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Oil, Gold and the US $


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In reply to: rog on Wednesday 13/04/05 12:15pm

Hi Rog,


In September 98 when I was telling people that in the short term oil would tank I had people telling me I was erring toward fantasy - an assertion which was no doubt assisted by the fact that the firm I worked for had some major clients in the sector. The reality, as you will be aware, proved somewhat different.


Analysing oil isn't rocket science, but the field is populated with lazy, fat analysts that do little real work while hugging consensus estimates and/or spouting complete rubbish for sake of talking the positions in their firm's proprietary accounts.


World oil price spikes and crashes are, in many respects, cyclical, as they affect oil supply and demand. For example, the oil price collapse of 1998 led to a large number of well closures (as well as a reduction in oil exploration and production) in non-OPEC countries, including the United States, where thousands of so-called "stripper" wells were shut down in Oklahoma and Texas. The price collapse also tended to stimulate world oil demand. Higher oil prices since 1999, on the other hand, have tended to encourage an upsurge in oil sector drilling activity and a reduction in oil demand growth.


Presumably, we are now experiencing the benefit of the upsurge in drilling activity and the reduction in oil demand growth that was realised on the back of higher prices post 1999.


And yet where is spot oil?


It seems that whenever someone suggests that some fundamental change might cause a deviation from recent historical norms the reactionaries leap to their feet.


Free trade and globalisation operate to promote differential growth in emerging markets. The income elasticities of oil demand in these economies are very much higher than the global average. As per capita incomes in these economies rise oil demand will accelerate ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ a function of the subsistence threshold effect outlined earlier.


There's a truck coming right at you. Blind Freddy could see it.




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NY Times

April 13, 2005

Oil Prices Fall 3.4% on Report That Demand May Slow



il prices fell 3.4 percent on Tuesday, the sixth decline in seven trading days, after a widely read industry report indicated that demand might slow slightly this year and as commercial stocks rose faster than expected.


Crude futures on the New York Mercantile Exchange for May delivery fell $1.85, to $51.86 a barrel, the lowest price in six weeks. Since a week ago Monday, when oil futures hit a record $58.20 a barrel, prices have dropped every day but one. Gasoline futures in New York trading have also dropped 1 percent, to $1.53 a gallon.


The monthly report issued by the International Energy Agency, an adviser to industrialized nations that is based in Paris, offered a more positive tone than previous reports, noting anecdotal evidence that demand from China was slowing. That could mean that the two-year rally in oil prices, driven mainly by high demand from countries like China and growing consumption by American drivers, might be drawing to an end.


"Fears of a surge in second-quarter Chinese demand are receding, OPEC is raising production and oil stocks are at a higher base than previously reported," the agency's report said in its introduction. "There seems less reason for concern."


Still, the agency, which has been faulted for understating the strength of Chinese demand, offered a cautiously worded forecast. "From the demand side," the report said, "it would appear that the risks are, for the first time in two years, edging towards the downside."


Some oil traders focused on the figures provided in the agency's 49-page report that showed commercial inventories - stocks held in consuming countries - had been revised upward. Oil stocks rose to cover 52 days of demand in February, up from 51 days in January, the report said.


"On the basis of the inventory perspective, you are in a significantly better position as a consumer than you were at the same time last year," said Jan Stuart, an analyst at Fimat USA in New York.


The figures also underscored OPEC's new policy to put as much oil on the market as possible to spur a build-up in inventories and ease prices. The Organization of the Petroleum Exporting Countries decided last month at a meeting in Iran to increase its production ceiling to 27.5 million barrels a day, and allowed for a second increase if prices remained high.


The president of OPEC, Sheik Ahmad Fahd al-Sabah, said on Monday that the group was on track to increase its ceiling by 500,000 barrels a day starting next month. While the measure does not have the backing of all OPEC members, individual producers, like Saudi Arabia and the United Arab Emirates, have increased their supplies already.


There are signs that OPEC's new policy, which differed from its practice of not letting stocks build up too much, has been effective. For example, crude-oil stockpiles in the United States rose 2.4 million barrels, to 317.1 million, in the week ended April 1, according to a report released last week by the federal Energy Information Administration.


Supplies were 8 percent higher than the period a year ago.


While down from last year's jump of 2.72 million barrels a day, the growth forecast this year remains substantially higher than in past years. The report also left unchanged a 7.9 percent growth projection for demand by China this year, down from last year's 15.6 percent growth.


Not everyone agreed with the agency's views, particularly on China. "China remains an area of risk to oil demand forecasts," Barclays Capital analysts said yesterday in a note to investors.


"We would highlight that it is too early to rule out upside risks to China's demand growth in 2005."



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QUOTE (mailhep @ Wednesday 13/04/05 05:55pm)


G'day mailhep


Your article demonstrates the ability of nations to speed up or slow down oil production at will, which brings the political dimension into the equation. It will be a case of fine tuning by OPEC to meet the market, too high and they lose their market, too low and they lose profits. And then there are non-OPEC producers to deal with, the US being one of them.



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In reply to: rog on Thursday 14/04/05 07:26am

Time will tell.


Over the past two years, spare production capacity has been eroded by surging oil  demand. OPEC now produces close to its capacity, which, for comparison, is lower than its peak capacity in the 1970s

Many fields in the non-OPEC region are now mature and have high decline rates.
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Been following the debate guys and well played by you both.....my point initially was simply that I don't put a lot of store in 'research' reports from folks like Goldman Sachs that spook the market with claims of $104- a barrel.....if they genuinely thought the fundamentals supported this outcome they'd be quietly going long...I think they are more likely talking the market up while unravelling their positions...like Harry Triguboff arguing the apartment market is still a good place to put your $$$....as you say jerry time will tell....I tend to support the position that energy substitution, reduced demand and increased output will subdue if not reverse any further large spike in oil prices....and this is what the NY Times article suggests.
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I wonder what the $104- per barrel GS analyst is working on next....




Oil prices tumble further


AFR 2005/04/14




World oil prices dropped sharply overnight, hit by bigger than expected rises in US crude stockpiles, amid forecasts of falling global demand for energy, analysts said.


New York's main contract, light sweet crude for delivery in May, fell $US1.16 to $US50.70 per barrel in early deals.


In London, the price of Brent North Sea crude oil for delivery in May lost $US1.06 to $US50.80 per barrel.


New York prices have slumped by 13 per cent since supply worries pushed them to historic high points of $US58.28 on April 4, the same day Brent crude rocketed to a record level $US57.65.


"The market was shocked by the (inventories) data," Societe Generale analyst Deborah White said.



"It was waiting for a signal (to sell), and it got just that."


US stocks of crude oil and petrol grew strongly over the past week, according to US government data released on Wednesday that eased fears about a supply crunch before the northern summer.


The figures came after the International Energy Agency on Tuesday suggested oil prices may have reached a peak, leaving traders looking for an opportunity to sell.


Weighing also on prices was an expectation of an output hike from OPEC.


"OPEC is looking to boost global stocks ahead of an expected surge in demand later in the year," analysts at the Sucden brokerage firm said.


OPEC president Sheikh Ahmed Fahd al-Sabah on Monday said he believed the cartel would go ahead with its proposed output increase of 500,000 barrels per day (bpd) next month, despite the drop in prices.



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QUOTE (mailhep @ Thursday 14/04/05 04:44pm)

It's been an interesting discussion Mailhep.


I posted the link to this chart before but I think it's worth having another look at it.




That is one powerful market dynamic that can draw down excess OPEC capacity, and simultaneously pull down stock levels, while propelling the price skywards.


According to the chart there is only around a half a million barrels a day of excess capacity left in OPEC (as at August 2004) - and that is supposed to hit the market this May.


Lucky we're in the second quarter and not going into a Northern Hemisphere winter.


Checking on some calculations I've done in the past (old data), I get as much as 2m barrels per day differential in demand for crude between the Northern Hemisphere winter and summer months - the weather is a factor. Crude demand is heaviest in the winter.


I suspect that the hope is that the OPEC supply increase next month will rebuild stocks before next winter (Northern Hemisphere).


Anyway, the recent stocks data looks to be giving the market some relief. It will be interesting to see the state of the market this time next year.


My view still is that any risks are skewed to the upside going forward.



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In reply to: jerry on Thursday 14/04/05 07:22pm

G'day jerry


you do have to wonder how long China can keep up its growth. Their market is a State run market and most companies are State owned - to be sustainable they need to privatise.


China is still cheating, they do not pay IP rights and copy others - no regard for contractual rights


Look at Russia, with the State takeover of Yukos and other dealings foreign investment is now pulling out fast. There is now a reaql danger that Russia could collapse.


So how much demand can a not-free market sustain? Who will pay the bills?



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In reply to: rog on Friday 15/04/05 04:55pm

Hi Rog,


Floating the Yuan might help. There's certainly pressure growing from the international community on this front - see link. But, whichever way you twist it, China still has massive comparative advantages in production that will not be easily dispelled.


China should understand there is a ``freight train coming'' as the U.S. Senate and the European Union weigh tariffs or import restrictions on Chinese goods.


I get the sense that people are becoming quite frightened.



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QUOTE (jerry @ Monday 18/04/05 12:40pm)

Hi Jerry


With over half of China's export businesses being foreign owned and with the enormous amounts of investment by foreign banks one could see immediate paper profits if the yuan is floated. The growing chinese exports will see huge returns on investment repatriated overseas - especially to the US who have been chasing the tiger for 200 years.


China needs to build an oil stockpile as a buffer against spikes.

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