The big meeting in Saudi Arabia came and went and the price of oil is still steady. As we said on several occasions last week the meeting was going to end with all agreeing that the prices of oil was too high and Saudi Arabia announcing an increase in production of a few hundred thousand barrels per day (pre-announced before the meeting). There were some in the world who thought the meeting would result in oil prices plummeting significantly this week. Unfortunately they are disappointed today and will continue to be disappointed if they do not change their approach to solving the problem. We are now back to where we were before the King called for the meeting.
· Supply & demand balances remain tight and will so for the foreseeable future. Spare capacity remains minimal even with the Saudi production capacity increase due to significant investment made over the last few years. With the supply cushion at less than 2% of consumption the supply risk premium will remain substantial.
· Demand is fortunately declining in developed countries like the US and throughout OECD. This is one of the very positive results of the high price environment and truly an example of a free market at work.
· Demand in developing countries (China, India, etc.) is still growing (albeit at a slightly slower pace) as their economies grow and as their governments still subsidize the price of oil. Several of the larger consumers have announced a reduction in the oil price subsidies but the fact of the matter remains oil is still subsidized in a large portion of the developing world. As I discussed last week I also believe the announcement by China had more to do with the upcoming Olympics and the desire for China to get refiners to increase refinery runs (refinery margins have been very low) and thus increase refined product production to mitigate any potential shortfalls of gasoline, diesel and jet fuel during a time when the entire international media will be in China. Unfortunately China demand is likely to increase as a result of the latest move by China.
· The Geopolitical hotspots remain very hot. The problems in Nigeria have increased of late resulting in another decrease in production (by Shell) greater than the Saudi pledged increase. In addition oil workers at Chevron’s facilities announced they will go on strike today. If the strike lasts it will also result in further capacity shut-in’s. The other ongoing hotspot remains Iran and their quest for nuclear power. With the Israeli’s supposedly having undergone exercises simulating an attack on Iran all eyes remain in this area once again. The whole Geopolitical situation around the world brings out the necessity of having a substantial supply cushion of which the world does not have right now. Geopolitics add significantly to the risk premium in the market.
· The dollar seems like it is ready to recover but has not breached the upper resistance area and has not yet embarked into a strong firming trend. The dollar remains range bound (albeit a the upper end of the range and near the breakout level). The energy complex will be impacted by the dollar if and when it enters a consistent recovery phase. We believe the dollar has a higher probability of firming at least 3 to 5% in the medium term and thus resulting in a significant bearish signal for oil prices. A high dollar will result in oil quickly becoming more expensive in non-dollar local currencies and hopefully resulting in an impact on demand.
· With many politicians around the world (and in particular in the US) looking to blame somebody other than themselves for the high price environment we all hear about the speculators being the main cause of the energy crisis, a crisis that has been in the making for about 30 years. I keep looking at the weekly CFTC Commitment of traders report. The latest report (shown with historical data below) shows that the non-commercial sector or speculators on the Nymex have continued to reduce their net-long position. The net long position of the speculators is now at about the lowest level for 2008 and below where it was at the end of 2007. On the other hand the price of oil (also shown on the chart) is very near the highest level year to date. This data does not indicate that speculators are the cause of the high price of oil rather they are a symptom of the problem. Granted there are other venues that speculators and investors trade that are not currently reportable but a substantial amount of trading is done on the Nymex on a daily basis which is a good indicator of the market.
What all around the world need to do to cap the price of oil is an aggressive program that includes everything. Actually all of the pundits in the media as well as all of the politician in the consuming world as well as the producers have all touched on one element(or more) as to the solution. I remain with the view that the primary reason the energy complex is valued at current levels with a higher probability of seeing higher levels before ever declining substantially is due to the major imbalance between medium & long term supply and demand and the absolute lack of surplus capacity to solve the next Nigerian or Middle Eastern problem. If the US continues to focus its attention on blaming somebody the problem will continue to fester as it has done for the last 30 years and will likely result in a catastrophic impact on the Global economy. The US and the world must :
· First and foremost must reduce consumption in an orderly manner so as to not cause a knee-jerk reaction to the economy. We are beginning to see the consumer already in that phase with demand declining for the first time in about 17 years. The government needs to encourage this trend…tax inefficient cars, and incentives energy efficiency. Again a good example of a free market.
· Drill safely any place in the US and world to increase production of oil and NG. There is substantial oil and NG still to be found and produced. Stop blaming the oil companies and stop trying to impede their capabilities of finding oil. That is what they do best. Had the US approached this more positively over the last 20 or 30 years the US may have been in a significantly better situation than it is today. It is time to move forward and open up onshore and offshore opportunities.
· Mainstream clean coal and shale if it is viable. We have been working in the is area for 30 years it is time to put substantial money in the area and if it is viable could provide oil equivalents in the US for many decades.
· The worlds strategic petroleum reserves need to be increased substantially as an additional cushion to help solve the aforementioned problems of today and likely tomorrow. Many of the Geopolitical hotspots have been with us for many years and will likely continue to be with us going forward.
· The US needs to embrace nuclear energy as a clean an efficient source of generating electricity. Other countries like France generate 80% of their power from nuclear. Supplies of uranium are plentiful.
· We need to shore up our energy infrastructure. Not only does the US import a substantial amount of crude oil but our refining capacity only covers about 80% of our production of gasoline, heating oil, etc. We need to build more refineries and we need to add to our network of oil & NG pipelines wherever needed.
· We need to thrust into the world of alternative fuels not as a novelty but as an opportunity to lead the world. The US has the capital base as well as the technological base to be the leaders in the field of alternative and renewable energy. Many US people complain that jobs are being exported. This is an opportunity to create many, many jobs while moving the US off of its dependence on a traditional hydrocarbon economy. We need to incentivize and do everything…wind, solar, biofuels, geothermal, etc,. We also need to accelerate when these sources will impact the balances. We and the world can’t wait until 2030 and beyond.
I do not believe the solution to this problem is to pick one of the above and go for it. The US and the world needs the whole portfolio of solutions discussed above and any other one I may have left out. The solution will not happen tomorrow. It has taken over 30 years to get into the mess we are in and it will take a solid 10 years for the world to once again have an efficient and reasonably prices energy environment. Over time this will once again bring energy prices to levels the world has seen pre- 2000. If not I would say the future will bring higher levels of volatility, much higher prices and a global economy that will be lethargic at best. The world needs reasonably priced (and clean) energy to fuel the growth of the global economy.
Currently prices are firm as all of above has not changed due to a meeting in Saudi Arabia.
| Current Expected Trading Range | | | ||
| | 6/23/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:59 AM | Yesterday | | |
| Aug WTI | $137.28 | $1.92 | $140.00 | $99.20 |
| July HO | $3.8319 | $0.0602 | $4.0000 | $2.7100 |
| July RBOB | $3.4657 | $0.0265 | $3.5000 | $2.5200 |
| July NG | $13.201 | $0.207 | $13.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5452 | (0.0105) | 1.6000 | 1.5200 |
| Yen/$ | 0.9310 | (0.0067) | 1.0450 | 0.9000 |
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