closing of several refineries in the US, Caribbean and Europe and Nigerian crude production decreases, have created current and potential future supply crimps.
All of these forces coming together at the same time are creating a higher level of long speculation. At the same time sellers have become more fearful to sell positions. This has caused the futures and options markets to go into runaway mode, where normally patient traders who only buy on pull backs, are forced to buy whenever they get an inside trading day and are even buying on up days to make sure they get their long orders filled.
Traders have to keep in mind that the underlying demand for petroleum products are falling due to the worldwide economic slow down. Year-to-date, the first 40 or so days of 2012 have seen gasoline demand that is about 7% below last year, if you look at Energy Information Administration (EIA) reports. If you look at MasterCard data, you witness a year-on-year decline of about 5%. These are huge numbers for demand destruction. And, within this calendar quarter, crude oil output in North Dakota will surpass crude oil production in Alaska.
As world prices for light sweet crude advance above $120 bbl, the fear begins to shift to the buyers. They may perceive that this rally is getting long in the tooth, recognizing that global demand destruction takes place when crude prices are in a $120-$130 bbl range. When the fear of falling prices finally takes hold, crude futures are likely to take a quick elevator ride down $20 to $30.
The main seasonal drivers for increased gas prices January through April are: shifts by refiners in their product mix percentage to an increase in distillates production with a decrease in mogas production and a shift in refiners production of higher winter RVP gas to lower summer RVP gas. Hedge funds are well aware of these supply issues with gas production and pile into RBOB futures and options pushing gas futures higher, which ultimately pushes spot cash gas markets higher.
These seasonal supply fundamentals have been exasperated this year by additional price drivers. Israeli/Iranian tensions, the closing of several refineries in the US, Caribbean and Europe and Nigerian crude production decreases, have created current and potential future supply crimps.
All of these forces coming together at the same time are creating a higher level of long speculation. At the same time sellers have become more fearful to sell positions. This has caused the futures and options markets to go into runaway mode, where normally patient traders who only buy on pull backs, are forced to buy whenever they get an inside trading day and are even buying on up days to make sure they get their long orders filled.
Traders have to keep in mind that the underlying demand for petroleum products are falling due to the worldwide economic slow down. Year-to-date, the first 40 or so days of 2012 have seen gasoline demand that is about 7% below last year, if you look at Energy Information Administration (EIA) reports. If you look at MasterCard data, you witness a year-on-year decline of about 5%. These are huge numbers for demand destruction. And, within this calendar quarter, crude oil output in North Dakota will surpass crude oil production in Alaska.
As world prices for light sweet crude advance above $120 bbl, the fear begins to shift to the buyers. They may perceive that this rally is getting long in the tooth, recognizing that global demand destruction takes place when crude prices are in a $120-$130 bbl range. When the fear of falling prices finally takes hold, crude futures are likely to take a quick elevator ride down $20 to $30.
Sunday, January 1, 2012
2012 Energy Outlook
Not so long ago a predicted 2% GDP growth rate for the United States would guarantee liquid energy prices are heading lower. There was a time when an economic slow down of the world's largest energy consuming country would assure lower energy prices are swiftly on the way. The world has changed, and is continuing to change rapidly due to the emerging market energy demand led by China, Brazil, India and Russia.
For 2012 and into the foreseeable future, these emerging market leaders should more accurately be called growth market leaders. China, despite a pull back in double digit growth, likely will lead the pack with 8% growth expected. And although these countries will not be immune to a financial melt down in Europe, with lower debts, much higher reserves, relatively stable banking systems, and trading ever more between themselves, the emerging markets will outpace the "advanced industrialised nations".
Europe's sovereign debt will once again take center stage in the first quarter of 2012. Italy, Spain and France all may receive credit downgrades in January. Italy has massive amounts of debt and is likely to have to pay above 7% on their long dated bonds. The weight of the sovereign debt may cause several European banks to fold, sending the euro and energy prices lower.
Despite this initial set back for energy, demand for crude, motorgas and diesel will likely continue growing in 2012. During 2011, global oil consumption averaged 89m barrels per day, according to the International Energy Agency, the Western world's oil think tank, up from 88.3m in 2010. The global economy was relatively subdued, but oil use still rose to an all-time high. Back in 2001, global oil consumption was just 76.6m barrels daily. So during the decade to 2011, worldwide oil demand rose 16%. We now face another sharp rise, with global usage set to reach 95m barrels daily by 2016. That would amount to a 25% consumption increase in just 16 years.
On the supply side, global crude production expanded to 90m barrels daily in November, up from 89.1m the month before. In addition, OPEC crude output rose to 30.7m barrels per day, a three-year high, with Saudi Arabia and Libya accounting for most of the 620,000 barrel increase.
Last month, in addition, OPEC raised its production ceiling to 30m barrels, the first change in three years, moving the target nearer current output as the exporters' cartel struggles to absorb rising exports from post-war Libya. But, still, despite these favourable supply-side developments, Brent crude has remained stubbornly above $100 per barrel.
One reason oil markets are tight is that inventories are very thin. Oil stocks held by the OECD group of advanced industrialised nations have lately fallen to 2,630m barrels. That's around 57 days of forward cover, several days below the five-year inventory average. In fact, US crude inventories are ending 2011 at their lowest level since late 2008, while European inventories are now at an 11-year low.
This inventory dip reflects two important aspects of global oil production. Several of the world's leading oil fields are losing pressure – not least Ghawar in Saudi Arabia and Mexico's Cantarell. Two of the very biggest fields on earth, both are now producing at levels significantly below their medium-term production forecasts.
At the same time, oil-well exploration and development were hit badly by the credit crunch. Crude production is a seriously capital-intensive business with long "lead times". In recent years, a lack of available finance has hit the oil industry hard.
2012 US gas prices will also need to weather the closing of several Northeastern US refineries and increased exports of US refined products.
The opportunity for energy traders will likely emerge early in the year with a pull back in futures. By the 3rd quarter of 2012 energy futures will have a high probability of breaking out of its year long trading ranges and begin a steady upward trending market.
For 2012 and into the foreseeable future, these emerging market leaders should more accurately be called growth market leaders. China, despite a pull back in double digit growth, likely will lead the pack with 8% growth expected. And although these countries will not be immune to a financial melt down in Europe, with lower debts, much higher reserves, relatively stable banking systems, and trading ever more between themselves, the emerging markets will outpace the "advanced industrialised nations".
Europe's sovereign debt will once again take center stage in the first quarter of 2012. Italy, Spain and France all may receive credit downgrades in January. Italy has massive amounts of debt and is likely to have to pay above 7% on their long dated bonds. The weight of the sovereign debt may cause several European banks to fold, sending the euro and energy prices lower.
Despite this initial set back for energy, demand for crude, motorgas and diesel will likely continue growing in 2012. During 2011, global oil consumption averaged 89m barrels per day, according to the International Energy Agency, the Western world's oil think tank, up from 88.3m in 2010. The global economy was relatively subdued, but oil use still rose to an all-time high. Back in 2001, global oil consumption was just 76.6m barrels daily. So during the decade to 2011, worldwide oil demand rose 16%. We now face another sharp rise, with global usage set to reach 95m barrels daily by 2016. That would amount to a 25% consumption increase in just 16 years.
On the supply side, global crude production expanded to 90m barrels daily in November, up from 89.1m the month before. In addition, OPEC crude output rose to 30.7m barrels per day, a three-year high, with Saudi Arabia and Libya accounting for most of the 620,000 barrel increase.
Last month, in addition, OPEC raised its production ceiling to 30m barrels, the first change in three years, moving the target nearer current output as the exporters' cartel struggles to absorb rising exports from post-war Libya. But, still, despite these favourable supply-side developments, Brent crude has remained stubbornly above $100 per barrel.
One reason oil markets are tight is that inventories are very thin. Oil stocks held by the OECD group of advanced industrialised nations have lately fallen to 2,630m barrels. That's around 57 days of forward cover, several days below the five-year inventory average. In fact, US crude inventories are ending 2011 at their lowest level since late 2008, while European inventories are now at an 11-year low.
This inventory dip reflects two important aspects of global oil production. Several of the world's leading oil fields are losing pressure – not least Ghawar in Saudi Arabia and Mexico's Cantarell. Two of the very biggest fields on earth, both are now producing at levels significantly below their medium-term production forecasts.
At the same time, oil-well exploration and development were hit badly by the credit crunch. Crude production is a seriously capital-intensive business with long "lead times". In recent years, a lack of available finance has hit the oil industry hard.
2012 US gas prices will also need to weather the closing of several Northeastern US refineries and increased exports of US refined products.
The opportunity for energy traders will likely emerge early in the year with a pull back in futures. By the 3rd quarter of 2012 energy futures will have a high probability of breaking out of its year long trading ranges and begin a steady upward trending market.
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