This page has been archived and commenting is disabled.

A Weak Outlook On Crude Oil Going Forward

Cornelius's picture




 

The story with oil, much like most commodities, has mostly focused on two factors: tight correlations with other macro products and China. The correlations can be reasonably expected to weaken a little once we are a little further into the deleveraging process and once we see a more familiar phase of the business cycle but until then, it's something to watch very closely. As seen below, it's definitely not something to be ignored.

 

The China demand picture has been widely overdone and the ensuing bubble has been a continuing theme on this blog over the past 4 months. As seen below, the factors of demand are much more liquidity driven than by anything close to resembling production fundamentals. Of course, this source of demand has a lot more stamina than most would care to ascribe with regard to such an artificially propped up boom but should also be considered when evaluating the term structure of crude futures.

 

 

 

With crude stockpiles accumulating at historically high seasonally adjusted rates, the picture is not likely to improve. Compounding the matter is the deteriorating picture in the MidEast; OPEC agreements are tough to push when the massive state-run welfare states of many of its members start grinding down. As seen below, the supply picture is not encouraging.

 

 

Finally, US demand will continue to be weak, even post-recovery. This has been a theme we have been running in parallel with our China pieces since mid-April and has been gaining steam in various forms (e.g. PIMCO's "new normal", aggregate demand forecasts, permanently increased US household savings rate, etc.) As the below graphic shows, commodity forecasts continue to be bearish.

 

Thanks to Morgan Stanley for charts

 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 08/18/2009 - 17:10 | 40278 Anonymous
Anonymous's picture

I just wanted to see if I got the Captcha problem right.

My being sufficiently intelligent is still questionable at best.

Tue, 08/18/2009 - 17:10 | 40279 John Self
John Self's picture

Agree, but this analysis doesn't take into account what happens with the dollar.  I'd be interested to know the strength of the correlation, historically. 

Tue, 08/18/2009 - 17:15 | 40284 Project Mayhem
Project Mayhem's picture

War is also a wildcard in the deck.

Tue, 08/18/2009 - 18:21 | 40375 Icarus
Icarus's picture

I don't think it is this time - the Treasury doesn't have the market for the debt.

Unless they use it for as an excuse to restart QE, but the Fed would never agree to that.

 

If you mean a non-US war, I doubt it would have a long-term effect.  The middle east has too much competition these days.

Wed, 08/19/2009 - 01:02 | 40555 vicecity (not verified)
Tue, 08/18/2009 - 22:39 | 40659 Anonymous
Anonymous's picture

The Fed would never agree to that? You make it sound as though the Treasury and Fed are two different entities.

The goal is to inflate away the debt and the middle class. QEII starts soon.

Tue, 08/18/2009 - 17:25 | 40303 Mannwich
Mannwich's picture

Fundamentals clearly don't matter anymore in anything when there's this much liquidity floating around in the markets.......for now.  That liquidity is certainly not making it's way to Main Street, except in the form of higher gas prices

Tue, 08/18/2009 - 21:37 | 40598 Anonymous
Anonymous's picture

One day Ben will press the blue button. Banks will withdraw their money from the Fed and begin lending. The subsequent hyperventilating economy will be called the Obama! Miracle. . . until one day folks look around and figure out there's something wrong with bread costing $100 a loaf no matter what the TV says. Then, wham-o, the wheels come off, the middle class disappears in a puff smoke. Apres, le guerre.

Tue, 08/18/2009 - 17:26 | 40305 Ducky
Ducky's picture

sans an unlucky hurrican strike, short crude looks like the best trade out there to me. i like jan

Tue, 08/18/2009 - 17:26 | 40306 Anonymous
Anonymous's picture

The top chart shows exactly how bubbles and market inefficiencies are created. Pricing breaks away from fundamentals because traders are gamblers and there is no volatilty (profit) in efficient pricing.

Aud, Eur, Gbp, Nzd- all rise with S&P (risk). Jpy gets
milked for the carry trade.

Dollar up = stocks/commodities down etc.

A look at any weekly chart- SPX, gbp/jpy or WTI, highlights that markets are anything but efficient. Just a casino where money rushes to catch the next bubble and squeezes it to oblivion until common sense and gravity catches up.

The casualties in the resultant crash are anybody from retail investors and sectors to entire economies.

Tue, 08/18/2009 - 18:19 | 40380 ZerOhead
ZerOhead's picture

Exactly. Very incisive.

Tue, 08/18/2009 - 17:27 | 40307 Anonymous
Anonymous's picture

The Defense Dept (US) is the biggest consumer of oil - in the world. So, if war breaks out, oil goes up.

Tue, 08/18/2009 - 17:30 | 40311 Project Mayhem
Project Mayhem's picture

What's the SPR data look like?

Tue, 08/18/2009 - 17:30 | 40312 Anonymous
Anonymous's picture

The world is awash in oil. The futures have been in contango recently. (Oil abruptly switches back and forth between contango and backwardation every few years). Far out months are at a large premium. This means that it pays to buy spot oil, sell it forward, and store it until contract delivery time to exploit the contango. Goldman Sachs has chartered a huge fleet of tankers around the world to do exactly that. But the world's storage capacity is almost exhausted. It may run out any time now. When it does, that game will be over and that source of demand will be gone. All of the new production will have to be consumed rather than stored. This will cause the price of oil to crash. That is what has happened in the past according to Verleger. The only place that his analysis is explained clearly is in this mp3.

http://media.bloomberg.com/bb/avfile/Economics/On_Economy/vHHE4QWaAwIs.mp3

He is calling for $20 oil by year end. (Of course there are some calling for $100 oil).

I have positioned myself to take advantage of a *potential* big move down.

Tue, 08/18/2009 - 17:34 | 40314 hardball22
hardball22's picture

Over the US's declared "recessionary" periods, what has been oil's performance relative to SPX?  If I had a Bloomberg here, I'd dig for the historicals, but I don't.  What's the correlation:

1. Beginning of recession to end SPY(t=0:t=1)/Oil(t=0:t=1)

2. Beginning of recession to end on daily basis

Tue, 08/18/2009 - 17:35 | 40317 Arco
Arco's picture

So let me get this straight. Data on ZH indicating that crude oil is going down? I better start buying!!

Tue, 08/18/2009 - 17:42 | 40324 Project Mayhem
Project Mayhem's picture

Ah yes -- the Inverse Zero Hedge trade.  I hear ProShares is about to launch an ETF for this.

Tue, 08/18/2009 - 18:22 | 40385 D.O.D.
D.O.D.'s picture

and Oil rockets A/H

Tue, 08/18/2009 - 18:35 | 40408 McLuvin
McLuvin's picture

I was just noticing that...any news?

Tue, 08/18/2009 - 17:49 | 40329 Anonymous
Anonymous's picture

Deleveraging is officially scheduled to begin, in earnest, in October, with the (currently presumed) cessation of quantitative easing. Unless, of course, you anticipate that banks will open the credit spigot as a compensating factor at that time.

Tue, 08/18/2009 - 17:53 | 40331 Anonymous
Anonymous's picture

I have been blogging about this for a few weeks. I think the trigger will be if the US Gulf of Mexico does not get hit with a hurricane this year.

http://merrillovermatter.blogspot.com/search/label/oil

Tue, 08/18/2009 - 17:54 | 40334 rapier
rapier's picture

What happened with all that jabber two weeks ago about limiting futures position sizes? All talk, or what? This is a gigantic dilemma because keeping oil flated is a lynchpin of the reflation operation.

All those petro dollars flow right into the financial system instantly. Liquidity at it's finest. From every main street in the world to the bubble machine.

High oil prices give meaning to the existence of every crackpot Global Strategic Thinker engaged in the Great Game in Pipelineistan. Where todays hopeless romantics with a taste for adventure, money, and sex slaves cavort.

Tue, 08/18/2009 - 18:26 | 40346 Project Mayhem
Project Mayhem's picture

Haha nice.  The position limits were more sweet nothings from our corrupt government and their minions within the CFTC.   Btw  I hear Craptakistan opium production is up 10x since 2001.   It's good work if you can get it.   I wonder how long until Afghan dope gets its own COMEX contract? 

 

Next all we'd need is to get a squid tentacle into Pakistan -- for the deepwater port.

Tue, 08/18/2009 - 17:55 | 40337 Anonymous
Anonymous's picture

I have been blogging about this for a few weeks.
I think the triggering event will be if the Gulf of Mexico does not get hit with a major hurricane.

http://merrillovermatter.blogspot.com/search/label/oil

Tue, 08/18/2009 - 17:59 | 40344 gridlocked
gridlocked's picture

After they have sold all their clients sufficiently long while going short themselves Goldman et all will stop manipulating the oversupplied demand dead market and allow it to fall back to reality.

 

Then they will start the cycle all over again.

Tue, 08/18/2009 - 18:01 | 40351 Anonymous
Anonymous's picture

I actually hope oil goes higher then we can blame that on past regimes and have more investigations and more abuses of power.... sorry got too excited there.

Tue, 08/18/2009 - 18:04 | 40355 Anonymous
Anonymous's picture

I also think there's a few folks in Washington thinking it's in the nation's best interest to keep oil high enough so the middle eastern countries don't go bankrupt. We're already hip deep in Iraq.

Wed, 08/19/2009 - 01:03 | 40552 vicecity (not verified)
Tue, 08/18/2009 - 18:15 | 40370 Anonymous
Anonymous's picture

Oh boy, if oil spot hits $20 because storage runs out, its probably the best layup trade of all time.

Tue, 08/18/2009 - 18:16 | 40372 Anonymous
Anonymous's picture

Sure, world's awash in oil, RIOGHT! With production declining at a 6.7% annulized rate AND your chart EXCLUDES SPR numbers, RIGHT? And the WTI/Brent Spread is -$4.5, Right?

Know why? No european SPR, THAT's why!

You guys are dunces or shills, if you think energy prices are going to decline.

Why the change in the PCE then to INCLUDE prices increases from FOOD and ENERGY and their REMOVEVAL from the PCI?

Think the Gov MIGHT, JUST MIGHT want to show that PCE is increasing indicating that the economy is "GROWING" while at the same time showing that inflation is "LOW".

Stupidest fucking shit I've read in my entire life.

Don't believe me. HERE IS THE BLS laying it all out for you.

Don't be stupid, ignore this TRIPE!

Regarding the data series you have questioned, please see the note below regarding the comprehensive revision. If you need further assistance, please let me know. NIPA Revision Notice: On Friday, July 31st, 2009 at 8:30AM EDT, the Bureau of Economic Analysis (BEA) will release their 2009 comprehensive revision to the National Income and Product Accounts (GDP & Corporate Profits). Annual revisions for monthly Personal Income and Outlays will follow on Tuesday, August 4th, 2009. This comprehensive revision, the first since 2003, will incorporate changes in definitions, classifications, statistical methods, source data, and presentation.

**Please Note: The change in the reference year will move from 2000 to 2005.

The BEA will NOT release full history all at once. Data Series will be processed as they are made available by the BEA. For further information regarding the comprehensive revision, please visit the BEA's web site: http://www.bea.gov/national/an1.htm

Monica
Monica Asselin
Economic Data Associate
Federal Reserve Bank of St. Louis
(314) 444-8573
(314) 444-8731 (fax)
Monica.Asselin@stls.frb.org

AND

http://www.bea.gov/scb/pdf/2009/06%20June/NIPA_%20Briefing.pdf

Quote:
? PCE*excluding*food*and*energy
???? Will*include*Food*services
???? Prices*less*volatile*than*Food*purchased*for*off?p remise*consumption
???? Core*CPI*not*changing
???? Will*develop*new*PCE?CPI*comparison
???? Tentative*re?release*in*late*Fall*2009

You guys DON'T KNOW WHAT THE FUCK YOU ARE TALKING ABOUT (or are intentionally misleading)

Tue, 08/18/2009 - 19:07 | 40440 Sqworl
Sqworl's picture

Glad you could join us Juaquin of Arabia..x

Tue, 08/18/2009 - 22:18 | 40621 Project Mayhem
Project Mayhem's picture

did you just have an aneurysm? 'cause if so that's pretty cool.  does the vein actually bulge?

 

anyway you make a good point i'm just messing around because you are a little wound up.  that's why i asked about the SPR data.  if USD has a currency stroke we can't really follow oil price very easily.  I prefer WTIC priced in gold to measure the price, which looks like we are on the verge of a A) breakout or b) double-top.   Gotta love technical analysis , right?

 

http://stockcharts.com/h-sc/ui?s=$wtic:$gold

 

RSI neutral, but MACD just put in a crossover.  My money is on double-top -- barring a 'currency event'.

 

Wed, 08/19/2009 - 01:16 | 40758 hardball22
hardball22's picture

I would echo the double top, particularly since MACD shows divergence.

Draw the flat trendline between the hypothetical "dbl tops" on the price chart, then draw the downward sloping trendline between the corresponding MACD tops. That divergence indicates a loss of steam.

Tue, 08/18/2009 - 22:27 | 40635 Anonymous
Anonymous's picture

The groups that are now saying 6.7% depletion, i.e. IEA, EIA, and EIEIO, were saying a few years ago that we had decades worth of oil and there was nothing to worry about. Wonder why they've changed their tune? You don't suspect they have an agenda, do you? I mean, we've always been able to trust the petroleum industry before.

Easy money is on oil going through the roof in 2 years. That's why the hard money is on oil plummeting.

Tue, 08/18/2009 - 22:40 | 40646 Project Mayhem
Project Mayhem's picture

 

Holy shit you are right

 

Brent is trading at a premium to WTI !    <--- WTF.    The last time this happened the US replaced the SPR with sour crude and flooded the pipelines with sweet , and the oil price crashed.   See Rob Kirby's article

http://financialsense.com/Market/kirby/2009/0629.html

 

---> WHY IS SOUR TRADING AT A PREMIUM TO SWEET? <---

 

Dated Brent Spot    71.98    -.43    -.59    22:23
WTI Cushing Spot    69.19    2.44    3.66    08/18

 

http://www.bloomberg.com/markets/commodities/energyprices.html

 


Wed, 08/19/2009 - 00:33 | 40738 nightfly
nightfly's picture

Uh, well you're right about all commodities being a finite resource...but that's a longer term story.

But believing or using the BLS or govt state is your first mistake of many - I'd rather believe the facts and charts don't lie.

Fundamentals of supply/demand always win; not pissed off long speculators.

Tue, 08/18/2009 - 18:53 | 40427 NHL
NHL's picture

Do you think oil price will hold until cap-and-trade vote?

Tue, 08/18/2009 - 22:30 | 40641 Anonymous
Anonymous's picture

I think that's "capping trade".

Tue, 08/18/2009 - 19:25 | 40454 Anonymous
Anonymous's picture

If only it was a simple supply/demand question that would decide the price of oil...

Tue, 08/18/2009 - 19:26 | 40455 Anonymous
Anonymous's picture

If only it was a simple supply/demand equation that would determine the price of oil...

Tue, 08/18/2009 - 19:29 | 40459 Anonymous
Anonymous's picture

Here's the reality, folks. You can find wackos saying there is plenty of oil. They invariably introduce abiotic oil creation models into the conversation and celebrate how fields are replenishing themselves. None of them are employed at once empty Oklahoma oil fields, though.

You can find wackos saying it will be exhausted tomorrow, too. They usually will talk about nukes over the Saudi fields.

The truth is . . . the Earth has finite volume. It's a lot more finite than you think. The deeper you drill, the higher the temperature. The higher the temp the more likely you are to find nat gas, not oil There are no nat gas 18 wheelers bringing food from Iowa to Savannah. Nat gas is not important to crude.

This is not supposed to be persuasion. Just sashay over to Wikipedia's entry for Oil Reserves and scroll down to the numbers country by country. The Middle East has been claiming increases or no loss for about 25 years while pumping the hell out of their fields.

Look. This is not rocket science. THEY ARE LYING. They have no reason not to lie. It's not a conspiracy. This is simply the natural reply to give. The result is almost no one has any idea how much oil is left. It's not infinite. It is some number less than infinity. If it's a lot less, you will starve. Period. Full stop.

Tue, 08/18/2009 - 22:41 | 40665 Anonymous
Anonymous's picture

You can say that again.

Tue, 08/18/2009 - 19:30 | 40461 Anonymous
Anonymous's picture

Here's the reality, folks. You can find wackos saying there is plenty of oil. They invariably introduce abiotic oil creation models into the conversation and celebrate how fields are replenishing themselves. None of them are employed at once empty Oklahoma oil fields, though.

You can find wackos saying it will be exhausted tomorrow, too. They usually will talk about nukes over the Saudi fields.

The truth is . . . the Earth has finite volume. It's a lot more finite than you think. The deeper you drill, the higher the temperature. The higher the temp the more likely you are to find nat gas, not oil There are no nat gas 18 wheelers bringing food from Iowa to Savannah. Nat gas is not important to crude.

This is not supposed to be persuasion. Just sashay over to Wikipedia's entry for Oil Reserves and scroll down to the numbers country by country. The Middle East has been claiming increases or no loss for about 25 years while pumping the hell out of their fields.

Look. This is not rocket science. THEY ARE LYING. They have no reason not to lie. It's not a conspiracy. This is simply the natural reply to give. The result is almost no one has any idea how much oil is left. It's not infinite. It is some number less than infinity. If it's a lot less, you will starve. Period. Full stop.

Tue, 08/18/2009 - 20:46 | 40531 Anonymous
Anonymous's picture

Price is NOT determined by reserves alone. Current *Demand* and usage has much more influence on the current price that the reserves of any country.

Tue, 08/18/2009 - 22:29 | 40638 Anonymous
Anonymous's picture

You can say that again.

Wed, 08/19/2009 - 08:50 | 40898 advill
advill's picture

When wood was scarce in Europe after millenia of use there was a energetic crisis until they start using coal instead, now we have nuclear 3.0, batteries2.0 and biofuels 3.0.

They could lie if we prepare it it´s ok

Tue, 08/18/2009 - 20:00 | 40489 aurum
aurum's picture

no one mentions the dollar (any fiat currency for that matter) collapse premium baked in..can it be quantified..?......will the premium grow? surely....if it hits $45 again i will charter my own tanker...

Tue, 08/18/2009 - 20:00 | 40490 RobotTrader
RobotTrader's picture

WTIC Crude

Tue, 08/18/2009 - 20:07 | 40495 Anonymous
Anonymous's picture

Crude's topping out pattern has been established 2 weeks ago, along w/ a temporary bottom in DXY at 78. Now risk aversion will do the rest. The supporting QUADRIFECTA of EUR, GBP, OIL & SPX still holds as seen in charts below

http://bit.ly/179NvP

Tue, 08/18/2009 - 20:13 | 40500 Anonymous
Anonymous's picture

Any reason why Crude was up $4 today? Equities up less than 1% and DX off marginally. APIs came in ~6 million draw after the bell at 4:30. Almost as though people knew the numbers before hand. Crude / products were the only commodities up today, and to be up 5% when everything else is down is seriouslly fishy.

Tue, 08/18/2009 - 23:11 | 40690 Gilgamesh
Gilgamesh's picture

Yes, and bet that they will be unloading overnight before the complete data comes out.  That draw is seriously flawed.

Tue, 08/18/2009 - 20:15 | 40502 estrader
estrader's picture

Any reason why Crude was up $4 today?  Equities up less than 1% and DX off marginally.  APIs came in ~6 million draw after the bell at 4:30.  Almost as though people knew the numbers before hand.  Crude / products were the only commodities up today,  and to be up 5% when everything else is down is seriouslly fishy.  

Tue, 08/18/2009 - 20:45 | 40530 Anonymous
Anonymous's picture

More buyers than sellers.

Realistically, while the Sep contract expires tomorrow, today was effectively the last day of trading it, so anything can happen. Perhaps those who had been taking advantage of the steep contango actually needed to take delivery to fill the storage.

Tue, 08/18/2009 - 20:21 | 40507 Anonymous
Anonymous's picture

Further, think about what has to be done to get old fields to produce. You have to build miles and miles of pipelines -- for sea water. Then you pump it underground and extract what comes out elsewhere, until it is more sea water than oil and you can't separate them.

You think that's free? That is billions of dollars of infrastructure, and ignoring Saudi Arabia for a moment, trying to get loans for those projects right now is impossible. So demand continues. Supply (Not Above Ground Storage -- REAL SUPPLY) starts to get scarce.

Nothing good comes of this.

Tue, 08/18/2009 - 20:27 | 40517 Anonymous
Anonymous's picture

By the way Prechter is calling for oil between $4 and $10 in a few years.

Wed, 08/19/2009 - 01:02 | 40551 vicecity (not verified)
Tue, 08/18/2009 - 23:11 | 40688 walküre
walküre's picture

It costs the Arabs about $5 a barrel to produce.

They are allot less interested in $70 oil than in $30 oil.

Why? Because they can pump at $30 and still make money, but at $70 they face more competition especially from oil sands or shale.

GS is storing oil to drive up price (like today was a good example) and then will dump it to force producers into either liquidation or bankruptcy. GS can buy them on the cheap so to speak and corner part of the very lucrative oil and gas market.

How much oil is left for consumption and production? More than we currently need and that's all that matters to the discussion of price here.

I like trading oil etfs for that reason. Today was a great day. GS came thru for me.

Tue, 08/18/2009 - 23:32 | 40710 wwtdd
wwtdd's picture

short squeeze from yesterday..a lot of people got short around 65 thinking that it would get another big leg down today..but as the day wore on, the price just kept steadiily rising...the last 2 dollar move of the day was definetly people abandoning their positions...Fundamentals and Techicals are against oil rising...inflation trade is dead for now and growth is no where in sight...Patience will win out and oil prices will return to 50 or less by year end

Wed, 08/19/2009 - 00:49 | 40740 Anonymous
Anonymous's picture

Oil demand is dropping but so is the supply. The difference is still small.

http://www.eia.doe.gov/ipm/

World Production/Demand millions of barrels per day

Demand
1Q08 2Q08 3Q08 4Q08 1Q09
86.65 86.01 85.19 84.03 83.25

Production
1Q08 2Q08 3Q08 4Q08 1Q09
85.78 85.64 85.28 84.94 83.44

Wed, 08/19/2009 - 01:44 | 40769 Anonymous
Anonymous's picture

In response to Project Mahem

See why I had an vein pop?

My point is, one of two things happening.

Last time we had a negative spread on WTI/BRENT the price crashed (or was engineered to crash depending on if you are a blue or a red pill kind of person).

SO, either, they have the stocks to do a repeat (only less successfully or less spectacular, as that would scare the shit out the equities markets).

Or THEY ARE TRYING TO but don't have the supply to make it happen.

SO place your bets.

Fri, 08/21/2009 - 10:08 | 43220 Anonymous
Anonymous's picture

If oil prices start to drop significantly I wonder if some oil producers will start to hoard the stuff, knowing that a supply crunch is coming in a few years. It would be preety stupid for many of them to sell the stuff at $40 now when they could keep it in the ground and get three times that amount for it in a few years. Of course many such countries need the cash flow now, but there is a tipping point somewhere...

Do NOT follow this link or you will be banned from the site!