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OPEC Moves Up Meeting To Deal With Plummeting Crude Oil Price

Anyone see this coming? From the staff over at the Telegraph (UK) earlier today:

With a barrel of Brent crude down more than 50pc on its July peak of $147, the oil cartel said it would now meet on October 24.

Last week the Organization of Petroleum Exporting Countries said it was going to meet on November 18 “to discuss the global financial crisis, the world economic situation and the impacts on the oil market”…

“Following consultations with the president of the OPEC Conference and colleague ministers, it has been decided to re-schedule the extraordinary meeting of the OPEC Conference,” the cartel said in a statement, citing a decision by OPEC Secretary General Abdalla Salem El-Badri.

“Party at my palace tonight?”

Reuters added today:

OPEC has not officially said what price it was seeking, but analysts said the market was heading towards unsustainable levels as far as producers were concerned.

“They are concerned that the momentum was going to pull it down to $60… At around $60, it starts to impact the Saudis’ budget,” said Lawrence Eagles of JP Morgan.

“$80 a barrel is a more comfortable level.”

Sources:

“Oil slide triggers Opec action”
Telegraph (UK), October 16, 2008

“OPEC says reschedules emergency meeting to Oct. 24”
Reuters, October 16, 2008

Is The Oil ‘Bubble’ Really Dead?

The chorus is a lot louder these days. “The oil bubble has popped! The oil bubble has popped!” It would seem so— at first glance. As I write this, MarketWatch is reporting:

Oil futures dropped below $70 per barrel Thursday for the first time in 14 months…

Only three months ago crude futures reached their record high intraday level of $147.27 back on July 11, 2008.

And just look at what headlines across the country have been saying lately:

“The oil bubble has burst” –Kansas City Star
“Analysts backpedal after oil bubble bursts” –Seattle Times

And my personal favorite…

“Markets ‘suckered’ into oil bubble” –The Oregonian

Even the Wall Street Journal has declared the “official” demise of the oil “bubble.” The Journal’s David Gaffen wrote on October 10:

Like a number of other commodities, oil’s move went from a steady ascent to a vertical bounce in the spring of 2008, topping out near $150 a barrel before speculative excess started to drain from the market. And those who believed that the oil price was justified by fundamentals — being, as it is, an actual product, rather than an Internet company’s vague promise of revenue — are smarting. “This is a market that is basically returning to the price level of a year ago which it arguably should never have left,” says Tim Evans, energy analyst at Citigroup. “We pumped up a big bubble, expanded it to an impressive dimension, and now it is popped and we have bubble gum in our hair.”

Black, stinky, oozing bubble gum, perhaps, but the point is taken. The decline in worldwide demand is only the secular story in this rapid decline in oil. The unwinding of large-scale leverage positions in commodities has meant the end of the spring’s most popular trade, one based on going long inflation (that’s commodities) and short everything else.

Despite all this hoopla surrounding oil’s demise, I’m not sure I’d declare the crude oil bull dead just yet. Neither would a seasoned investor such as Jim Rogers, who called the beginning of the latest bull run in commodities back in 1999. The former partner of George Soros in the renowned Quantum Fund pointed out as recently as October 4 in a New Delhi Television Limited (India) interview that:

You always have consolidation and correction. Three times in the last nine years, oil prices have gone down by 50 per cent, and each time it was not the end of the bull market.

FREE VIDEO LESSON: It’s not over till it’s over

Those who believe crude oil prices will rebound and go higher (much, much higher in some cases) make some pretty good points.

According to highlights from the latest “Oil Market Report” produced by the International Energy Agency (IEA):

Oil demand forecasts for 2008 and 2009 were trimmed by 240 kb/d and 440 kb/d, respectively, given weaker OECD deliveries and the IMF’s downward revisions to 2009 global GDP assumptions. World oil demand is expected to average 86.5 mb/d in 2008 (+0.5% or +0.4 mb/d vs. 2007) and 87.2 mb/d in 2009 (+0.8% or +0.7 mb/d).

Global oil supply declined by 1.1 mb/d in September to 85.6 mb/d. Hurricane outages in the Gulf of Mexico and renewed stoppages in Azerbaijan and among OPEC producers offset higher supply from Russia and the North Sea. Non-OPEC net output growth is largely wiped out for 2008, now averaging 150 kb/d, plus an extra 310 kb/d from OPEC gas liquids. Combined 2009 growth is +1.45 mb/d.

I interpret this as meaning overall global crude oil demand is forecast to increase next year. In addition, that tight supply-demand scenario we’ve been seeing is also expected to continue in the near-term.

Just one second. Hasn’t the media been reporting slowing economies around the world will translate into slowing demand for crude oil, resulting in lower prices?

I’ve often heard that when the mainstream media in the United States talks about crude oil and “the world,” they’re referring only to the U.S. and the twenty-nine other members of the Organisation for Economic Co-operation and Development (OECD). I suspect it suffers, quite understandably, from something akin to ethnocentrism, the tendency to look at the world primarily from the perspective of one’s own culture.

And just what exactly is taking place with crude oil demand in the real world? Although yesterday’s OPEC report was misconstrued as being oil bearish, Stevenson Jacobs of the Associated Press noted:

The Organization of the Petroleum Exporting Countries said rich nations in 2009 are expected to need only 400,000 barrels a day more oil than this year, whereas demand from developing countries will increase by an estimated 1.1 million barrels, with most of that growth coming from China, the Middle East and India…

While total oil consumption dropped in developed countries by more than 1 million barrels a day as of September over a 12 month period, demand growth from developing countries increased by a daily 1.2 million barrels over the same time, OPEC said.

Looks to me like the rest of the world (non-OECD nations) still have a thirst for that liquid gold. At least for now. Jacobs added:

OPEC’s report comes about a month before the cartel is scheduled to hold a special meeting to discuss ways to deal with oil’s slide, including the possibility of tightening output. OPEC controls 40 percent of the world’s oil supply, though analysts say a cutback in OPEC production likely would not dramatically alter crude’s downward direction.

But it could halt the decline. The Wall Street Journal’s Keith Johnson wrote in the “Environmental Capital” blog Wednesday:

So what’s a cartel to do? Cut production, of course. That’s the plan for the November summit in Vienna. The smart money says OPEC will probably cut production by 1 million barrels per day—on top of the 500,000 barrels it took off the market earlier this fall. Will that be enough?

“At the very least, that should serve to stabilize oil prices,” Paul Tosseti, director of oil market analysis at PFC Energy, a Washington-based consultancy, told us.

Still on the topic of supply, is it just me, or have we forgotten that oil output from existing reserves is dwindling rapidly? It’s not like this fact is a state secret. Consider this:

Worldwide, output from existing fields is falling by as much as 8 percent a year, which means that oil companies must develop up to seven million barrels a day in additional capacity simply to keep current output steady—plus many more millions of barrels to meet the growth in demand of about 1.5 percent a year. And yet, with declining field sizes, rising costs, and political barriers, finding those new barrels is getting harder and harder. Many of the biggest oil companies, including Shell and Mexico’s state-owned Pemex, are actually finding less oil each year than they sell.

As more and more existing fields mature, and as global oil demand continues to grow, the deficit will widen substantially. By 2010, according to James Mulva, CEO of ConocoPhillips, nearly 40 percent of the world’s daily oil output will have to come from fields that have not been tapped—or even discovered. By 2030 nearly all our oil will come from fields not currently in operation. Mulva, for one, isn’t sure enough new oil can be pumped. At a conference in New York last fall, he predicted output would stall at 100 million barrels a day—the same figure Total’s chief had projected. “And the reason,” Mulva said, “is, where is all that going to come from?”

FYI. The above excerpt came from the June 2008 issue of National Geographic Magazine.

This leads us to a very important question:

If crude oil is, or was, in a “bubble,” then where is all the excess supply?

Excess supply seems to be one notoriously-common characteristic of an asset bubble. Think of the housing glut during the U.S. housing bubble, and the dot com bubble of the nineties, where the supply of technology stocks could be expanded infinitely and new stock issues helped push down prices. Back on June 6 on our sister blog Investorazzi.com, I talked about a Bloomberg interview from the preceding day in which Jim Rogers discussed the topic of oil. Here’s what the commodities guru had to say:

I submit to you that most of the people and - I don’t know about most of the people, I shouldn’t say that, but we know that the IEA, the definitive authority on oil has said that the world has an oil problem. The Saudis have told Bush that we have an oil problem. Betty, if there is lot of oil, please, would somebody tell us where it is, so we can all invest in it? The world has a serious oil problem. Now, Betty, that does not mean that oil cannot go down 50 percent. During this bull market since 1999, oil has gone down twice by 50 percent, going down by 50 percent in 2001 and again, in 2000 whatever it was, ‘05 or ‘06. So sure, you can have big reaction in any bull market. But that’s not the end of the bull market. There is no supply of oil unless you - somebody can tell us where the oil is, the bull market in oil has years to go despite new corrections which may or may not come.

Hey, I hate high oil prices as much as the next person. But it appears to me that the over-emphasis on demand in predominantly the United States and OECD countries distorts the big picture for crude oil, which becomes somewhat clearer when supply side issues are factored into the overall equation.

So is the oil “bubble” dead? I’d say, what bubble? I, for one, wouldn’t be surprised if crude oil prices start rising again, and soon.

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

Sources:

“Oil below $70 on economic fears, rising U.S. supply”
Polya Lesova
MarketWatch, October 16, 2008

“The Official Demise of the Oil Bubble”
David Gaffen
Wall Street Journal (MarketBeat Blog), October 10, 2008

“Commodity bull run not over yet: Jim Rogers”
New Delhi Television Limited (India), October 4, 2008

“Highlights of the latest OMR”
International Energy Agency (IEA), October 10, 2008

“Oil dips below $75 as OPEC cuts demand forecast”
Stevenson Jacobs
Associated Press, October 15, 2008

“Oil Slide: What Can OPEC Do About Falling Oil Price?”
Keith Johnson
Wall Street Journal (Environmental Capital), October 15, 2008

“World Oil”
Paul Roberts
National Geographic Magazine, June 2008

U.S. Energy Policy Is All Smoke And Mirrors

With the price of crude oil now well above $100, how has the U.S. government responded? Well, last week Congress voted to halt the shipment of 70,000 barrels that were being sent on a daily basis to our emergency reserve of crude oil known as the Strategic Petroleum Reserve, or SPR. Never mind that this number represents only 0.3% of the 20 million barrels consumed by Americans each and every day, and might only shave 4 to 5 cents off a gallon of gasoline according to the U.S. Energy Information Administration.

And this week? Have you ever heard anyone tell you to stick with what you’re good at? Well, of the 435 members of the U.S. House of Representatives, 158 come from the legal profession, or more than one-third of the legislative body. So, it’s not surprising that in a day where crude oil surpassed the $129 a barrel mark in trading, Congress decided to sue the Organization of Petroleum Exporting Countries. OPEC, which produces 40% of the world’s oil, is comprised of Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, Qatar, the United Arab Emirates, and Venezuela. And we wonder why the rest of the world loves us so? According to the Associated Press today, the U.S. House of Representatives voted to let the U.S. Department of Justice pursue energy antitrust and price fixing cases against members of the OPEC oil “cartel.” The bill, which was approved 324 to 84, would create a special Justice Department task force to investigate energy markets to root out manipulation and unwarranted speculation. Democratic House speaker Nancy Pelosi was quoted by the Agence France-Presse as saying:

The House today with a strong bipartisan and veto-proof margin voted to hold foreign oil cartels and Big Oil accountable… Instead of using a veto threat to shield cartels and Big Oil companies from accountability, the Bush Administration should work with the Congress to protect American consumers.

However, AP reporter H. Josef Hebert noted this afternoon:

Many energy experts and legal scholars doubt that such an enforcement action would be successful.

Earlier today Bob Tippee, editor of Oil & Gas Journal, told News Radio 590 KLBJ in Austin, Texas, that:

It will work against, rather than for the interest of oil consumers. It’s a wrong move. I think it’s more of the silly policy-making we see in Washington D.C. these days…

It shows a gross misunderstanding of the oil market and OPEC’s role in it. It sets up a false dragon display. The supposition is that OPEC is producing far less than it could be producing, and that is blatantly false.

Short of calling this legislative body a “House Of Fools,” it appears this is yet another display of “smoke and mirrors” by Capitol Hill politicians. As with the SPR situation, the U.S. House of Representatives is only making it appear like they are doing something to deal with the energy crisis of 2008. The sad thing is, a number of Americans will probably buy into the farce. Earlier today on CNBC, legendary oil investor T. Boone Pickens, Jr., had this to say about Washington and our energy “policy”:

You’re talking about reducing taxes on gasoline for the summer? Is that an energy plan? Hell no, it’s not an energy plan. It’s no plan at all. And, you know, it’s just amazing to me what politicians focus on. They ought to step back and look at the $600 billion a year that it’s costing this country to buy oil…

Well, I still say politicians, I mean, what they think about, is getting re-elected, or getting elected, one or the other. They’re not thinking about how to solve the problems for energy in America.

Sources:

“House action targets OPEC”
H. Josef Hebert
Associated Press, May 20, 2008

“US House passes anti-OPEC bill”
Agence France-Presse, May 20, 2008

“Texas Oil Analyst Says OPEC Vote Flawed”
KLBJ News Radio, May 20, 2008

“Pickens: Oil Going to $150, So Move to Gas”
CNBC, May 20, 2008

Jumpin’ Jack Flash, There’s No Gas, Gas, Gas!

MarketWatch’s Moming Zhou reported Monday that U.S. refineries operated at only 81.4% of their capacity in the week ending April 11, according to the U.S. Department of Energy. The last time this number fell below 80% was in October 2005, in the wake of Hurricanes Katrina and Rita. This takes place at a time when the Energy Information Administration (EIA) predicts the price of gasoline could surpass $4 a gallon in the upcoming driving season in some areas.

The culprit, said Zhou, is the record run in oil prices, which is rising much faster than gasoline prices. The gap between the price of crude and the price of gasoline and other refined products has pressured profit margins at refiners, so much so that earnings from downstream operations including refining slumped 62% for a group of 10 major U.S. oil companies in the fourth quarter. The first quarter may be even worse. Earnings for the three dedicated refiners in the S&P 500 Index are anticipated to fall 94% to just under $67 million from $1.2 billion a year ago, according to Thomson Financial.

Since their bottom line is taking a huge hit, refiners have decided to take more of their production offline and retool their plants this spring. Which explains why refineries are operating at only 81.4% of capacity. According to economist James Williams of energy-research firm WTRG Economics:

This is a maintenance season. If you can’t make a lot of money, you do a little more repairs.

Zhou said that spring is typically when refiners idle parts of their plants to undertake maintenance. But, she noted, “they don’t always cut back so drastically.”

Source:

“Refiners slow fuel production as profits drop”
Moming Zhou
MarketWatch, April 21, 2008

Recession Fears Grow As America Looks To Stimulus Plan

The Associated Press reported earlier today that President Bush and Federal Reserve Chairman Ben Bernanke have “embraced calls” for an economic stimulus package to avert recession. Bernanke warned Washington politicians, however, that any delays would be costly:

To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so.

While in Jordan today, U.S. Energy Secretary Sam Bodman told reporters that the probability of a U.S. economic recession is growing and high oil prices pose a significant problem for the world’s largest energy consumer. According to Reuters, Secretary Bodman said global oil supplies were not as high as the U.S. would like, but he stopped short of repeating President Bush’s call earlier this week for OPEC to boost supplies. Bodman revealed:

There are certainly signs that we are facing economic challenges and I think that the probability of a recession is now greater than it has been in the past… In my view, there is some evidence that suggests that supplies are less than we would like to see.

The Agence France-Presse (France) said yesterday that the International Energy Agency (IEA) attributed recent record oil prices above $100 per barrel to not only tensions in the marketplace, but also falling stocks in top consuming countries. In its monthly oil report, the IEA said:

The most recent rise would appear the easiest to explain: OECD stocks have been falling since July 2007, reflecting a tightening physical market… Total OECD oil inventories are now below five-year average levels.

The OECD area includes the 30 member countries of the Organisation for Cooperation and Development, which includes North America, Europe and Asia’s most industrialized economies.

The AFP noted that the IEA statement appears to be at odds with OPEC Secretary General Abdullah al-Badri, who told the AFP yesterday that the market was adequately supplied and that OECD stocks were within their five-year averages. The IEA left its 2008 forecast for oil demand unchanged on Wednesday. The Paris-based organization predicts that strong oil demand will continue regardless of a U.S. economic slowdown.

“Shop Smart, shop S-Mart, you got that?”

Two recent Reuters polls also reflect the growing concerns over a recession in the United States. A survey of 100 analysts taken between January 11 and January 16 revealed yesterday that the risk of a U.S. recession has grown to 45% from 40% last month. According to Reuters, this percentage has steadily increased from 30% in October. Also on Wednesday, a Reuters/Zogby poll conducted on January 10 and 11 revealed that of 1,006 eligible American voters surveyed, 47.5% said they think a recession is likely in 2008. This figure was up from 43.4% in the prior month. For the first time since the recession question was added to the monthly poll back in September 2007, more people said a recession was likely than unlikely.

New Report Suggests No Relief From High Oil Prices

According to global news agency Agence France-Presse, leading energy consultants are forecasting oil prices will remain high in 2008 due to tight supplies and despite fears of a weakening U.S. economy. Consultants at the London-based Centre for Global Energy Studies also used their December report to attack the Organization of the Petroleum Exporting Countries (OPEC), saying that the oil cartel deliberately restricted oil production in 2007 to prevent prices from declining.

The CGES said earlier today that:

Although oil production at last appears to be rising, oil prices are expected to remain high over the winter and into 2008, despite fears about the true state of the US economy.

Regarding OPEC, the energy analysts pointed out:

This year OPEC deliberately kept the world short of oil in order to avoid a repeat of last year’s autumn price fall, a policy that has been extremely effective from the organisation’s point of view…

As a result of OPEC’s supply restraint, global oil inventories are expected to fall by 425,000 bpd (barrels per day) this year and it is difficult to see how this, combined with strongly rising prices, can be described as a market that is well supplied, as OPEC has repeatedly claimed.

In a post from December 12 I noted that Goldman Sachs, the most active investment bank in the energy markets, is also forecasting higher crude oil prices in 2008, buoyed by restricted production levels. Goldman analysts are predicting an average of $95 a barrel next year.

OPEC, which produces about 40% of the world’s crude, has insisted it was not responsible for the price of crude soaring to almost 100 dollars a barrel in 2007. Rather, the cartel said that speculators were to blame for the spike in prices.

Goldman Sachs: Oil Prices Headed Higher In 2008

According to Reuters, the most active investment bank in the energy markets, Goldman Sachs, released a new forecast today that said U.S. oil prices will head higher in the coming year. The bank also expects the Organization of the Petroleum Exporting Companies (OPEC) to restrict crude oil production levels, even though global demand may rise. Goldman is forecasting U.S. crude oil to cost an average of $95 a barrel in 2008, up $10 from a previous projection. Analysts at the bank suggested that the price could even reach $105 by this time next year. The new price forecast for 2008 is 7% higher than the most bullish projection among 37 analysts recently polled by Reuters. According to the Financial Times (UK) today, Jeffrey Currie, head of commodities research at the investment bank, said continuing industry cost inflation and uncertainty should provide support to prices in 2008 in spite of an expected economic downturn.

Goldman Sachs also predicted OPEC will not change its stance in restricting oil supplies. The Financial Times said Currie believes that OPEC’s decision to leave production levels unchanged, rather than to raise them as anticipated, suggests the cartel shares the market’s concerns and has moved to pre-empt the anticipated slowdown in oil demand growth. According to the commodities analyst:

Importantly, the OPEC decision is now limiting actual supplies coming to market, while the anticipated weakness in economic and oil demand growth remains as forecast, with current oil market fundamentals showing no signs of significant weakness yet.

Goldman Sachs expects global oil demand to rise by 1.7 million barrels per day (bpd) next year, which is 200,000 bpd less than previously forecast, but still a higher estimate than others, including OPEC.

Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York, told Bloomberg today that, “Goldman has credibility because they were the first to predict that crude would spike to $100. A sharp increase in their forecast catches everyone’s attention.” Arjun Murti, a New York-based Goldman Sachs analyst who covers oil producers and refiners, roiled markets in March 2005 when he reported that oil prices could touch $105 a barrel during a “super spike” because demand was stronger than anticipated.