Opinion

The Great Debate

Don’t bank on return of backwardation

Many energy analysts are predicting the crude market will move into backwardation before the end of the year.

Increasing demand and rising refinery runs will, in their view, reverse the unusual build up of inventories around the NYMEX delivery point at Cushing, and the market should revert to a more normal term structure.

The extreme contango visible at the front end of the NYMEX futures curve in the last seven weeks is certainly evidence of a “dislocation” caused by congestion around the delivery point. Front-month NYMEX futures have been trading at abnormally large discounts not only to second- and third-month NYMEX futures but also to Brent and other spot crudes such as Tapis.

Recent upticks in refinery runs, coupled with the forthcoming driving season, and continued economic recovery, have the potential to tighten the markets for crude oil and refined products over the summer. The question is whether this will simply narrow the contango from its current extreme level or push the market level or even into a backwardation.
Recent experience suggests the contango is set to narrow, but will not disappear entirely. Contango, not backwardation, is the “new normal” in oil markets.

STRUCTURAL SHIFT
Before 2005, WTI crude prices were more often in backwardation than contango. Backwardations were both larger and more frequent than contango (Charts 1-4).
(1) http://graphics.thomsonreuters.com/ce/CL-STRUC-1.pdf

Sustainable oil price is $70-90: ESAI

(ESAI, Energy Security Analysis Inc, is a Massachusetts-based energy consultancy. The opinions expressed here are those of ESAI.)

The crisis is over, economies all over the world are recovering, record unemployment is slowly subsiding, and oil demand is growing. The logical question now is where will oil prices go from here? The question is not what the price of oil should be, as discussed at last month’s International Energy Forum. Likewise, it is not what is the equilibrium price.

Equilibrium price is a concept, offered by classical economists, which asserts that there is a price at which supply and demand balance. Price behavior, especially in recent years, has proven that this is an overly simplistic and unworkable concept for the oil market. There is never a point in the global oil market when supply equals demand, and thus there is no such thing as an equilibrium price. The right question is what is the fundamentally sustainable price?

Obama, politics and nuclear waste

yucca

-Bernd Debusmann is a Reuters columnist. The opinions expressed are his own-

The project involved more than 2,500 scientists. It cost $ 10.5 billion between 1983 and 2009 and it included one of the most bizarre scientific tasks of all time: evaluate whether nuclear waste stored deep inside a Nevada desert mountain would be safe a million years into the future.

That was the safety standard set in September, 2008, by the Environmental Protection Agency (EPA) as a condition for allowing nuclear waste to be stored deep in the belly of the Yucca Mountain, 95 miles (155 km) from Las Vegas, long the subject of political debate and a fine example of nimbyism (not in my backyard).

The vastly complex computer models and simulations experts launched to figure out whether Yucca Mountain would be a safe environment in the year 1,000,000 and beyond ended before there was a scientific conclusion.

Peak demand leaves refineries idle

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

U.S. refiners have emerged as the biggest losers from the previous surge in oil and push for cleaner energy. The industry’s brief golden age has swiftly given way to a prolonged dark period of adjustment and decline.

What went wrong? Like other sectors, refiners have been hit by the cyclical downturn, which has cut trade volumes and the related demand for transport fuels such as aviation fuel and marine diesel especially hard.

Weatherization heats up in 2010

OBAMA/

By John W. Edwards, Jr.

President Barack Obama certainly is walking the walk when it comes to weatherizing America’s homes.

Five billion dollars was included in the economic stimulus legislation for the Weatherization Assistance Program, the federal program started in 1976 to help low-income families.

And more recently the president has proposed a “cash for caulkers” incentive program for homeowners modeled on the successful “cash for clunkers” autos program earlier this year.

Energy realism and a green recovery

jay-pryor– Jay R. Pryor is vice president of business development for Chevron. The views expressed are his own. —

The concept of a “green recovery” is a compelling topic of discussion at the World Economic Forum this week in Dailan, China. It stems from the United Nations Environment Program calling for investment of 1% of global GDP (nearly $750 billion) to promote a sustainable economic recovery.

A “green recovery” speaks to two of the most important issues of our time –- the efficient use of energy and the realistic understanding of energy’s role in the global economy. It’s a role that can help lift millions of people out of poverty, while addressing a healthier environment.

Develop domestic oil reserves for energy independence

 Diana Furchtgott-Roth– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. —

President Obama is in favor of moving towards “energy independence,” but his new 2010 Budget specifically seeks to raise taxes on domestic oil exploration by $31 billion over 10 years, a larger tax increase than on any other industry. In addition, oil and gas producers would bear a disproportionately heavy share of other tax increases on business, more than $320 billion.

Surely a president who desires energy independence would leave oil companies alone so that America could develop greater domestic reserves.  But this is not the case.

First 100 days: Turn down the rhetoric on Russia

Peter SchechterPeter Schechter is an author and an international political and communications consultant. A founder of one of Washington’s strategic communications consulting firms, he has spent twenty years advising Presidents, writing advertising for political parties, ghost-writing columns for CEO’s, and counseling international organizations out of crises. “Pipeline” is his second novel. The views expressed are his own. –

After an eighteen year sabbatical, we fiction writers have recently put Russia back foursquare into its role as a novelist’s favorite fierce antagonist.  For decades, thrillers were dominated by the threatening Soviet imagery spun by John Le Carré, Tom Clancy and Frederick Forsythe.  Now, recent offerings like Daniel Silva’s “Moscow Rules”, Ted Bell’s “Tsar”, and my own “Pipeline” again reassign Russia its place of concern for political leaders, intelligence agencies and military planners.

That Russia provides good material is no surprise. The non-fiction Russia uses natural resources for coercion.  It militarily overwhelms a small neighbor. It crushes domestic dissension through physical or psychological intimidation. It suffers from near-obsessive mistrust of foreigners’ intentions.  Oligarchs and Kremlin bureaucrats are locked in a maze of corruption, mafia and violence.

A stimulating energy policy

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- Robert Engle is the Michael Armellino Professor of Finance at New York University Stern School of Business and a Nobel Laureate. His views are his own. -

We have faced energy crises before. The last energy crisis was about running out of oil. This one is about the fear that we might not. The future health of our planet is jeopardized by the greenhouse gases emitted by our industrial society. But can we afford an expensive energy policy in this time of economic distress?

The simplest and best solution to reducing emissions is thought by most economists to be a comprehensive tax on the emission of greenhouse gases. Only in this way will individuals and businesses that avoid the tax be doing what is socially desirable. Only in this way will it become profitable to find substitute energy sources; no longer would it be necessary to subsidize alternatives. The price of oil will rise naturally when we begin to run out, but in this proposal, the price would rise before we reach the bitter end. It is only a matter of timing.

Ukraine gas crisis spurs EU energy policy

Paul Taylor Great Debate– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

The gas dispute between Russia and Ukraine that has left hundreds of thousands of Europeans shivering in the winter cold is bound to accelerate plodding European Union efforts to build a common energy policy.

The cut-off of Russian gas supplies to Europe via Ukraine highlighted how little progress the 27-nation EU has made in connecting national energy networks and diversifying supplies since the first such crisis three years ago.

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