Great summary article on the oil complex. Expect oil price volatility to be significant for the foreseeable future. Of course, I am in the China hard landing camp. Thanks for the tip, Brent.
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JF Tardif has come out of retirement. He says the demand for commodities will not be there in the next decade. He singled out oil and copper. He thinks oil's bottom may be $70.
I wrote about this demand uncertainty in the Geopolitics of Energy last November. "Systemic imbalances in the global economy are forming, creating the potential for a category five hurricane of volatility and risk. Policy makers once again, despite ample warnings, have failed to buttress the levees. As a result, the storm’s aftermath is likely to be felt for an extended period of time, maybe even a decade. The purpose of this article is to explain why we are entering into a lengthy period of increased economic risk for the oil market and the broader economy. The swing in WTI futures from contango to backwardation, where contracts are trading below spot, is seen, by some, as evidence that producers are hedging their production with the expectation that the global economy will be weak over the next couple of years. Most of the mistakes that will be made in capital allocation over the next twelve months will not be because the decision makers misread the economic environment for 2012; many analysts will misjudge the underlying causes of the 2012 recession and fail to see the broader implications of the systemic imbalances. This article addresses how imbalances in the US, Euro area, and Chinese economies are creating significant demand uncertainty in the global economy for the foreseeable future." Pretty wide dspersion of oil price paths.
The Canadian numbers were down because projects were temporarily shelved when the economy collapsed and because in-situ (non-mining) extractions rates were disappointing in some cases (Opti-Nexen). Don't know which effect dominates. Ft article that quotes Bernstein’s energy analysts:
"While OPEC plays a key role in influencing price through production quotas, in the long run we believe that it is the marginal cost of non-OPEC production which sets the oil price. As global demand has surged over the past decade the marginal cost of production and oil prices have increased, as the industry has venture to increasingly higher cost (smaller, deeper fields) and more marginal regions (deep water, high arctic) to produce the incremental barrel of oil." This is what I said last year: "The implication of Saudi Arabia being an “emperor who has no clothes” is that the cost of extraction of unconventional oil coming from sources like Brazil and Canada are much more likely to drive oil prices than marginal costs have in the past. " Marginal costs are now approaching $100 US per barrrel. While oil prices go up because Iran is making its ususal empty threats, the world is peacefully oblivious to the real threat that is emerging - bio weapons. If Iran really wants to harm the US it could send over a form of weaponized SARS anonymously. Seasons greetings from the ghost of Christmas past, Michael Chrichton.
Does the Iranian regime get to have its own cake and eat it too? They sabre rattle against the US and oil prices go up. They please the hardliners and their primary commodity goes up. Not only that, but the higher prices comes from the US ,the regime’s dreaded enemy. Is this a win-win?
In August, I published a post on how the idea that economic growth of the BRICS can decouple from the global economy is a fantasy. Now, as I predicted, we see India is beginning to decelerate.
From 'The Economist': :"EXPECTATIONS for India’s economic growth rate have been sliding inexorably. In the early spring there was still heady talk about 9-10% being the new natural rate of expansion, a trajectory which if maintained would make the country an economic superpower in a couple of decades. Now things look very different. The latest GDP growth figure slipped to 6.9% and industrial production numbers just released, on December 12th, showed a decline of 5.1% compared with the previous period, a miserable state of affairs. The slump looks broadly based, from mining to capital goods, and in severity compares with that experienced at the height of the financial crisis, in February 2009, when a drop of 7.2% took place. Bombast is turning to panic. " Good luck cheerleaders. However, the price of oil seems higher than warranted given global economic activity. This remains a mystery to me. Supposedly, SA recently decided to increase output to 10 million barrels a day.
I am with this guy: “We doubt that Saudi will risk over-supplying the market, thus we are circumspect as to the announced 10 million barrel-a-day number,” said Harry Tchilinguirian, BNP’s head of commodity markets strategy in London. “Equally, if you look at International Energy Agency estimates for Saudi production going back to 2000, the kingdom has never produced 10 million barrels a day, and under the current market circumstances, a sudden and large jump in production relative to October levels appears counter-intuitive.” Speculation is often used to blame price increase in the oil markets, most recently in the historic increase – and then dramatic reversal in the Brent - WTI spread. The balance between supply and demand in the oil market has been tight for years. For most of the past decade, global economic growth has been strong and oil demand growth in developing countries, particularly China, has been growing at nearly twice the rate of the developed world. Also, excess capacity in OPEC has been diminishing. Despite rhetoric and promises to the contrary, Saudi Arabia has found it difficult to be the marginal supplier to the market. In the short run, oil demand is relatively unresponsive, inelastic, to price changes and as a result, real oil price growth has reasonably tracked growth in global GDP. Since 2007, the volatility of oil and the volatility of the S&P 500 have had a correlation of .87.
Currently, Saudi Arabia is scrambling to maintain production despite rig counts being near all time highs. So the demand story continues. Saudi Arabia has been constrained for some time now, at least the last five years, in its ability to deliver excess capacity to a tight market. Five years ago they cut production as oil prices were rising. Those who subscribe to peak oil theory have viewed this as evidence that Saudi production was in permanent decline.
Their behaviour during the supply disruption caused by the Libyan civil war cast further doubt on the Saudis ability to act as the marginal supplier to the global market. What’s more, the house of Saud announced a 100 billion dollar investment in renewable energy so that it could increase oil production. The Saudis promised investments that would raise production to 15 million barrels. Recently, they have recanted on these promises citing the supply coming from Brazil and Iraq as sufficient to satisfy global demand. All of this behaviour is very strange for the country with the supposed largest oil reserves in the world and the lowest cost of production. By their actions one should begin to question the truth of either of these two assertions. The implication of Saudi Arabia being an “emperor who has no clothes” is that the cost of extraction of unconventional oil coming from sources like Brazil and Canada are much more likely to drive oil prices than marginal costs have in the past. Unconventional projects take a long time to complete, so we are unlikely to see the oversupply response we have seen in response to past price spikes. The volatility in oil markets is going to increase, as unconventional production delivers an ever increasing share of the world’s production. Political crises and production disruptions will lead to immediate and severe price spikes in the absence of a moderating supply source. Only a stable Iraq, with a significant investment in its field, could possibly replace Saudi Arabia as the “go to country” for incremental oil production in times of global disruptions. Imagine that. Editorial note Jan. 07/12 : My refined thinking has it that oil demand continues to drive prices given the relative tightness between supply and demand. I wrote an article for the Geopoliitcs of Eenrgy which primary thesis was that oil demnad would be more volatile than suppy over the next 10-25 years. |
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