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OilPrice.com Weekly Oil Market Update: 01/25/2010 - 01/29/2010
OilPrice.com Oil Market Summary for 01/25/2010 – 01/29/2010
Crude oil futures slipped below $73 a barrel for West Texas Intermediate late Friday as a temporary boost from strong GDP figures failed to last and let prices sink to a one-month low.
Earlier in the week, China, weak refinery demand and slumping tech stocks all conspired to keep energy prices low, with prices oscillating around $73 a barrel.
U.S. gross domestic product grew at a seasonally adjusted 5.7% annual rate in the fourth quarter, the Commerce Department reported on Friday, its fastest pace in six years. The previous quarter had registered growth of 2.2% and the year-ago period saw a downturn of 5.4%. For 2009 as a whole, GDP contracted by 2.4%, the worst record since 1946.
But analysts did not expect U.S. GDP growth to continue at the same pace in the current quarter, and concerns remained about China’s growth after authorities clamped down on bank lending.
Capacity utilization at U.S. refineries stayed near the 20-year low reached the previous week (not counting hurricane-related shutdowns), and inventories of distillates continued to rise.
The dollar, which had firmed earlier in the week after President Obama’s State of the Union message and the confirmation of Ben Bernanke for a second term as chairman of the Federal Reserve Board, rose to a six-month high after the GDP news, keeping downward pressure on oil prices. The euro, hurt by Greece’s debt problems, dipped below $1.39 by Friday afternoon.
While most analysts remain cautious about economic prospects, Morgan Stanley put out an upbeat report on energy prices, forecasting that inventories would start to fall sharply in the second half of the year or OPEC would increase production on the back of stronger economic growth, particularly in emerging markets. The bank predicted a price of $95 a barrel for crude by the end of this year, $100 for 2011, and $105 for 2012, well ahead of consensus estimates.
The Morgan Stanley analysts noted that demand for gasoline alone in China and India continues to grow despite economic sluggishness.
In Davos, too, oil executives talked their book, making the case that there is simply no substitute for oil and the world economy needs more energy.
Oil prices emerged from the week somewhat battle-tested, analysts said, having withstood a sharp drop in prices of copper and other base metals on Thursday, as well as weak equities and a strengthening dollar. But weak demand continued to weigh on the market.
Originally Published at: http://www.oilprice.com/article-energy-prices-sink-lower-despite-strong-gdp-growth.html
This article was written by Darrell Delamaide for Oilprice.com who focus on Fossil Fuels, Alternative Energy, Metals, Oil Prices and Geopolitics. To find out more visit their website at: http://www.oilprice.com
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Suggestion / Zero Hedge readership are a pretty well read audience. In the future, please try to provide the readership some kind of "market edge" in your reporting that includes information which doesn't simply doesn't rehash general market information (like above). If you or your firm wishes to build a following, you may want to consider giving ZH readership oil or energy information that is tradeable or thought provoking that can help traders set themselves up for the following week (i.e. tachnical levels, OI, trendlines/moving averages, etc.). Food for thought. Good luck.
Truth about oil = http://www.kunstler.com/index.php
Truth about the real GDP = http://www.shadowstats.com/alternate_data/gross-domestic-product-charts
Baltic Dry Index is collapsing again!
The last three days were of a free fall. BDI closed at 3205 on Tuesday, and today, Friday, it closed at 2848. It is below 3000 again. World trade is about to collapse again.
This is a repeat issue over the past several months. Crude has advanced testing $82 -85 before retreating. Shortly after, the various equity markets retreat.
What's going on?
An article by Chris Cook in The Oil Drum last week suggests the Saudis are using the Brent complex to manipulate prices. Since Cook used to run the exchange, I suspect he knows something about how to do so:
http://www.theoildrum.com/node/6145
His argument is that Saudia is using a leasing tactic to monetize oil it 'stores' underground. The process allows a small amount of spare capacity to fix the value of the dollar to oil.
The ramifications of this are profound; the dollar is a proxy for crude at this time and all other commerce activities bend around the dollar/crude axis.
The reach of this turning is beyond the scope of a comment, but the outcome that matters most is the end of the 'Short- dollar' trade where the buck is sold short and the proceeds used to buy higher yielding issues in both dollar denominations and in other currencies. Investments in stocks, developing countries and in gold are short- dollar trades. This trade has been an attempted defacto dollar devaluation. It has been the policy centerpiece of the Federal Reserve and the Administration. The Saudis have ended the dollar short or carry trade by acting and selling crude at a price that does not rise beyond a certain point. As Chris points out in the article, a small amount of crude on the Brent market can effect the marginal price, particularly as demand is constrained by recession. It makes sense that the Saudis would want to receive something of value in exchange for their oil.
By fixing the crude price, Saudia puts value to the dollar. I can finger Saudia because they have spare capacity and the rest - particularly non- OPEC producers - are running out. The other OPEC producers are probably pumping flat out. 75 million barrels of oil a day is still a lot of oil. The other swing 'producers' or 'Pseudo- Swings' are those who store oil offshore in tankers. This probably includes the Saudis who might need to change delivery schedule to keep the price from sagging at any given time.
The end of the short- dollar trade means the policy irrelevance of Fed Chair Bernnake.
We are living in the Ironic Universe; an example is the observation that some of the major producers such as Saudia and Iraq are living Peak Oil while the major consuming nations - US and China - are behaving like the 'See No Evil' monkey, denying everything.
Consequently, the Saudi oil minister has accumulated great economic power. The monetizing process exists because of the rise of the 'swing producer'. Saudia's spare capacity gives them the power to move the oil market. Everyone who is savvy in the energy markets wants to be swing producer. This is behind the tankerage oil, IMO and is also behind Iraqi oil minister Husayn al-Shahristani's announcement of 12 million barrels- per- day 'future' production. Shahristani is becoming Mr. Virtual Spare Capacity Wannabe before he's even pumped one drop of new oil out of the ground.
Strategic Reserve also becomes spare capacity which can be used to swing the oil market. Of course, when everyone is swing producer, nobody is and the situation reverts back to the condition that existed prior to 2008. An observation that can be gleaned from the past year is that volatility is more damaging in effects on economies than already damaging high prices by themselves. Limiting volatility sugar coats the prices. A swing producer removes some of the volatility enabling them to command an implied volatility premium.
Until he-she-it cannot, anymore.
Iraq announcing spare capacity dashes the hopes that Iraqi oil would be dumped on the market and stimulate US commercial growth. Iraq clearly understands Peak Oil and is waiting for Saudia's spare capacity to evaporate. Ditto with Brazil. Brazil would only sell enough of its oil to maneuver the markets. The wild card in these countries - as Jeffrey Brown points out - is their own domestic consumption. Saudia's spare capacity is being devoured by its own expanding auto fleet and the rising 'oil cost' to produce new oil. Saudia is in the EROEI trap along with its producing peers.
Heaven help us if Iraq becomes the world's swing producer. Al- Naimi at least resembles a sane person.
What's next? The 'closest crisis' is the chain of ongoing sovereign defaults in the Eurozone. Greece is first in line at the edge of the pit with Portugal, Spain, Ireland and 'Others' queued up behind. Germany and the ECB have no choice but to bail out Greeece and the rest - the alternative is a deflationary collapse in Greece - and the others - and the ultimate end of the Euro. The ECB must create a flood of euros to refloat Greece and its brethren in default. What happens to oil priced in euros?
The dollar priced in euros will thence become very hard and impossible to come by. Without access to cheap dollars, how will Europe afford fuel? Can Saudia take a chance and hold a euro/crude peg? The answer is no because well- capitalized currency traders would arbitrage between oil, dollars and euros. If Saudia doesn't hold a peg, oil prices will fall in dollars and Europe will have a severe energy crisis on its hands. Petrol prices could double and double again. The effect would be China in miniature: central bank euros would rush into the oil 'asset' The price spike would have a powerful defationary effect on the overall euro economy.
IF the ECB shuts off the printing press, the deflationary collapse from debt overhangs would restart. Europe is between the devil and the deep blue sea. It's where the upper and lower bounds meet somewhere in the middle.
Meanwhile, back at the ranch, the resulting massive super- hard dollar will amp US deflation and pound the economy like the hammer of Thor. This time, the Fed will have to redirect its money spigot away from its banker/finance pals and put cash into the pockets of citizens. Look for lots of volatility, teetering stocks, super high bond prices and lots of soothing bromides from the establishment.
steve
Well written thanks!
Excellent--thanks
Anonymous - 211618.
Oilprice.com here - thanks for the suggestion 0 i'll have a word with the journalist today and hopefully next weeks report will have more of what you're after.
I have read Chris Cook article - could this explain Fridays strange movements are the investment banks loosing their shirts?According to Chris the banks are long forward oil and short the US$.A strong dollar in the last few days has brought oil prices lower- this must be causing pain?(they must have hedged)Great for the Saudis? They would not have sold all their oil forward.
Good article from Cook spoiled by `opaque market interventions by investment banking intermediaris`
THE EURO IS 33% of the Dollar index, and the DXY is only one factor- in fact the correlation of the DXY and front month CL has been falling- data has improved slightly on Crude- albeit from really bad levels. The market ignored it/ looked past it.
But managed money is what is truly driving oil (below)-
http://www.scribd.com/doc/25651563/First-Quarter-2010-GTAA-Commodities
This is driven in part by the dollar. China is joke- 10% of world oil demand- we are not refining btw.
The price per barrel is almost irrelevant. The price at the pump no longer reflects these changes. I've seen the price at the pump go up since the price per barrel dropped below $75. I paid $2.59 a gallon for regular yesterday and today it was $2.62 at the same station.