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Goldman Warns Of Further Oil Price Upside "Risks" As Global Crises Escalate
Who would have thunk it: Goldman advising clients to brace for high oil prices. In a note just released by Goldman's David Greely, the commodity analyst sees further upside "risk" to the price of oil as the black swan clusterflock flaps its wings ever stronger. "We estimate there is a $10/bbl risk premium embedded in oil prices. However, with the coalition airstrikes on Libya, damaged nuclear reactors in Japan, and continued risk of political contagion in the Middle East and North Africa, the risks to our forecasts are still to the upside." Furthermore, as we assumed a week ago, the so called demand destruction in Japan which pushed crude prices lower materially, will have a far more than equal and opposite reaction in oil prices once the restocking process begins with a material portion of Japan's nuclear capacity offline. "Concerns over the impact of events in Japan on the economy provoked a sharp, though brief, sell-off last week, but we expect the increased demand for oil-fired generation will far outweigh oil demand lost to reduced economic activity." And as always, in this market which is now entirely impervious to news flow, and in which jumps in gas prices imply a surge in GDP, any oil dip is to be purchased, especially since the marginal dollar is once again going toward the purchase of commodities.
More observations from Greely:
While the ongoing economic recovery has now drawn OECD total petroleum inventories back to five-year average levels (Exhibit 1), the oil market remains justifiably focused on the risks to the forward supply-demand balance posed by the dramatic events unfolding across the globe. In addition to the risks to oil supply from the ongoing political unrest in the Middle East and North Africa (MENA) and the impact on oil demand from the damaged nuclear reactors in Japan, this weekend has brought reports suggesting another oil well in the deepwater off the US Gulf Coast is leaking. However, at the time of writing, US Coast Guard states that the observed “oil sheen” is likely the result of sediment and not oil.
In such an environment, it is not surprising that net speculative long positions in WTI crude oil reached a new record high of 391 million barrels. In comparison, when WTI crude oil prices peaked at over $145/bbl in July 2008, the net speculative long position in the light sweet crude oil contract (future and options) was less than 100 million barrels. We estimate that each million barrels of net speculative length tends to add 8-10 cents to the price of a barrel of crude oil. Given that net speculative length has been about 100 million barrels higher since the political protests spread from Tunisia and Egypt to Libya (Exhibit 2), this suggests that the oil market has been pricing a $10/bbl risk premium into the price of crude oil due to concerns over potential political contagion to other oil producing states in the MENA region. This is consistent with the fact that Brent crude oil has been trading near $115/bbl in the recent period, $10/bbl above our 3-month target.
Crude oil prices fell sharply in a broad liquidation on Tuesday as demand concerns raised by the unfolding events in Japan briefly offset the supply concerns arising from the MENA region. However, net speculative length only declined by 15 million barrels, highlighting the strength of the MENA concerns. Further, as we discuss below, we expect that the increased demand for oil due to the loss of nuclear generation capacity in Japan will far outweigh the demand lost to lower economic activity. More specifically, we estimate that 230 thousand b/d of combined residual fuel oil and direct-burn crude oil will be required to offset the nuclear generating capacity lost in Japan. We estimate that to lose a comparable amount of oil demand in Japan would require an 8.0% decline in Japan’s economic activity due to the earthquake and its aftermath.
Consequently, we continue to view a containment of the threat to oil production from the political unrest in the MENA region as the primary downside risk to crude oil prices in the near term, with a downside risk from current prices of near $10/bbl. However, at this time assessing the threat to oil production remains challenging, with the ultimate impact of the initiation of airstrikes this weekend by a coalition including the United States, France, and the United Kingdom enforcing a UN-sanctioned “no fly” zone in Libya still unclear. Further, with reports of protests in Syria and Yemen, hostilities at the Gaza/Israel border, and Saudi troops in Bahrain, the risk of political contagion remains.
These developments suggest that the $10/bbl risk premium may prove too modest, and as the world focuses on MENA and Japan, events continue to unfold elsewhere. This weekend brought reports of a 100 mile long oily sheen spotted on the waters off the US Gulf Coast, 20 miles north of the site of last year’s Macondo leak. In the wake of last year’s leak, another leak in the deepwater would certainly increase the risk of a reduction in supplies from the US portion of the Gulf of Mexico. Fortunately, the initial tests carried out by the US Coast Guard suggest the “oil sheen” is likely caused by large amounts of sediment, and not fresh oil.
Consequently, the balance of risks to our forecasts remains clearly skewed to the upside, with the primary risk to oil prices over the medium term coming from higher oil prices and their potential to slow the pace of economic recovery.
We expect increased demand for oil from power generation sector to far outweigh demand lost due to a decline in pace of economic activity in Japan
Crude oil prices sold off sharply, although briefly, last week as concerns mounted over the impact of the unfolding events in Japan on the country’s economy and its demand for oil. While a decline in Japan’s pace of economic activity would slow its oil demand, the decline is likely to be far smaller then the increase in oil demand as Japan uses its oil-fired power generation capacity to replace lost nuclear generation capacity.
In order to weight the relative impact of lost economic activity and increased demand for oil-fired power generation on Japan’s oil demand, we regress the year-over-year change in Japan’s oil demand (in thousand b/d) on real yoy GDP growth (in percent), the yoy change in generation (in thousand MWh/d) as well as the yoy change in weather (HDD and CDD) and a trend. As shown in Exhibit 3, this simple model has explained over 70% of the variation in the annual growth in Japan’s oil demand over the past 20 years.
The regression analysis shows that a 1% decline in its real GDP would lower Japan’s total oil demand by 31 thousand b/d. Given Japan consumes around 4.4 million b/d, this implies a GDP elasticity of 0.7. Meanwhile the loss of 1 GW of nuclear generation would lead to an increase in oil demand of 0.82*24 hours/day or around 20 thousand b/d. With 12.5 GW of Japan’s nuclear capacity offline following the earthquake and tsunami, this implies an incremental oil demand of 247 thousand b/d (Exhibit 4), mainly in residual fuel and crude oil which is burned directly (which is included in the “Other producers” category, Exhibit 3).
Meanwhile, assuming that Japan’s power generation infrastructure is stabilized by the end of April (which is the current plan from Tokyo Electric Power Company), our Economists in Japan would expect a 0.5% decline in real GDP. Under this scenario, the loss of oil demand would be only 16 thousand b/d. While a delay in stabilizing the power grid could result in more severe GDP losses (for details see our Japan Economics Analyst: Earthquake damages likely to reach ¥16 trillion, March 15, 2011), these estimates imply that the impact of the earthquake and its aftermath would have to slow the Japanese economy by 8.0% in order to outweigh the impact of the need for more oil-fired generation given the loss of the nuclear generation capacity.
While the historical response in Japan has been to turn to residual fuel and crude oil-fired generation in response to lost nuclear generation capacity, disruptions to the power grid itself could lead to more demand for portable diesel-fired generation. This, combined with the loss of Japanese refining capacity, will likely remain supportive for diesel cracks and prices, which led us to roll our long March ICE gasoil trading recommendation into the April contract at expiry on March 10, 2011 for a $208.00/MT (26.3%) gain.
Full note with charts below:
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its okay. Dudley and FRBNY are figuring out a way to fuel your car with iPads
Fuck Goldman!
Can someone please cut their forked tongues off at GS? Why we continue to tolerate GS and our government is proof enough that we have no passion to confront evil.
People paid for this analysis?
Next GS analysis will say 'We believe stepping in front of a speeding city bus may have materially more risk than reward potential at this point'.
TD = sellout
I'm a seller
As a short term adjustment, but I think they are off around 10 bucks. +$20 on the per barrel price. Japanese requirements may have been shortened in the short term (weeks) but shipping is going to go batshit because Japan is now dependant on more imports than ever before.
Last I looked tankers and shippers don't run on wind power in any manner other than in prototype designs.
SPX
Update.
http://www.zerohedge.com/forum/99er-charts-0
"Goldman warns..."
Oh the irony.
And hello ZH. Long time, first time.
So what? $120, $150, $200@brl, it doesn't matter. Japan could sink into the pacific. The House of Saud could get overthrone. The market would still rally. All that matters is that the Fed continues QE. Nothing else matters. Nothing else would cause the market to tank. Look, today we are back over 12k. HAHAHA! You can't make this stuff up folks!
Yeah, unless we hear from a rogue bankster/politician like that EU Energy guy who burped a fear remark about FUKU!!! That was completely absorbed but it was a market shaker. Yeah, that's what we need.
Too bad the Fed can't print oil.
Avid Gree(d)ly? I think I've met him somewhere.
Oil will price itself out of the mainstream soon, just for the mil. boys to play with. Th erest of us will have to buy or gov.lease volts. Naturally or un-naturally, the bell has been rung on free-energy. The cost of living (or should that be staying alive) in the matrix just got a whole lot higher. Many just don't know it yet.
ORI
http://aadivaahan.wordpress.com/2011/03/21/what-can-i-do/
Wow, brilliant analysis here by Goldman Sachs. Who knew that higher prices on inflexible goods brings about risk.
/sark-ozy
At any rate, they still manage to butcher and understate the extent of the risk.
On the other front, the one metric that The Bernank has had success with - the equity indexes (he apparently bought a 3 trillion dollar wealth affect for a few firms that are trading POMO potatoes between each other, and for 401(k) account holders that may still be in the game - it only cost him his credibility, the death of free markets and the American Economy, and 12 trillion in borrow and spend/pledge, with the tab soon-to-be-handed-over-to-U.S. taxpayers), are The Bernank's Alamo and last stand. Once they tank, he literally has no 'virtuous circle jerk' talking point (singular, not plural; The Bernank has one solitary talking point by which to defend his record, as of now, specious and fleeting that it will turn out to be).
The House of Saud has broken with the American 666 banksters over the last week. The Chinese are assisting Iran with nukes and will probably give Saud some too. The 666 banksters would have to start Armaggedon in order to stay in power.
The petrodollar is toast.
I sound like a broken record: Low volume dead cat bounce! LAST ONE!
No question, QE Xn WILL COME!
What a fricken science rocket Mr. Greely obviously is. Why does Goldman even bother to put out reports like this anymore when they will have 0 impact on the markets. Heck look at oil spike today? And gold,silver and check out the dollar continuing its death spiral. None of this matters anylonger, oil could hit $150 a barrel yet if the POMO pump decides to ralley, all is well in the world. Dow up 200 points on all the good news...LOL.. Not only do we have the government completly relying on the FEDS pomo teet for its survival but now we have the entire financial system as well. This would be ok if the stimulation was real nutrition and not just synthetic ponzi juice. As the pump keeps the dreamers dreaming the RED SWAN continues swimming and is getting closer to shore. Not only is it getting closer but it is growing in size now that Russia has jumped on its back and has made it even more scary.
I have friends stationed at Yokota AB in Japan, well away from the nuclear plants, and they just told me they were ordered to evacuate. Only essential military personnel are staying behind.
Does this not tell you, its worse than they are telling people? But many of us already know it, just saying.....to those who want to keep buying the proverbial dips...you will get caught with your pants down soon enough if you are long equities here.
Crude
Update.
http://www.zerohedge.com/forum/99er-charts-0
How amusing that it is always about events, and never about geology.
Could it be that geology is a science, and science is for nerds?
Is there a better way to make money than to obsfucate the underlying trend for the benefit of the sheeple that need shearing?
Brilliant observation by Goldman! Did anyone investors (who read world news) pay for this "investment advice?"
Yemeni Generals begin defecting and turn tanks on pro-USA Yemen president.....Syrian police kill another handful of protesters.....Azerbaijan....Algeria......
Nomura made the $220 Oil call early and should get 100% credit.
Here's what they're saying, in code: the risk is rising that one or more of the ongoing insurgencies in oil producing nations results in nationalization. That would send a huge shockwave through every single developed economy on the planet and raise political risks to infinity.
In the offshore mist you can see the GS oil armada sitting low in the water.
Tyler
with all of the craziness in the past couple weeks, I haven't seen a Donkey Kong "it's on like Donkey Kong" post. i thought surely i would see one with regards to Libya and the Chosen One's peace prize
What do people here think about natural gas?
RE: Nat gas...I like it as a long term play.
I added a thousand shares of UNG since it is so cheap. After all, it is a commodity that right now is oversupplied and out of favor. But long term why not?
Don't waste your money on UNG, it is for day traders only.
Buy the underlying cash flow, HGT, SBR. Read up on the tax implications first, they are complex but worth it.
Cool, thanks. I was reading this morning how Japan is the largest importer of natural gas, and with its nuclear power grid shutdown, they will probably have to import more. Looked at the chart of FCG (nat gas ETF), and it looks like there was a nice pivot point on 3/17.
'Japan govt not in control, IAEA can do nothing, people right to panic'
"Rival tanks deploy in streets of Yemen's capital
SANAA, Yemen – Rival tanks deployed in the streets of Yemen's capital Monday after three senior army commanders defected to a movement calling for the ouster of the U.S.-backed president, radically depleting his support among the country's most powerful institutions.
Maj. Gen. Ali Mohsen al-Ahmar, commander of the army's powerful 1st Armored Division, announced his defection in a message delivered by a close aide to protest leaders at the Sanaa square that has become the epicenter of their movement."
http://news.yahoo.com/s/ap/20110321/ap_on_re_mi_ea/ml_yemen
Can you say $220 oil?
Even the Buffet Shill said,"it's going to be long and painful" back in 2008...and we are still in the 3rd inning.
In other words, J. Aaron has some oil they want to sell today.