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UBS' Andy Lees Presents The Bullish Case For Crude

Tyler Durden's picture




 

By now we have heard every worthless Wall Street economist expound on the bull case for the economy courtesy of a ultrashort-term dip in oil and gas as a result of the moronic IEA decision to tap strategic reserves. And while short-term gyrations are largely irrelevant when as we presented yesterday, and as the FT confirmed, the bulk of volume and price formation comes from speculative daytraders, the longer-term dynamics for crude point in only one direction. Up. Here is UBS Andy Lees to explain why despite the brief jump in crude (which will likely never make it into the system courtesy of banks taking the purchased light sweet crude and storing it in tankers) supplies, we are facing a substantial supply-side crunch as soon as a few months from now.

From Andy Lees:

Reuters reports that lack of investment due to a heavy tax burden means Russian oil production will struggle to maintain present levels. A lack of new projects in the pipeline while existing fields mature will make maintaining production increasingly  difficult. “Certainly Russia’s production growth is not catching up with the world’s growing demand. Russia’s mature fields base is so large that it needs a lot of new projects just to offset that decline” according to the IEA. “So any changes to the tax regime would have to be ones that encourage significant new fields start-ups. And/or investments needed into fields with declining production”. Nevertheless Russia is expected to issue RUB30bn (USD1.1bn) of 7 year bonds at between 7.75% and 7.8% as government finances are buoyed, at least in the short term, by the high oil prices.

In a second article Reuters warns that Saudi Arabian oil exports may trail far behind rising output this summer as its power stations burn more crude than ever before to keep the booming population cool, fed and watered. After defying OPEC its production is expected to reach 10m bpd in July but most of that will be soaked up by a summer surge in air conditioning and the ramp up of the huge refinery Rabigh after maintenance. “Available Saudi crude export capacity is getting squeezed from all sides” according to HSBC Saudi Arabia. Soc Gen estimates that the refinery will absorb 400,000bpd of extra production and domestic power consumption a further 300,000bpd leaving just 300,000bpd to offset the loss of Libyan crude exports. To some extent this helps explain the IEA’s action to release strategic reserves onto the market. Saudi sources say direct crude burning in power stations is likely to average 540,000bpd this year compared with 403,000 last year (although in July last year it was burning as much as 920,000 bpd).

Traders also highlight that the monthly discount of Saudi Heavy crude to the benchmark Oman/Dubai was actually lowered from USD2.65 to USD1.90. They had hoped for a discount to increase by more than USD1bbl. Asian refineries are unlikely to ask for additional term volumes at these prices. The refining margins are high and Saudi is justified in thinking it is not their job to boost Asian refinery margins, but it does mean that despite all their rhetoric of increasing production, they are not pricing the oil to achieve that aim. As a client tells me, “Do as they do, not as they say”.

Translation: those with a longer-term target on crude would be well advised to buy some CL at prevailing levels.

 

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Wed, 07/06/2011 - 15:43 | 1430717 Dr. Engali
Dr. Engali's picture

Just keep sinking the rigs and printing money. That's bullish.

Wed, 07/06/2011 - 15:44 | 1430720 baby_BLYTHE
baby_BLYTHE's picture

Ben can't print oil. CIA seems to think it can (i.e. Libya).

Wed, 07/06/2011 - 16:52 | 1430868 trav7777
trav7777's picture

KSA was burning 1mbpd last year at this time just to keep the population at bay (cooled off).  YoY, their direct consumption of this stuff is up 25%.  Export Land Model, bitchez

Wed, 07/06/2011 - 15:46 | 1430724 chistletoe
chistletoe's picture

A mere hair's bredth difference between supply and demand

causes oil prices to move, relentlessly.

 

Yes, production supplies continue to drop

as the mathematics of Hubbert's predictions take their inevitable toll.

 

Meanwhile, the "recovery" engineered by the central banks keeps on destroying jobs, incomes, manufacturing, transportation, and demand.

 

its a close race .... made more complicated because every single participant lies about his real numbers ....

 

(Andy's always been one of the better callers, however ....)

Wed, 07/06/2011 - 15:46 | 1430725 101 years and c...
101 years and counting's picture

record oil demand during a depression.  love the (non) correlation.

 

Wed, 07/06/2011 - 15:58 | 1430750 css1971
css1971's picture

China

Wed, 07/06/2011 - 16:03 | 1430760 101 years and c...
101 years and counting's picture

according to this site, china is a bubble waiting to pop. i will admit, it probably does take a lot of oil to build vacant cities.  so, as long as china gives out bad loans to build more vacant cities, oil demand will just go higher.  if they stop building vacant cities.....???

Wed, 07/06/2011 - 16:25 | 1430827 css1971
css1971's picture

That's exactly what everyone is waiting for.

Wed, 07/06/2011 - 15:48 | 1430731 css1971
css1971's picture

Bullish for tankers. Must get one.

Wed, 07/06/2011 - 15:56 | 1430747 zorba THE GREEK
zorba THE GREEK's picture

 Higher oil prices will certainly put added pressure on an already weak economy. Obama better

 hope he gets the 2.4 trillion dollar raise on the debt ceiling soon. With the economy tanking, he's

 going to need it to buy votes through money give-aways disguised as economic stimuli for the

 struggling poor and middle classes. And I'll wager the lion's share will be spent in 'swing states'

 with both strong republican and strong democrat states getting short changed.

Wed, 07/06/2011 - 16:01 | 1430756 Dick Darlington
Dick Darlington's picture

OT: 7,8 magnitude quake near New Zealand, tsunami warning issued

http://www.reuters.com/article/2011/07/06/us-quake-pacific-idUSTRE76567K...

Wed, 07/06/2011 - 16:07 | 1430777 TooBearish
TooBearish's picture

Laz poos 2500 on CNBS live!!!

Wed, 07/06/2011 - 16:09 | 1430782 apberusdisvet
apberusdisvet's picture

I've been telling everyone I know that we'll hit $5 by Christmas.

Wed, 07/06/2011 - 16:24 | 1430822 Liquid Courage
Liquid Courage's picture

WOW! $5 crude ... what a bargain ... what a short! Oh, wait, $5 gasoline. Oh sure.

Hard to believe crude ever sold for under $10/bbl. Wacky old world.

Wed, 07/06/2011 - 18:08 | 1431042 Ruffcut
Ruffcut's picture

The price was over 4  for a couple months verse 2008 when the price pump was 4 also, but crude hitting 147 a bucky barrel. Shit the oil cartel of criminals can have 5 bucky gas and 50 buck oil, at the same time and the sheeple will think long and hard, and then say "HUH?".

Wed, 07/06/2011 - 16:09 | 1430784 SilverIsKing
SilverIsKing's picture

This may be of interest to Tyler and ZH readers for further due diligence/analysis/comment:

http://silverstockreport.com/2011/BIS-DATA.html

Wed, 07/06/2011 - 16:12 | 1430789 ian807
ian807's picture

A more likely view is that oil will start whipsawing up and down in price over the next couple of decades.

A couple of things contribute to this. As cheap, high energy return oil becomes more scarce, it suddenly dawns on the militaries of the world that they'd better hoard as much as they can. Once that starts, and oil producing countries figure out that they'd better save any available oil that's left for their domestic  consumption, oil will suddenly and dramatically vanish in country sized chunks from the world market.

But people still have to eat, and get to work, so there's still a lot of demand. Prices go up. The price becomes inelastic and here's where the fun begins. High oil prices eventually work their way down the value chain, making all oil-dependent products more expensive, including the prices of locating, extracting, refining and delivering oil. Oil price feedback sets in. Oil prices spike wildly, until the economy falls over. Oil prices go down a little, but not to previous levels. Because demand is inelastic, prices go back up soon, an then it happens again. Rinse. Lather. Repeat.

Not too long after that, we're done with oil a major part of the energy picture although the "long tail" of oil may hover around 5% for centuries.

 

Wed, 07/06/2011 - 16:34 | 1430843 Idiot Savant
Idiot Savant's picture

I agree with you, but I'm not sure about your last comment. 

Not too long after that, we're done with oil a major part of the energy picture although the "long tail" of oil may hover around 5% for centuries.

I believe we'll all eat each other (war) before moving on to alternative energy. Besides, what's a viable alternative to oil?

As far as "for centuries", I'd argue that you're not paying attention. At the rate we're polluting the earth, we won't last another hundred years. Just look at how thoroughly we've fucked this place up in the last hundred years.

Wed, 07/06/2011 - 16:47 | 1430858 ian807
ian807's picture

"...At the rate we're polluting the earth, we won't last another hundred years. Just look at how thoroughly we've fucked this place up in the last hundred years."

Pay me no mind. It's just my ebulliant optimism talking :)

Humans are pretty resourceful. I'm convince a breeding population will survive. Humans as a species have been through population bottlenecks before. It may come down to a few thousand people living in Antarctica sweating through the tropical heat, but they'll make it.

Wed, 07/06/2011 - 18:36 | 1431096 ian807
ian807's picture

And hey, to the person who flagged my post as junk, feel free to come up with credible numbers to refute. I would love to be wrong about this. Really.

Wed, 07/06/2011 - 16:13 | 1430791 Cleanclog
Cleanclog's picture

OT - What a lying bunch of shits at Goldman as we now learn that they borrowed the very most, $15 Billion, when the Fed opened it's emergency program as the Bear Bailout got underway, followed by Lehman, RBS and UBS with $10B each.

Goldman . . . always saying they didn't need help, were ahead of the curve, blah blah blah.

Wed, 07/06/2011 - 16:20 | 1430801 bardian
bardian's picture

Economics isn't that difficult. 

The oil price has been suppressed for decades for political purposes.  Price fixing leads to shortages.  When shortages come to a head, the price shoots up like a recoiled spring, leaving the victims without the appropriately adjusted capital infrastructure that could have been provided in the setting of free market gradual oil price increases over time.

Wed, 07/06/2011 - 18:20 | 1431059 Ruffcut
Ruffcut's picture

"Economics isn't that difficult. "

It is a theory and is not practiced. You should have figured that out a long time ago.

Criminal economics: "don't have any, gotta go get some".

Honest economics? On this planet? It will never happen.

Proof is in the dark brown pudding with a few corn kernels in it and it does not smell very good.

One law of economics is that if you take shit, you will receive it, constantly. I like mine with cool whip on it.

Wed, 07/06/2011 - 16:20 | 1430812 Gringo Viejo
Gringo Viejo's picture

Off topic but I've a question for the zerohedge community. I've just been banned from posting on the msn money "marketwatch" site for making "Unwanted" posts. In response to an article "Dow rallies as traders shrug off fears of yada yada yada" my post quoted the line and said that "You couldn't make this sh-t up! lmao". Last I looked it had 34 positive/3negative ratings. My question to the community....anyone else been banned from there?

Wed, 07/06/2011 - 16:47 | 1430859 mayhem_korner
mayhem_korner's picture

No, but I would offer that access to ZH has been censored by ICANN at certain computers that I used to log on from.  Don't know how or why, just that it is.

Wed, 07/06/2011 - 16:51 | 1430862 Gringo Viejo
Gringo Viejo's picture

Thx 4 taking time to respond mayhem. 

Wed, 07/06/2011 - 17:42 | 1430984 monopoly
monopoly's picture

Gringo. Not sure how long you have been here but it is very probable that you have upset those in the media that do not want to hear negative comments, no matter how truthful. So much is being hidden from the sheeples so they don't take action. Very few sites similar to this one that allow you to post whatever you want.

I mean, Tyler has not even banned Robot. lolol.

Wed, 07/06/2011 - 19:33 | 1431232 Gringo Viejo
Gringo Viejo's picture

Sent mail to them re: being banned stating "the truth needs no advocate while the lie needs a thousand champions." 

Thx 4 your time monopoly

 

 

Wed, 07/06/2011 - 17:57 | 1431020 Ruffcut
Ruffcut's picture

Yep dudes and dudettes, party like it is 1929.

Fuck all those who don't know what hits them. I am tired of talking to limited minded fucktards.

There are those who "get it" and the rest are tippy toeing thru the tulips.

Wed, 07/06/2011 - 16:21 | 1430815 long-shorty
long-shorty's picture

(1) Implied vol on very long-dated crude futures call options is incredibly reasonable. The things don't trade often, but if you put a bid out there at a bit of a premium to "settlement value" (whatever that means), then you'll likely soon have some nice options in your pocket. The only downside is you're going to have to take an immediate hit to your P&L to do the trade, because your position is going to immediately worth less than you paid for it, according to the very low "settlement values" based by the exchange on some ridiculously low implied vol.

(2) CVV, bitchez! [yes, that is completely irrelevant. but hey, I gave you the crude trade for free.] CVV is the most ignored great growth stock I've ever seen. Going higher. Our largest holding. Precious metals just sit there, but you can make LEDs out of graphene!

 

 

Wed, 07/06/2011 - 16:41 | 1430849 Critical Path
Critical Path's picture

Banned for being the turd in the punch bowl... don't want to ruin the party.

Wed, 07/06/2011 - 16:58 | 1430876 mayhem_korner
mayhem_korner's picture

This just in...Brian Sack and the Bernank spotted trying to get through life without a printer and a catcher's mitt... 

http://www.youtube.com/watch?v=OI5m7rkgHZo&feature=related

Wed, 07/06/2011 - 17:27 | 1430943 Pete15
Pete15's picture

Tyler stop being a Douche, the article above this says be bearish on crude. We need the Zero Hedge source to be clear otherwise Im gonna stop wearing the tee shirt nukka 

Wed, 07/06/2011 - 18:09 | 1431033 CrashisOptimistic
CrashisOptimistic's picture

1) RUSSIA IS THE WORLD'S #1 OIL PRODUCER, NOT KSA.

And so . . . watch Wall Street verbage here:

Reuters reports that lack of investment due to a heavy tax burden means Russian oil production will struggle to maintain present levels. A lack of new projects in the pipeline while existing fields mature will make maintaining production increasingly  difficult. “Certainly Russia’s production growth is not catching up with the world’s growing demand. Russia’s mature fields base is so large that it needs a lot of new projects just to offset that decline

Notice, people, the use of the word "Mature".  See how carefully that was chosen.  The correct phrasing would be "past Peak", or "dying", or "old".  But that can never be allowed into discourse.  So you have to train yourself to translate "mature" to mean what it means . . . oil production from that place is falling, and the decline rate is usually almost never quoted.  For Russia's west Siberia fields, it's 10%/yr, pre drilling and 5% post drilling (frantic drilling of additional wells in a field to try to offset the decline in output from dying **wells** of the field).  But that is geology in action, folks.  That is the decline rate and NOTHING can be done about it.

2) KSA will not get to 10 mbpd this month.  Period.  Full stop.

3) KSA's next production increase will come from the offshore Manifa ultra heavy oil field.  Think real careful about all of that phrasing.  KSA . . . is drilling offshore, and all they are going to bring up is heavy sour, with Vanadium laced in it.  

Sorry, folks.  I know people don't like to hear about this, but the end is coming, and it's not financial.  Finance has nothing to do with this.  Geology is going to kill a lot of people.

Soon.


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