Global Investing

If Lithuania’s experience is anything to go by, Spain may regret its declaration that it would rather Russian oil company LUKOIL did not buy a major stake in its largest refiner, Repsol.

Russian oil company LUKOIL is in talks to buy around 30 percent of Repsol, one of Western Europe’s five largest non-government controlled oil companies by market value, sources close to the matter say. Analysts think the move could be a prelude to a full takeover, which would be the largest overseas acquisition by a Russian company.

Spain‘s Interior Minister Alfredo Perez Rubalcaba said on Tuesday he would prefer a different buyer. Rubalcaba didn’t say why LUKOIL was persona non grata in Madrid but analysts think the company’s nationality is the reason.

Europe relies on Russia for around a quarter of its gas and much of its oil. EU leaders fret about their reliance on Russia for energy supplies and recent moves by Russian companies, especially state-owned Gazprom, to buy up European energy infrastructure such as power stations and gas networks, have prompted Brussels to consider investment restrictions.

For LUKOIL, Madrid’s hostility is ominously familiar. In 2006, Lithuania opted to sell control of its Mazeikiu refinery to Poland’s PKN Orlen, rather than LUKOIL. Analysts said LUKOIL, and TNK-BP, another Russian oil major, lost out because the Lithuanian government feared a Russian buyer would give the Kremlin too much influence over the Baltic state’s economy.

The price of oil was falling sharply on Tuesday after traders stopped worrying about former Hurricane Gustav’s winds, but by at least one calculation it remains very pricey – that is, its link to the price of gold.Some market watchers argue that there is a long-term relationship between the prices of the two commodities. Roughly speaking, this theory would have 10 barrels of crude oil costing the same as one ounce of gold.  Back in March, for example, gold hit a record of $1,030 an ounce and a barrel of oil brought around $105.

By July, however, gold had fallen and oil had risen to the extent that the ratio was not 10 to 1, but 5.9 to1. Some argued at the time that hedge funds noticed this and began to short crude. With the latest tumble, oil is about 27 percent below its high. But against gold, the ratio is still at 7.4 to 1.

The problem is that gold won’t stop falling either, which rather undermines the ratio theory. Perhaps it is all just hooey. If it is not, however, oil would have to dive another 25 percent to reach equilibrium of $79 a barrel against today’s gold price.

As George Bush might say, the EU is addicted to Russian energy. While no member wants to kick the habit totally, Brussels would like the bloc to reduce its growing dependence.

Even before Moscow invaded Georgia, the main non-Russian route for exporting Central Asian and Azeri crude and gas to Europe, the EU watched Russia’s regular cuts in energy supplies to neighbours with concern.

But EU members have been reluctant to take the hard measures that would allow them to bypass Russia, so analysts think their reliance on Moscow will grow.

Do oil price spikes cause recessions? It is a controversial question and one that is very much a propos. It is all very chicken-and-egg, of course. If oil is soaring because of overheating economic demand, is it the demand or the ensuing rise in oil prices that causes the crash?

Britain’s Centre for Economic Policy Research has had a go at trying to answer this with a report written by Natalie Chen and Andrew Oswald from the University of Warwick and Liam Graham from University College London. The twist was that the academics used terrorist incidents as an instrumental variable. Roughly, they looked at the impact of a sharp rise in oil prices on the profitability of various industries. By using terrorist events, they stripped out macroeconomic drivers and focused on something that was separate from the business cycle.

Following an acrimonious and drawn-out takeover battle for Hungary’s MOL, Austrian oil and gas group OMV finally did as expected: it threw in the towel.

Yet according to OMV Chief Executive Wolfgang Ruttenstorfer, the consolidation pressures in central Europe — the strategic rationale which prompted him to launch the unsolicited offer in the first place — remain in place.

Analysts and investors have often pointed out that OMV could do better with the cash then parking it in a MOL stake. And while OMV sat tight and awaited the outcome of its unwanted approach, MOL busied itself stringing together a network of strategic allies, entering into ventures with Cez from the Czech Republic and Oman’s OOC.

Industry analysts and executives are sceptical a planned opening of the war-torn country’s oil industry to foreign investment will bring big profits for the Western Oil Majors, or boost output as much as hoped.

While many have lined up to register to bid for Iraqi oil deals, actual bidders may be thinner on the ground and deals may take longer to conclude than the government plans.

John Mitchell, an energy specialist at the Royal Institute of International Affairs said recent rises in Iraqi production to around 2.3 million barrels per day were largely due to the improving security situation. If Iraq wants to make big jumps from here on, it will need to invest a lot of money in, and apply a lot of technology to, its oilfields.

European industry is suffering under soaring energy costs. Profit warnings are becoming more common and industry leaders predict plant closures and job losses may follow.

Companies say they are doing all they can to improve their game but want government help.

Britain’s Castle Cement, part of Germany’s Heidelberg Cement, is a case in point. Its cement furnace in Stamford, England, is replacing much of its coal with  alternatives  — tyres, bone meal, paper – as $140 a barrel oil sends all fuel costs skyrocketing.   

Here’s a look at the average daily volume of oil futures on the NYMEX expressed in terms of global consumption of oil. As the chart makes clear, the number of paper barrels traded every day on the NYMEX is now over three times the number of actual barrels consumed every day worldwide. On Friday, as oil surged to a record $139 a barrel, the volume on the NYMEX was over 5.2 times average daily consumption. The chart gives some indication of the boom in oil and commodity futures in general.

T. Boone Pickens told broadcaster CNBC he expected crude oil prices to keeping going up. “I think we’ll get to $150 this year,” he said. Analysts at Birinyi Associates, Inc. today put his projections over the past two years against the movement in the price of oil. They concluded the oil investor’s views shouldn’t be ignored.

1 Was surprised oil went down this much (19 month low) still thinks oil will average $70 in 2007
2 Could exceed $70 in 2007
3 Oil will reach $75 before $55
4 Oil will likely reach $78 this year
5 Says $4.50 gasoline will be possible this summer
6 Oil will average $70 for rest of 2007
7 “No way you can be short oil”
8 Oil may surpass $100 on a geopolitical event and will rise to $80 within 6 months
9 $80 oil could push US into recession
1 0 Oil to retreat before hitting $100
1 1 Oil to hit $100 within a year
1 2 Oil to hit $100 within 6 months
1 3 $100 oil will be routine
1 4 Oil to decline by $10 to $15 in 2nd quarter, which would be to $83
1 5 Oil to stay above $100 in 2nd quarter
1 6 Reversed bet on oil and thinks it will now rise. Covered his short and is now long
1 7 Thinks oil wil rise to $150 by end of 2008
1 8 Thinks oil will go to $150 in 2008

– Graphic courtesy of Birinyi Associates, Inc.