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OPEC accommodates investor demand
By keeping production targets unchanged despite swelling inventories and uncertainty about the outlook for oil consumption, OPEC has decided to accommodate rather than fight investors’ demands for a high level of inventories.
Forward cover has crept up to 62 days, well above the long-run average of 52-53 days OPEC members have previously indicated is their target, consistent with stable prices. But further cuts were never seriously on the agenda at this meeting, and seem unlikely to be seriously considered at the next one in December unless there is a shift in sentiment and a price collapse in the meantime.
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While spot prices are less than half last year’s peak, they have rebounded to a level that was unprecedented before 2007. Ministers must be amazed at their good fortune, with prices at historically high levels amid the deepest global downturn since World War Two.
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More importantly, the cartel is keeping a wary eye on the Copenhagen climate conference in December. Key members, led by Saudi Arabia, are anxious to avert a repeat of last year’s vertiginous price spike and the bout of demand destruction that came with it.
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Being seen as a responsible supplier of energy is especially important now, with consumer countries about to take decisions on conservation and substitution measures that will have profound impact on demand for OPEC’s output for decades to come.
Producers therefore had little choice. So long as investors demand a high level of stock to alleviate fears about a future supply crunch, OPEC’s task is to accommodate them. Cutting output to force inventory levels back down to long-run averages would risk triggering another sharp rally, reigniting consumer demands for tough climate measures to reduce dependence on “unreliable Arab oil”.Â
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THE CENTRAL BANK OF OIL
Gold’s run impressively up
All the goldbug fever, not withstanding today’s pullback in the yellow metal’s price, got me thinking about just how well has gold stacked up against say stocks and oil over the longer term. I picked 2004 as a starting point for no other reason than it gives enough distance from the mania of the credit bubble and the distortion of its popping.
Gold’s trajectory is pretty impressive. Now whether you think that means it’s bubble that never fully burst or whether it’s indicating a longer term trend in which enough investors want a hedge against inflation further down the line is another matter. But, since 2004, it’s been mostly up.
CFTC lifts lid on large commodity positions
  By John Kemp
  LONDON, July 29 (Reuters) – Data presented to yesterday’s public hearing on energy markets show the U.S. Commodity Futures Trading Commission (CFTC) and exchanges have granted so many exemptions from hard position limits and soft position accountability levels that the traditional position-limiting system has become meaningless.
  CFTC chairman Gary Gensler noted that exemptions have become so numerous they risk “swallowing the rule”. There’s no danger, the rule has disappeared without trace. The scale and frequency it has been broken has seen to that.
  It’s clear from the figures that traders’ positions can be big enough to raise the risk of distorting prices which set fuel costs across the globe.
  Gensler’s slide presentation provided the first comprehensive insight into how exemptions have been used — giving detailed data on the number of times limits have been exceeded since mid-2008 for the Big Four energy contracts on NYMEX (crude oil, natural gas, heating oil and RBOB gasoline).Â
    Last week (July 21) there were 37 exemptions in force in the crude contract for an average of almost 5,700 lots (5.7 million barrels of crude oil), and 43 exemptions in force for natural gas for an average of 2,930 lots (29.3 trillion BTUs or 28.5 billion cubic feet).
  These were exemptions from spot-month limits (contracts approaching expiry and therefore most vulnerable to squeezes or settlement failure). They take no account of exemptions in force for contracts further out along the curve.
  For the 12 months between July 2008 and June 2009, 43 traders received dispensations from the single-month limit on the NYMEX crude contract, exceeding the notional limit by an average of 10,000 contracts (10 million barrels) and with excursions lasting an average of 87 days. In other words, it was routine practice to run positions in a single month at twice the notional “accountability level” set by the exchange.
  For natural gas, 26 traders received dispensations from the combined all-months limit, and exceeded it by an average of 32,000 lots (311 billion cubic feet) (four times the usual limit) with excursions lasting an average of 80 days at a time.
  Positions on this scale utterly defeat the objective of setting limits.
  As Gensler noted, the CFTC’s avowed aim has always been “to ensure that markets were made up of a broad group of diverse participants with a diversity of views. The intent was to avoid the concentration of positions of any single party”.
  “In 1980, the CFTC reiterated its goal to prevent market concentration. In its rulemaking, the Commission stated that ‘a trader’s net position has a continued effect on price, and if sufficiently large can become a perceptible market factor’”.
  “Speculative position limits serve to decrease the potential for positions to influence the general price level”.
  But massive exemptions have produced the opposite effect. For NYMEX natural gas, the CFTC data shows 13 traders had positions amounting to more than 10 percent of the open interest in a single month at some point over the last year, 4 traders had positions over 20 percent, and 3 traders had positions over 30 percent. With this much concentration, price setting is hardly the result of a “diversity” of views.
  For the CFTC, the policy question is whether to make minimal changes to the process for setting limits and granting exemptions to restore public confidence in the system’s integrity, or be more aggressive and try to use tighter limits and more narrowly drawn exemptions to reduce the average position size and cut concentration levels.
  (Editing by David Evans)
CFTC prepares to recant speculators’ influence
– John Kemp is a Reuters columnist. The views expressed are his own –
Like Archbishop Thomas Cranmer before he was burned at the stake for heresy, the U.S. Commodity Futures Trading Commission (CFTC) seems about to make a dramatic recantation.
Ryanair has sights set on greater market share
Ryanair’s warning that things are going to get worse in Europe’s economies has understandably got investors in airline shares flustered. The airline’s own shares fell by more than 8 percent.
The low-cost airline’s finance director Howard Miller couldn’t have been more stark in his comments: “There are no signs of recovery in any country across Europe. We think things are getting worse. There are no signs of green shoots so a tough winter for everyone”.
No immediate oil shortage, but medium-term outlook uncertain
– John Kemp is a Reuters columnist. The views expressed are his own –
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  By John Kemp
  LONDON, July 27 (Reuters) – The oil market looks set to remain well supplied through 2010.
  The huge stockpile of crude oil and refined products now being stored around the world, together with more than 5 million barrels per day (bpd) of spare production capacity, half of it in Saudi Arabia, means the market has a substantial buffer against either supply or demand “surprises”.
  But a Reuters poll of supply and demand forecasts for 2010 highlights an unusual degree of uncertainty on the outlook as forecasters struggle to assess the combined effect of the deepest recession in 50 years as well as structural shifts in consumption patterns and production costs [ID:nLR342038].
  Uncertainty about supply and demand dynamics implies considerable uncertainty about how quickly the market will tighten again. Based on forecasts in the poll, cyclical slack could be absorbed as soon as the end of 2010 or as late as 2012.
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  FORECAST DISPERSION
  The International Energy Agency (IEA), regarded by many as the benchmark forecaster for the oil market, projects crude oil consumption will rise 1.4 million bpd next year, reversing about half of the demand lost in 2008 (0.3 million bpd) and 2009 (2.4 million bpd) but still leaving consumption far below the 2007 peak (86.5 million bpd).
  Most growth is set to come from emerging markets (1.3 million bpd) such as the Middle East, China and the rest of Asia with only a marginal contribution from the advanced industrial economies (0.1 million bpd).
  But the IEA is the most bullish forecaster in the survey. Others are more cautious. Estimates in the poll put the increase as low as 0.5 million bpd, with an average of just 0.9 million bpd.
  Similar uncertainty dominates supply projections. While IEA sees non-OPEC crude production rising 0.4 million bpd next year, other forecasters put growth as high as 0.9 million bpd or see a contraction of up to 0.6 million bpd.
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  FORECASTING UNCERTAINTY
  The problem for all forecasters is how to assess the overlay from the largest cyclical variation in business activity and oil demand since the Second World War, as well as structural shifts in both consumption patterns and production costs, on longer-term trends in supply and demand:
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  (1) LONG-TERM TRENDS
  For the advanced industrial economies, oil consumption has been basically stable since 1997. Efficiency gains and the transfer of energy-intensive manufacturing industry to emerging markets have offset increases in GDP and transport demand.
  Marginal demand for crude has come almost entirely from emerging markets (up 11 million bpd between 1999 and 2007) especially the fast-growing economies of China, the rest of Asia, and the Middle East. The pattern is consistent with research showing oil demand rises steadily as per capita GDP rises from $5,000 to $20,000 before stabilising.
  On the supply side, underlying production from existing fields is falling by around 7 percent a year, according to the IEA. Producers need to bring on almost 6 million bpd of new capacity each year just to ensure output remains unchanged [ID: nLK174997].
  Much of the new production involves development of smaller, more expensive fields; often in difficult geological areas or expensive deepwater environments; employing costly techniques to enhance recovery rates (such as water injection); or involves unconventional resources such as Canada’s oil sands.
  Given enormous resources of conventional oil, bitumen, coal and gas, let alone methane hydrates, there is unlikely to be a real shortage of hydrocarbons for hundreds of years (long after combusting them has cooked the planet, if fears about global warming prove correct). But the industry’s rising cost structure means the days of cheap $20 oil are over forever, unless there is a major technological breakthrough in recovery and refining systems.
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  (2) DEEP CYCLE EFFECTS
  Overlaying these trends, the financial crisis has introduced the largest cyclical variation in both economic activity and oil consumption since 1945.
  The collapse of world trade has produced sharp declines in diesel and jet fuel consumption [ID:nLL657354]. This demand should return as the major economies start expanding again from Q4 2009 and world trade levels normalise. It will add back hundreds of thousands of barrels per day in consumption next year, but only once high inventories of both jet and distillates have been worked down [ID:nLN322311].
  On the supply side, the lasting impact is harder to gauge. While major oil companies have largely protected capital investment programmes, many smaller companies have cut exploration and production development expenditure sharply in a bid to conserve cashflow.
  The number of rotary rigs drilling exploration and production wells in the United States has halved since September 2008. For the time being, production has continued to increase, reflecting the lagged effects of the earlier period of high prices in 2004-2008. But past experience suggests the fall in new drilling activity could cut underlying production by as much as 500,000 bpd next year if not quickly reversed.
  The same pattern is repeated worldwide. OPEC’s capacity is set to rise sharply in 2009 and 2010 as new Saudi fields (Khurais, Shaybah and Nuayyim) planned during the years of high prices finally come online after lengthy construction delays. It will push Saudi Arabia’s maximum theoretical capacity to 12.5 million bpd compared with actual current output of around 8.2 million bpd, restoring a generous cushion of spare capacity to the market. But this will be gradually absorbed unless prices are sustained at a level high enough to continue incentivising new investment.
  Less clear is whether the price collapse will harm investment in the long-term. Following a rebound, current prices of $60-70 per barrel should be high enough to make most of the investments needed in the short-term economic. But the price gyration itself could make the industry more cautious about committing capital, slowing supply growth over the next 2-4 years and tightening the market by 2012-2015.
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  (3) STRUCTURAL BREAKS
  From the demand side, the shock caused by the earlier surge in prices has led to determined interest in conservation and substitution measures. Because many of these are embodied in legislation, they will not be reversed just because prices have fallen. In the United States, toughened ethanol blending requirements will displace an extra 30 million barrels of crude in 2010, followed by a further 16 million barrels in 2011 and 20 million in 2012.
  Price volatility, together with pressure for “decarbonisation” is pushing petroleum-derivatives out of the power stack in favour of cheaper and cleaner-burning natural gas — as well as non-fossil sources, with heavy investment in windpower and solar systems [ID:nLD829860]. Cheaper prices may slow, but will not reverse, determined efforts to reduce dependence on conventional petroleum.
  Meanwhile rising costs are increasing the price-hurdle needed to sustain investment, meet demand growth and compensate for natural field declines. In a sign of the future, BP’s state-of-the-art Thunder Horse platform cost $5 billion and extracts oil from three intervals of oil as much as 4 miles below the surface of the ocean at pressures almost 1200 times the earth’s atmosphere.
  The poll’s uncertainty about near-term and future production reflects the growing challenge of maintaining sufficient, risky investment to keep the market adequately supplied, with a cushion of spare capacity, in the face of an increasingly tough technical environment.Â
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 http://graphics.thomsonreuters.com/ce-insight/OIL-POLL.xlsÂ
 http://graphics.thomsonreuters.com/ce-insight/OIL-FORECASTS.pdfÂ
Financial markets fall into Monday rut
If things continue like this, investors will have to start calling the start of the week “mopey Monday.”
Financial markets are once again heavy with worry as concerns that the U.S. economy will take longer to emerge from the current doldrums are front and center. Even the stronger-than-expected activity in the U.S. services sector couldn’t lift investor spirits. The terrible U.S. jobs report released last Thursday is most likely still contributing to the market blues as is the end of the July 4th holiday weekend in the U.S., but I have to think that there’s a deeper ennui afflicting investors.
Global market cross-currents, Fed in focus
With the big event for the week – the outcome of the Federal Reserve’s Federal Open Market Committee – not due until Wednesday, global markets are left to focus on number of cross currents that are weighing on the stocks and oil and bolstering government bonds and the dollar.
The World Bank, which warned that the prospects for global economy continued to be “unusually uncertain,” downwardly revised its 2009 outlooks for Japan, the Euro Zone, and the United States. The organization expects global output to shrink by 2.9% this year , worse than an initial estimate of 1.7%.
Oil off the charts, Treasury yields less of a conundrum
Oil making a 7-month high overnight is getting markets into a twitter. The a drop in crude stocks is the driver, adding fuel to hopes that an economic recovery is on the horizon. A weakening U.S. dollar also doesn’t hurt. Blogger Macroman, however, makes an interesting point: the demand for crude doesn’t seem to be driven by China – the usual culprit behind sharp rises in commodities.
While crude hogs most of the headlines in the commodity space, on the basis of this study at least China’s behaviour has had relatively little impact on price. Unlike the other commodities, import volumes have yet to reach last year’s highs, and they have only now reached the trend of the salad days.
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The Wall
