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.
Saturday, May 19, 2012
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.
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.
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