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.
Saturday, February 25, 2012
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.
Saturday, December 24, 2011
Navigating Macro Economic Influences on Energy Futures
Energy prices, along with all commodities, will look back at 2011 as the year of intense correlation to the macro economic environment. Successful energy traders not only had to have a firm grip on traditional supply and demand fundamentals; a strong understanding of macro events and their consequences were essential to be on the right side of price movements. Unfortunately for energy market participants, 2012 will require the same nimbleness to accurately navigate the major tidal movements of the macro economic waves.
2011 began the year with a strong upward trending pricing structure for crude, mogas and distillates. Crude reached a high in April of $115 on the hopes of a strong world wide economic recovery. Then came the less than stellar US economic data in May, combined with fears of European sovereign debt, creating a sell off in crude down to $75 in October. Crude has since rallied back to the three figure level with one week left of trading for the year on hopes that the United States and emerging market economies will carry world economic energy demand.
Forecasting 2012 energy futures will not be an easy task as these macro economic forces will continue to mystify the best of traders. Until clear trends manifest themselves again, successful market participants will incorporate hedging strategies to compensate for influences well beyond the traditionally relied upon fundamental tells of supply and demand; contango and backwardation.
2011 began the year with a strong upward trending pricing structure for crude, mogas and distillates. Crude reached a high in April of $115 on the hopes of a strong world wide economic recovery. Then came the less than stellar US economic data in May, combined with fears of European sovereign debt, creating a sell off in crude down to $75 in October. Crude has since rallied back to the three figure level with one week left of trading for the year on hopes that the United States and emerging market economies will carry world economic energy demand.
Forecasting 2012 energy futures will not be an easy task as these macro economic forces will continue to mystify the best of traders. Until clear trends manifest themselves again, successful market participants will incorporate hedging strategies to compensate for influences well beyond the traditionally relied upon fundamental tells of supply and demand; contango and backwardation.
Saturday, November 19, 2011
Analyzing the WTI/Brent Price Spread
The price of WTI vaulted 3.3% this week. The catalyst being that on Wednesday, Enbridge said it would buy a 50% stake in a pipeline that
brings oil from the Gulf of Mexico to Cushing, Okla., and reverse the direction
that the oil is pumped, so that oil would be leaving Oklahoma instead of
arriving. That will ease the glut of crude oil, known as West Texas Intermediate
crude, or WTI, stored at Cushing—a glut that has been keeping the price of WTI
far below that of Brent, the European standard.
What was even more noticeable was that the price of other world oil benchmarks did not budge. Brent crude actually retreated on price. The "correlation" between the two crudes—their tendency to move in the same direction—has averaged 0.96 over the past two decades, just slightly below a perfect correlation of 1.0. On Nov. 15, it had fallen to 0.71, the lowest in at least 20 years.
Refiners in the US Midwest had been benefiting from the price of lower WTI Cushing prices and enjoying large crack spread margins. On Wednesday Midwest refiners faced a new world of a tightening spread between WTI and Brent. Marathon was one of several refiners whose stock sold off 5% on this new dynamic.
The global event pricing pressures that have been lifting Brent higher, have begun to retreat. Libyan crude production is coming back on line faster than forecasted, European GDP growth is slowing more than expected and Israeli/Iranian discord seems to playing itself out in rhetoric rather than rockets.
This might not be the best time to bet that the "spread" between WTI and Brent will widen, however. The difference between the two has dropped already to about $9 a barrel on Nov. 15 from about $25 in mid-October. While some strategists see the spread narrowing even further—Goldman Sachs, for one, expects it to shrink to $6.50 during the next six months—the move likely won't be in a straight line. The best bet: Wait for the spread to widen before placing such a trade, or avoid it entirely.
What was even more noticeable was that the price of other world oil benchmarks did not budge. Brent crude actually retreated on price. The "correlation" between the two crudes—their tendency to move in the same direction—has averaged 0.96 over the past two decades, just slightly below a perfect correlation of 1.0. On Nov. 15, it had fallen to 0.71, the lowest in at least 20 years.
Refiners in the US Midwest had been benefiting from the price of lower WTI Cushing prices and enjoying large crack spread margins. On Wednesday Midwest refiners faced a new world of a tightening spread between WTI and Brent. Marathon was one of several refiners whose stock sold off 5% on this new dynamic.
The global event pricing pressures that have been lifting Brent higher, have begun to retreat. Libyan crude production is coming back on line faster than forecasted, European GDP growth is slowing more than expected and Israeli/Iranian discord seems to playing itself out in rhetoric rather than rockets.
This might not be the best time to bet that the "spread" between WTI and Brent will widen, however. The difference between the two has dropped already to about $9 a barrel on Nov. 15 from about $25 in mid-October. While some strategists see the spread narrowing even further—Goldman Sachs, for one, expects it to shrink to $6.50 during the next six months—the move likely won't be in a straight line. The best bet: Wait for the spread to widen before placing such a trade, or avoid it entirely.
Sunday, October 9, 2011
The Euro Zone Financial Crisis and Liquid Energy Futures
Crude, along with heating oil and mogas bounced dramatically off yearly lows, rising 10% last week.
Could the bottom be in on liquid energy and the endless bid on petroleum futures resume its relentless upward march? The answer will mostly depend on the collateral damage that will ensue to euro zone banks on the eventual default of Greek sovereign debt.
The European Central Bank, International Monetary Fund and European leader's are desperately trying to calm market fears by buying up bonds of floundering euro members, notably Greece. The actions appeared to have calmed investors last week as the euro gained versus the US dollar and other currencies.
Will they be able to continue with the bond buying? Juergen Stark voiced his opinion by resigning his executive board position on the European Central Bank. Mr. Stark was furious that the ECB has drifted from its original mandate of fighting inflation to bailing out weak euro countries.
Juergen Stark is not alone in is dissension to fighting the European sovereign debt crisis by running the monetary printing presses. The hard working people of Germany have had enough of seeing their tax burdens increase well into the future in order to fund bailouts for less hard working Southern euro countries. The turmoil among Germans is likely to increase should it become necessary to include Italy, Portugal and possibly even Spain into the bond buying program.
The end result of the European debt crisis is largely unknown. Europe may be able to delay the Greek debt default just long enough to allow Euro zone banks to build enough equity to mitigate collateral damage. Hopefully, this will contain the fallout from spreading into the worldwide banking system.
On the other hand, if euro banks are already too leveraged to build equity quickly over the coming months, there is the possibility that the contagion will spread resulting in a possibly worse banking crisis than was experienced in 2008.
Traders will be best served by tuning in closely to the developments that ensue from European leaders over the coming weeks. When the crisis has finally passed, normal seasonal trends will resume, with the most tradeable and reliable seasonal trend, rising gas futures from early January into April.
Could the bottom be in on liquid energy and the endless bid on petroleum futures resume its relentless upward march? The answer will mostly depend on the collateral damage that will ensue to euro zone banks on the eventual default of Greek sovereign debt.
The European Central Bank, International Monetary Fund and European leader's are desperately trying to calm market fears by buying up bonds of floundering euro members, notably Greece. The actions appeared to have calmed investors last week as the euro gained versus the US dollar and other currencies.
Will they be able to continue with the bond buying? Juergen Stark voiced his opinion by resigning his executive board position on the European Central Bank. Mr. Stark was furious that the ECB has drifted from its original mandate of fighting inflation to bailing out weak euro countries.
Juergen Stark is not alone in is dissension to fighting the European sovereign debt crisis by running the monetary printing presses. The hard working people of Germany have had enough of seeing their tax burdens increase well into the future in order to fund bailouts for less hard working Southern euro countries. The turmoil among Germans is likely to increase should it become necessary to include Italy, Portugal and possibly even Spain into the bond buying program.
The end result of the European debt crisis is largely unknown. Europe may be able to delay the Greek debt default just long enough to allow Euro zone banks to build enough equity to mitigate collateral damage. Hopefully, this will contain the fallout from spreading into the worldwide banking system.
On the other hand, if euro banks are already too leveraged to build equity quickly over the coming months, there is the possibility that the contagion will spread resulting in a possibly worse banking crisis than was experienced in 2008.
Traders will be best served by tuning in closely to the developments that ensue from European leaders over the coming weeks. When the crisis has finally passed, normal seasonal trends will resume, with the most tradeable and reliable seasonal trend, rising gas futures from early January into April.
Sunday, September 4, 2011
The Red Metal Dr. of Economics and Liquid Energy Futures
The science of economics tends lean heavily on the art of forecasting future growth trends. Economists have a slew of carefully crafted computer models that are relied upon to forecast the general direction of worldwide economic growth. A more real life predictor of economic trends with a good track record of reliability lies not in computer models, but in the pricing trend of the world's third most widely used metal, copper.
Dr. Copper has consistently forecasted economic slow downs for many years. The reason is due to its primary use in cyclical applications, such as housing and industrial machinery manufacturing. Quite simply, when we are coming out of a cyclical worldwide growth phase, copper prices will begin peaking and then reverse trend.
Technically, copper has formed a double top. This formation generally, but not always, indicates a reverse in trend is about to occur. Fundamentally, copper supplies have fallen due to strikes and production difficulties in key mines throughout the world. Despite the copper supply shortages copper has had difficulty carving out new highs.
If the slow, but growing worldwide economic models that most economists are relying upon are truly accurate, the price of copper will need to confirm by breaking through the double top and resuming its longer term upward trend. Failure to break resistance will be one of the first real life indicators that the entire world economy is likely headed for a recession.
Liquid energy traders will be monitoring Dr. Copper, adjusting long or short positions to stay ahead of economic growth trends.
Saturday, August 13, 2011
Japan's Recovery and Fuel Demand
Asian country economies have been, with the recent exception of Japan, steady and consistent growth and fuel consuming machines. Japan may reveal that it is back on it feet when this coming Monday they release gross domestic production numbers for Q2.
Japan's GDP data will be an important measure future fuel demand. While economists are expecting a contraction anywhere from 1.4% to 4.7%, any surprise data better than these contraction percentages, will put a bid on liquid energy futures.
Follow up strength or weakness indication from Japan will be given Thursday when they release trade data. Japan grew trade surplus to $900 million in June. If the July numbers continue showing this trade growth, energy futures, particularly heating oil futures, will receive additional support.
Technically energy charts are bearish. $88 provides solid short term resistance for crude. Should this level hold, bears have the opportunity to try to push down to the $70 handle. Should prices continue to fall, end users of gas and diesel will do well to lock in the lower prices, anticipating prices steadily moving higher in 2012.
Japan's GDP data will be an important measure future fuel demand. While economists are expecting a contraction anywhere from 1.4% to 4.7%, any surprise data better than these contraction percentages, will put a bid on liquid energy futures.
Follow up strength or weakness indication from Japan will be given Thursday when they release trade data. Japan grew trade surplus to $900 million in June. If the July numbers continue showing this trade growth, energy futures, particularly heating oil futures, will receive additional support.
Technically energy charts are bearish. $88 provides solid short term resistance for crude. Should this level hold, bears have the opportunity to try to push down to the $70 handle. Should prices continue to fall, end users of gas and diesel will do well to lock in the lower prices, anticipating prices steadily moving higher in 2012.
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