The Great Debate

The darkest period before dawn?


Abandon hope all ye who enter here was the inscription written above the gates of Hell in Dante’s Divine Comedy.

Investors who decided to take a long position in commodity futures at the start of 2010 anticipating a global recovery, tightening supply-demand balances, and rising prices, could be forgiven a sense of despair.

Their risk-taking has been rewarded with range-bound prices and a contango eating deeply into returns. Most longs lost money in H1 2010.

Flagship U.S. oil prices have moved sideways for the last 12 months, while negative contango rolls ensured investors lost around 13 percent since the start of the year.

The problem is not confined to WTI, which has been likened by some analysts to a “chocolate teapot” because of its sensitivity to inventories around the delivery point at Cushing. An investment in Brent futures, which reflects the seaborne international oil market more faithfully, according to analysts, is down just over 9 percent on a total return basis.

from The Great Debate UK:

Facebook group defends “harassed” BP


BP’s chief executive Tony Hayward branded “the most hated man in America” may be surprised to find himself cast in the role of victim by a growing clan of web-based supporters on Facebook.

One such group ‘Support BP’ calls itself the defender of an “undeservedly harassed institution” and seeks to show that the public opprobrium BP faces over its now 60-day-old Gulf of Mexico oil spill is not universal.

Members have been increasingly vocal since a succession of strong rebukes of BP by U.S. President Obama and lawmakers at Thursday’s congressional hearing, which they are calling a “lynch mob”.

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.

Money illusion and “real backwardation” in oil

Forward commodity prices are not properly accounting for the impact of inflation.

“Money illusion” was the term coined by Cambridge economist John Maynard Keynes to describe the tendency of people to be fooled by thinking in nominal rather than real terms, ignoring the effect of inflation on the purchasing power of money.

It is usually associated with unsophisticated retail investors. But there is evidence it is misleading a much wider group in the commodity markets, and long-term commodity prices are being mis-valued as a result.

Weak fundamentals bite back in oil

The past month has seen weak near-term fundamentals reassert themselves over bullish sentiment about the medium-term outlook in oil markets.

Crude prices have pulled back to a more realistic level, towards the middle of OPEC’s informal $70-$80 target range, as growing evidence of ample supplies and swelling inventories overwhelms the previous uptrend.

Much of the price movement has reflected changes in the shape of the forward curve rather than flat prices, and been concentrated in the NYMEX light sweet crude contract, rather than ICE Brent futures.

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.

Anything but oil

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

As OPEC ministers meet in Angola this week, they can congratulate themselves on a brilliant piece of market management.

Quick decision-making and aggressive output cuts over the last 18 months have stabilised prices at their highest level in real terms since the early 1980s. And this despite the deepest recession since World War Two.

Dubai will pay for Abu Dhabi aid

Alexander Smith– Alexander Smith is a Reuters columnist. The opinions expressed are his own —

Abu Dhabi is not going to crow publicly over Dubai’s troubles. But it will use the opportunity to assert control over its upstart neighbor. The price for Abu Dhabi’s help could be prize assets like airline Emirates. Dubai has little choice but to do what it is told.

Dubai is unable to service the $80 billion debt it has amassed during its meteoric rise to wannabe global financial hub. Oil-rich Abu Dhabi holds the political and financial trump cards. Not only is it the capital of the United Arab Emirates, its ruler is head of the UAE’s seven desert states — squeezed between Saudi Arabia and Oman.

Dollar faces long journey downward


- James Saft is a Reuters columnist. The views expressed are his own –

Even putting aside the spectacular but hard-to-measure risks of a financing crisis or the loss of its special status, the dollar faces really serious headwinds from boring old fundamentals.

The dollar has been weak for months and markets have been fretting over a host of big picture worries.

Perhaps the world’s oil exporters will stop using the dollar as the medium for petroleum trade. Or maybe the so-far patient and docile buyers of Treasuries will finally turn jittery. Either could be a disaster for the dollar, but you don’t need conspiracies or crises to be bearish on a currency from a country which on some measures has run the largest-ever deficit between what it imports and what it sells abroad.

“Dollar demise”: Inexorable but not sudden

– Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own –

LONDON (Reuters) – An article in Britain’s Independent newspaper on Tuesday rightly attracted a lot of market attention with its provocative heading “The demise of the dollar.” While subsequent and almost co-ordinated denials from numerous capitals have taken the steam out of the story, the dollar’s role is again under scrutiny.

While the geopolitical realities of the Middle East would arguably rule out the re-pricing of oil in non-dollar currencies at this time, that may change in the future.