Commentaries

Now raising intellectual capital

CFTC prepares to recant speculators’ influence

Photo

johnkempcrop– 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.

Later today, the Commission will hold the first of three public hearings to discuss whether to impose tougher position limits in energy markets and restrict the availability of hedging exemptions. But it is already preparing to release a report that will accuse speculators of playing a significant role in last year’s oil price spike, according to a report in the Wall Street Journal.

While it might seem a minor shift in emphasis, it is a radical reversal of the Commission’s previously stated view that there was “no evidence” that investment flows had a material impact on prices. Commission staff have doggedly maintained that physical supply and demand factors could explain all the observed volatility in oil and other commodity prices over the past two years.

Magna sweetens Opel bid, but not on GM concerns

Canadian-Austrian car parts maker Magna has sweetened its offer for General Motors’ main European arm, Opel, by pledging more of its own capital up-front as it tries to burn off Belgium-based financial investor RHJ International, which has GM’s favour so far. But the improved bid doesn’t appear to address the U.S. auto maker’s main concerns about future control. 

According to a German government source, Magna is now offering to inject 350 million euros immediately, with another 150 million to be raised through a convertible bond. Magna had originally offered just 100 million of its own capital up-front with 400 million to be raised in bonds. That compares with RHJ’s offer of an initial 175 million euros, plus another 100 million at the end of 2012.

Reaching a floor in housing

– Christopher Swann is a Reuters columnist. The views expressed are his own —

By Christopher Swann

NEW YORK, July 27 (Reuters) – Nestled in today’s otherwise heady home sales figures was a sobering message on prices. Homes were still fetching close to six percent less in June than they did just a month before, and 12 percent less than a year ago.

No immediate oil shortage, but medium-term outlook uncertain

– John Kemp is a Reuters columnist. The views expressed are his own –
   
   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.
   
   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.
   
   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:
   
   (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.
   
   (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.
   
   (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. 
    

 http://graphics.thomsonreuters.com/ce-insight/OIL-POLL.xls 
 http://graphics.thomsonreuters.com/ce-insight/OIL-FORECASTS.pdf 

The danger of a lost generation

– Christopher Swann is a Reuters columnist. The views expressed are his own —

NEW YORK, July 24 (Reuters) – For the first time in three generations, Americans across the nation are facing the threat of long-term unemployment. Already more than one in four jobless Americans have now been out of work for more than six months, the highest level since records began in 1948.

GM dumps Chinese in Opel race, standoff looms

Two things Opel junkies need to know in today’s news.

1) General Motors has dumped Chinese state-owned carmaker BAIC’s long-shot bid to take over GM’s main European arm. That leaves a two-horse race between Canadian-Austrian car parts maker Magna and Belgium-based financial investor RHJ, loosely associated with U.S. private equity firm Ripplewood.

2) The two trustees appointed by the German authorities to a board overseeing Opel in its transition to new ownership are refusing to toe Berlin’s line that Magna’s bid is the only game in town (according to an intriguing Reuters sources story).

Tax-happy French eye carbon tax

Cynics say the French never saw a market they didn’t want to regulate, or an economic activity they didn’t want to tax. Now this levy-happy nation, with one of the highest fiscal burdens in the world, is eying a new target for taxation: carbon. And in this case, they may just be right.

Former Prime Minister Michel Rocard, a moderate Socialist commissioned by conservative President Nicolas Sarkozy, will present a report on Friday calling for a carbon tax on fossil fuels used in transport and heating (hat tip Les Echos). Speaking on France Inter radio, Rocard confirmed the broad outlines of his complex proposal, which would return some of the proceeds of the “Climate Energy Contribution” in a “temporary and partial” payment to poor households, the elderly and people living in remote areas who are dependent on their cars. The goal would be to preserve the “price signal” needed to change consumer behaviour and reduce emissions of carbon dioxide, the greenhouse gas most blamed for global warming.

Polish EU vision breaks the mould

At last — a Polish vision of the future of the European Union that does not involve refighting
World War Two or dying in a ditch for outsized voting rights.

In a thoughtful report entitled “Europe can do better”, a group of eminent Poles, including two former foreign ministers and a former central banker, offer a blueprint for Poland to partner EU heavyweight Germany in advancing European integration.  Even if some of the proposals look unrealistic, Berlin would do well to grasp the outstretched hand from Warsaw and explore common ground.

Goldman’s trading secret

LONDON, July 22 (Reuters) – Goldman Sachs last week reported record net revenues from trading and principal investments ($10.8 billion) during the three months ending June, with the major contribution coming from the fixed income, currencies and commodities segment ($6.8 billion).

Most commentators ascribe the firm’s stunning performance, and strong results reported by some of its peers to luck (a rising market lifts all boats); brilliance (trading strategies that are just smarter than everyone else); being one of the last men standing (benefiting from the lessening of competition in many of the markets in which Goldman operates); or some combination of all three.

Biden, Georgia, Ukraine and war

Officially, U.S. Vice President Joe Biden is visiting Ukraine and Georgia this week to balance President Barack Obama’s warming relations with Russia and reassure Kiev and Tbilisi that Washington still supports their aspirations to join NATO (but in slow motion, please). Unofficially, his mission is to try to prevent another war in an unstable region that Russia regards as its backyard.

If that sounds over-dramatic, it’s not because hostilities look imminent in either country. Georgia is licking its wounds from last year’s August war over South Ossetia. Ukraine is mired in domestic power struggles ahead of a presidential election next January. And Moscow, while determined to reassert its influence in the former Soviet republics, has enough on its hands with the severe economic fallout from the financial crisis. A major Russian military exercise in the region was well flagged in advance and passed off without leaving raised troop levels or unusual military activity. 

  •