Erste Oil Special Report: "Force Majeure - Middle East"

Tyler Durden's picture

Erste bank has released the definitive report on oil price dynamics (attached) accounting for all the latest geopolitical hoopla. For what it's worth, the Austrian bank is constructive on oil prices, and see substantial upside from here: "We see mainly upside risk for the oil price. Even though the supply in the market is currently still sufficient, we believe that the wave of revolutions will continue to roll and could thus push the oil price  to new highs. For technical reasons we therefore expect the upward trend to continue at least in the first half of the year, and we also think that new all-time-highs are possible. As soon as the parabolic phase has been reached, the sentiment starts spiking, and first divergences are emerging, we recommend stops be set. However, it currently seems to be too early for that. We expect an average price of Brent of USD 124 for the full year." 57 pages of pure factual and chart goodness.

Report highlights:

  • As discussed in our Oil Report 2010, “Too fast, too furious… now time for a break”, the risk/return profile for oil-investors was of limited attractiveness last year, both in absolute terms and in relation to equities or other commodities. But to be fair, we have to point out that the correction that we had anticipated for the second half of the year never happened. We underestimated the amount of ink that the Federal Reserve was going to pour into its “virtual printing press” and the extent of relentless deficit spending and, at the beginning of 2010, failed to foresee how little importance was going to be attached to monetary stability. The weak US dollar is logical consequence of the quantitative easing, which in our opinion is really just a euphemism for printing “virtual” money.
  • We believe that the “Bernanke put” is the main reason for the price increases in the commodity segment. The Fed has repeatedly emphasized the positive effects of higher stock prices. Commodities also benefit from the investors’ increased willingness to assume risks, as the following chart clearly illustrates. It is quite impossible to explain the extremely high correlation of the equity market and the oil price with classic supply/demand patterns. According to Dave Rosenberg1 there is a 86% correlation between the movements in the Fed balance sheet and in the S&P 500 since the onset of QE two years ago. Indeed, the monetary policy seems to have turned into the most important determining factor. Since QE2 was announced, the speculative net exposure of wheat and oil for example at the CBOT has doubled; the one of copper has increased by 90%, and that of soy by 40%. One can therefore assume that the rally is mainly driven by liquidity.
  • As discussed in our latest Gold Report, the discussion about inflation these days focuses on the symptom of the price increases rather than on their causes. Rising prices are therefore only a valve for the increased money supply. Many a time the fact that the expansion in money supply is responsible for the rising price levels is simply forgotten. The FAO Food Price index also illustrates this, having set a new all-time-high recently. Natural disasters, structural imbalances and a sharp increase in speculative demand were also crucial to the uptrend in soft commodity-prices. The correlation coefficient with the oil price has been 0.91 since 1991. On top of that, it seems like the FAO index is slightly leading in relation to oil, particularly when it comes to impulsive upswings.
  • That said, the wait-and-see stance taken by OPEC also contributed to the recent price increases. At its latest meeting, the organisation had indicated that it would only intervene from USD 100/barrel onwards. The fact that the ordinary meeting in March was cancelled would also suggest a further increase in prices until the next ordinary meeting in June, where we believe OPEC will step up production again. We do not think that the cartel would wish to provoke another price spike like in 2008.
  • On the demand side, China clearly remains the driving factor. The recent interest rate hikes and the numerous increases in the minimum reserve requirements are supposed to facilitate a “soft landing”, but have so far shown little success. In 2010 money supply was up 19.7%, and credit growth expanded by 18% (after 35% in 2009).
  • We remain critical of the blind faith in the Chinese economic engine. China can and will not be the single driving force of worldwide recovery, the sheet anchor and messiah of the global economy, or the only hope of oil demand. We will discuss the reasons for our bearish stance on China on the following pages.

Full report:


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Sudden Debt's picture

Our economists are really smart:


Expensive oil is good!

Poor people will now be using the bus and their bikes a little bit more and this is good for the environment!

For the state it's also very good because of the revenue that helps them with their deficits and they would be a fool to let the price go down...


yes... the environment...


They repeat those morons idea's every hourover here on the radio...

consequences for the economy aren't really a thing to worry about...

and if they repeat it another 1000 times, most people will start to agree and soon we'll be wondering why 400$ oil isn't here it...



CitizenPete's picture

VXX 6%



This Bloomberg Report may give your portfolio a rise.

Long-John-Silver's picture

You got the $5 gallon gasoline you wanted. Good by and good riddance Obama.

Flakmeister's picture

 You are deluded if you think anyone in the Oval Office can do anything about the price of gas....

DaveyJones's picture

The only thing scarier is that some people in the oval office think so too :/

Long-John-Silver's picture
U.S. to Issue 'Handful' of Drilling Permits


You are deluded if you think they can't intentionally cause a rise in the price of anything.

Flakmeister's picture

Look buddy, instead of listening to asshats that say "Drill, baby, Drill" look at the data. Here is a link (sorry, its slow) that should tell you what is going on (I like it because it gathers a lot of info in one place)

Scroll down, there are about 6-7 charts pulled from the IEA...

There are more rotary oil rigs out running now than there has been since 1987 (when the data series started)

The number of wells being drilled is back to the level in mid-eighties, we are pin cushioning the country.... 

The cost of drilling is doing a moonshot....

NotApplicable's picture

I bet those Chevy Volts are just gonna start flying out of the lots now!

I wonder at what gas price those things become economical (if it fits your commute, of course)???

carbonmutant's picture

People aren't buying Volts for gas mileage (Prius is better and cheaper).

They're buying to make a political statement.

JacksLackofSurprise's picture

Not any cheaper under GWB, remember 2007-2008-- "Oil futures...skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008."(1) 

This price manipulation is so far above the Puppet in Chief level.  Link below only scratches the surface but worth the read--GS not the only rat bastards. 



mynhair's picture

Trying for 2.50 on SSN.

the rookie cynic's picture

If average price for Brent is $124 for the year, what is the DOW average for the year?

goldsaver's picture

16,000.... the HFT algos will make sure of it.

Flakmeister's picture

Top notch report.... spotted one error in a quick cursory look

Manifa has the problem of too much trace Vanadium. Vanadium destroys the catalytic crackers in a standard refinery...

Flakmeister's picture

Reposted from an earlier thread:

Here is a toy model of oil pricing:

Oil price inelasticity = -0.06 to 0.07  i.e. 1% cut -> 14-16% price increase

Brent Price Jan 2005  ~$40

World Net Exports since Jan 2005 = ~ -9%

Dollar index  factor for time period: DXY  90/76

Predicted value of brent today:  $108 - $118

Absolutly fucking remarkable, eh?

michigan independant's picture

yes, when the aggregate dropped so close to one percent we seen a 10% pump rise to consumer. Just a outlier report. They will not admit it but I feel they are at 140.00 model margin. The point is big fish will eat small fish as bolt on revenue models. Plan ahead... seen it before

CPL's picture

Spare capacity in oil is much like listening to bums ask for spare change.

Oh regional Indian's picture

Average Brent for the full year. 124?

Hmmmmm, I guess they cannot come off sounding like doomers, can they?

200 and it will stay there once it breaches it.

Only the Militaries will be allowed cheap oil (their contracts are already in place a long time ago, BP major Pentagon supplier BTW).

Facts are about to get a wrenching change.


Atomizer's picture

Excellent report.

And now for something completely different

No Fly Zone Update

ivars's picture

With Brent going up sharply again, we are in for second peak in this graph,

commencing yesterday, and peaking at around April 1st with Brent crude STABLE above 125 USD, with a possible short spike to 135 USD somewhere near the top.

After that, another downturn to during May Brent 110-115, and then, in June-July upturn to 140-150 USD peak. The scale on the graph is 5-8% below what is really happening, but , if USD strengthens, may be realistic. USD will strengthen still in 2011. Its currency in which military protection of oil assets is bought.

The Stock market will of course move down all this time ( as it has started from February 18th) till middle May-middle June, with a small return before final realization the USA is heading for recession due to Oil prices and fiscal restraint, as easing to make oil more expensive and spend extra printed money on it makes no sense, as it does not contribute to growth:

I published the graphs on February 6th, so there is some predictive power in them already.

High Plains Drifter's picture

Yeh we are almost out of oil, we don't know what to do. God help us. blah blah blah blah....Fear , fear , fear , fear.   Damn it, I feel like humbugging today. Does anyone want to put on the gloves? 

Flakmeister's picture

I've got time to go a few rounds....

DaveyJones's picture

don't ya love how they keep misdefining peak oil as almost out?

Cdad's picture

[Cdad raises hand]

I fuck!

Oh regional Indian's picture

perhaps you want to take off the gloves, Fight club style?


Cdad's picture

I don't need know fuckin' gloves.  I own VXX up the ass!  I reduced silver so that I could buy the fucking dip! 

And your face will do just as well as any other...

High Plains Drifter's picture

You are mean and feisty today Cdad....

Cdad's picture

You got that right, you twat.  Picked a bad day to quit smoking.


Additional: one wants a piece of me?  That is unusual.

Buy the fucking VXX you dip shits.  On a 90 day chart, there is a 31% fucking price dislocation...the result of the criminal syndicate known as Wall Street naked short fucking selling the fucker into oblivion for the purpose of keeping the fraudulent rally going with their fucking Marxist tactics...the fucks!

So my point is...even if the market stabilizes right here [which I don't think it will]...this thing will probably continue to fuckheads!


Flakmeister's picture

Hey, I picked up Apr 53 SSO puts yesterday... I got no bone to pick...

Cdad's picture


What fucking good is that!  Go short a fucking casual dining stock, for fuck 4 fucking dollar fucking gas is coming no matter what fucking game the criminal syndicate known as Wall Street plays today.

You tell me...what is more fucking fun than shorting a shitty restaurant chain?  I hate fucking shitty restaurant chains!  Fucking short the lot of them...while the VXX carries you inexorably upward.

And fuck Marxism, too!

Flakmeister's picture

I play the game differently.... I got burned bad in Sept 08 being short 5000 shares of COF the day the fuckers changed the rules before the fucking botton fell out...

Cdad's picture

For fuck sake, Flak,

Re grow yer pair, fuckstick! 

Flakmeister's picture

My pair is just fine, thankyou... Lets see how you deal with a $75,000 hit in one position in one day, when you were margined.

ricksventures's picture

how can Erste calculate the oil price correctly (they see the future right? the amount of burned oil fields or a super duper democracy)

and couldnt see the money printing early enough ???? that makes no sense, even zero hedge knows better


they are either lying, or just plain making numbers up as we go


how much would oil cost if the whole middle east starts burning (good bye super duper democracy) and who ever relied on oil from middle east would have to find another supplier or use bikes like the dutch, or like the danish where they bike their kids in show on the way to school and work in the morning


but then again, having less cars on the road in the west is a nice thing

Flakmeister's picture

Did you read my post? Predicting the price of oil is childs play in the limit of small excess production capacity....

Elmer T Pudd's picture

"When the Levee Breaks".....LedZeppelin and Neil Young classic sound check/rehearsal in Cleveland

YouTube - Zeppelin & Neil Young RnR Hall Of Fame When The Levee Breaks

BigJim's picture

Prefer the all Zep versions, myself... here's an alternate take you might enjoy:

baconator3000's picture

Karl Denniger is a friggin moron

RobotTrader's picture

Bad News:  We are now in a sell mode.

Good News:  Crude oil is finally crashing, giving much relief to retail stocks and airlines, which are celebrating this event as commodity stocks are now in full crash mode.

DaveyJones's picture

always good to analyze million year energy source with one minute market

RobotTrader's picture

Notice how JPM is unfazed today.

Why is that?

100% success rate at shorting gold and silver at the appropriate times, and cleaning out the CIGA's once again.

lieutenantjohnchard's picture

remember, folks. as zh's resident genius - the old catfish mouth robo uber bull bear wannabe - told us, it's easy to make money in the market. all you have to do is buy jpm. of course, as far as is known, the old catfish doesn't own jpm, or at least he hasn't told us so as he has everything else about himself.

of course, the old catfish told us it was easy to make money before he told us it was "a jungle out there" which was before he told us it was easy which was before ..... well, you get the point.

btw: as i type jpm is down 2%. oil is down 2.5%.

odd that oil is crashing but jpm is unfazed even as they trade within 1/2% of each other.

what a fraud the girl is.

ghostfaceinvestah's picture

yeah, the act is getting old, why does he still have rights to post graphs anyway, really cheapens the site.

Cdad's picture

You don't need to get this from Robo when you can get it all day long on the Ministry of Truth [CNBC] where the whole institutional game is the constant gentle establishment/movement of expectations.

That is what Robo is into.  That is what The Street is into.  The criminal syndicate known as Wall Street has only this product to show for itself...expectations.  And that is why they constantly move them they can bag a few points on the spread.

As others refer to them, the parasite class...the class that makes nothing but somehow controls everything.  Well, except the price of silver, of course ;)

tmosley's picture

Yes, "cleaning them all out" all the way back to levels not seen since A WEEK AGO.

Why don't you ever talk about how the CIGA's are WINNING every time gold hits a fresh all time high, or how they are winning when silver hits a fresh 31 year high?

Oh, that's right, you are a slave to your bias.  Keep shorting it, catfish mouth.  Get what you deserve, your 7th bankruptcy in 5 years.

pauldia's picture

To all you loyal Democrat American Jews you now can refer to yourselves as "Jewicidal". Nice job thinking Rahm Emmanuel cared about anything more than self agrandizement. Not to mention the Saudi's who now see Obama as tilting toward fundamentalist Muslims & eschewing more liberal Musims. Next move, Netanyahu.

Obama accepts prospect of nuclear-armed Iran
DEBKAfile Special Report March 10, 2011, 2:42 PM (GMT+02:00).