Crude Oil Prices Heading For A Fall
Commodities / Crude Oil Jul 23, 2012 - 06:06 AM GMTBy: Andrew_McKillop
The week ending 20 July had vintage scenes from the 2008 epoch, as oil boomers bid up prices with such gusto they were able to grab 3%-a-day rises, midweek, but by weekend the cold chill of reality was trmming their sails. Although this was a vintage spectacle for a global oil market where the biggest brokers, bankers and traders both need and want higher oil prices, oil prices are set on greasy skids, oiled by a slew of so-called fundamentals. These include stubbornly slowing world demand, growing stocks, OPEC overproduction, increasing NOPEC output, large new finds of shale oil and stranded "greasy gas" able to yield NGL output, and oil's declining share in the global energy mix.
By weekend the mood had already changed and the bears came tiptoeing back. US CFTC (the commodities trading watchdog agency) data will soon show how buyer/seller intentions showed a near perfect upturned "V" through the last two weeks, after the previous massive dip in upside sentiment.
The flash of optimism, for the bulls, was or is driven by an outlook for US oil demand turning around, but above all by rising geopolitical tensions in the world: price hikes week long were as high as 10%-plus, causing WTI futures to soar above $90 for the first time since May. The only real fundamental onside in all of this was US EIA (Energy Information Agency) data upping the USA's amount of total petroleum use. Bulls however also drew succour because of the global economy's parlous outlook going forward, building hopes of more QE-style "injections" of central bank cash into the economy in China, Europe and even the US.
In the week, Ben Bernanke's careful way of saying he is not ready to do QE3 or clone versions of it caused some initial disappointment for US oil bulls, but on mulling the way he said it oil turned around and rallied, as other harder-edged figures came in. The US housing market seemed stronger, and a stronger number for industrial production were able to outweight the bad news from China and even worse economic news from Europe.
However the real drivers of the oil bull stampede was a terror act in Bulgaria against Israeli tourists, and a powerful upsurge in Syrian civil war fighting and terror bombing acts inside Syria against regime figureheads. These turned the market's new upward bias into a full scale breakout on the upside.
Syrian military figurehead slain included Asef Shawkat — the husband of the president’s sister, Bushra and deputy chief of military staff -- and others included Gen. Dawoud A. Rajha, the defense minister and most prominent Christian in the government, and Sunnite military chief Major Gen. Hassan Turkmani, opening up speculation on which rebel factions operated the suicide bombing and how long the Bashr el Assad regime can hold, as well as what it will do with its stockpiles of chemical and other weapons. The answer from both Russia and China at the UN Security Council was 'niet' or 'bu' to any US and European military action against the regime.
GOLDMAN'S NICE PRICE WILL STAY ELUSIVE
Oil price euphoria even drove a surge of natural gas futures buying, with Platts reporting that trading spiked on Wednesday, when the contract jumped to $3.02 per mln BTU, pricing US natural gas on an energy basis at $17.40 per barrel equivalent. As even this simple figure shows, the US natural gas supply revolution has changed the USA's energy picture forever - with a sure and certain downside for oil. US coal futures have also beaten a major retreat in recent weeks, to well below $9 per ton pricing coal energy at a little over $40 per barrel equivalent.
The "nice oil price for 2012" that Goldman Sachs proclaimed in a 'pro domo statement' on the base of reports from its algorithm-friendly analysts, in September 2011, of $130 for Brent and WTI close behind at $125 a barrel, is an almost certain collateral victim of reality on global and US energy.
Even in high gas price Asia, natural gas is backing out oil: Dow Jones reports the Japanese government policy of promoting natural gas for electricity generation may further erode the outlook for Japanese oil demand continuing to be boosted by oil imports, to compensate lost nuclear power output. The head of Japan's Petroleum Association, Yasushi Kimura, warned Thursday that government preference for natural gas sends a clear message for its oil industry - and for oil analysts expecting Japan's Fukushima filip to oil consumption, which reached as high as 400 000 barrels a day in midyear 2011, to remain sustainable. For the longer term, the government focuses the renewable energy sources of wind and solar power - operating on entirely free "fuel".
Dealing the probable biggest blow to Goldman's nice price trading stategy for 2012, Dow Jones reports that China's commercial crude-oil stocks grew in June at their highest monthly rate this year, due to a significant decline in crude throughput at major refineries. Chinese buying of crude at lower prices from end April through June, and lowered demand growth drove this crude oil stocks growth, with a probable similar trend operating in India, where forward estimates of national oil demand growth are now as low as 3%, compared with a 1999-2009 year average 6%.
In both cases, China and India are showing us in real time how their economic policy of getting more GDP out of the barrel, and developing non-oil energy alternatives is radically changing the scene that oil analysts forecast as recent as 2011. This saw the Asian Locomotive driving global oil demand far above global supply, by as soon as 2015. Oil prices would naturally explode. This was a coming crisis that Goldman Sachs was surely going to design the very nicest trading strategy around!
Adding more meat to the new wisdom which is Goldman hostile, China processed about 8.8 million barrels a day in June, for a decline of 0.6% from the same month in 2011, exactly dovetailing with official Chinese data released last week which showed national electric power consumption completely flat lining, at zero-percent growth on one year earlier. Quite simply, this never happened before.
To be sure, oil bulls can point to shrinking Chinese stocks of refined products, but the upstream crude stockpile, and falling demand growth will surely limit Chinese buying needs going forward. India's new moderation for its oil needs will also eat into the supposed "unstoppable growth" of Asian oil demand, while any notion of European oil demand "bouncing" remains fairy story talk.
RETURN OF THE DOWNSLOPE
Other than Mid East mayhem, there is little rational hope for the oil bulls. Also, however long the Mid East mayhem lasts it will end one day, maybe soon. All of the region's major oil exporters need to export oil to purchase things as basic as their food and their Mercedes Benz saloons. Barring all out war in the region, for example Iran Bombing, talking up oil prices on the back of Middle East geopolitics is a short-term strategy with fast declining returns.
The global energy supply side is almost as bad as its possible to imagine for expensive oil, and the demand side is also negative. Whatever type of QE emerges in the US and Europe, experience already tells us the easing mainly feeds the "financial community", to deleverage some its accumulated debt, with the trickle down into the real economy being weak or hesitant. The potential for a serious hike in month-on-month GDP growth trends in the USA may exist, but in Europe this is an unreal prospect for several quarters ahead. The handy equation of Goldman's algorithms, that any recovery of GDP has to and must pump up oil demand is being wrongfooted by the real economy on a daily basis and is now as realistic as imagining a sluggishly growing economy can also quickly drive a recovery in jobs.
The big curtain downer on brokers, bankers and traders playing for a major spike in oil prices will be year-on-year global oil demand: for 2013 the forecasts are rolling in for zero growth YOY, and for this year 2012 we have rising numbers of forecasts for a small but real decline in day-average oil demand on a 12-month basis, for Dec 2012 against Jan 2012.
Being able to imagine out loud we can have two straight years of oil demand decline, apart from showing how deep the economic hole really is, shrinks the rational oil price outlook to at best the $75 - $80 per barrel horizon for WTI and Brent. Goldman's famous forecast for oil prices in 2012 will likely have one spark of truth: the decline of the famous Brent premium also, which will operate on the downside - as well as in Goldman's fantasy picture it threw together in Sept 2011 !
By Andrew McKillopContact: xtran9@gmail.com
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012
Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.
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