Whither Crude

Tyler Durden's picture

As Brent and WTI prices ebb and flow from local and global fundamentals and risk premia, Morgan Stanley notes that to be bullish from here, one would need to believe a supply disruption is coming. Considering conflict with Iran, sustained Middle East tensions, and the potential for sustained supply disruption their flowchart of price expectations notes that prices follow inventories and that as price rises, fundamentals will weaken (as without an OPEC production cut, inventories would balloon by 2Q12) and therefore to maintain current prices across the curve, supply risk premia must continue to grow. They raise their estimate for 2012 average Brent price to $105/bbl from $100/bbl which leaves them bearish given the forward curve priced around $115/bbl, as their base case adjusts to a belief that Middle East tensions persist but a conflict with Iran does not occur as they address QE3 expectations and EM inflation/hard landing concerns.

But What Is Driving Price Higher?

1. Geopolitical tensions and supply concerns likely to persist.

Iran is one of the world’s largest oil producers with production near 3.5 mmb/d. More important, Iranian exports have averaged ~2.2 mmb/d. A complete loss of these exports would likely push effective spare capacity towards zero, leaving little buffer for future supply disruptions in other parts of the world.

An SPR release could be used to combat short-term disruptions, but not a sustained global imbalance. If demand exceeds supply, prices would need to surge to restore equilibrium. The end result would be a significant shock to the global economy, lower oil demand, and a high likelihood of a global recession.

2. Abating EM inflation and hopes for monetary easing.

As we noted recently the relief rally in emerging markets has far outpaced the rally in developed markets. With concerns of a China hard landing subsiding, investors have been willing to take on more risk. At the same time, slowing inflation in many emerging market countries has created the expectation for additional easing to stimulate economic growth. As a result, the global risk demand index has reached its highest since 2007. Higher oil prices, however, may arrest the recent decline exhibited in EM CPI.

3. QE3 expectations and a risk-on environment.

QE3 could create a bid in commodities broadly, all else equal, but fundamentals are more important. The growing likelihood of QE3 is also supporting commodities. However, as Exhibit 8 illustrates, fundamentals are important, hence the volatility of oil price around growing money supply. In other words, fundamentals tend to trump any apparent relationship between money supply and commodity prices, and the fundamental picture for oil remains bearish near term.

 

Source: Morgan Stanley

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CvlDobd's picture

AAPL will fix this.

The4thStooge's picture

Rumor floating around that Kim Jong un has been assasinated.

4realmoney's picture

Doug Casey discusses his views on Gold and why now is a good time to buy US Real Estate. very interesting:

http://djia.tv/doug-casey/doug-casey-how-to-invest-successfully-36/

vast-dom's picture

oil at anything lower than $115 is beyond the scam that the markets are. but then again SP above 850 is too. so bust out any (flow)charts and tell us how we're on the precipice and how Greece is defaulting etc etc but the reality is there is no real reality save for the reality-defying scams we are witnessing.

Ruffcut's picture

The CL seems to like the 100 bucky mark, almost like a gravitational pull. Appears very controlled.

Actually this commodity should be pulled from trading and be controlled. The futs market on forward month contracts deciding the daily price at the pump is still a major fucking scam upon the people and gas station owners. Oil money still has alot to say in these markets and the general reasons for all this bullshit war and takeovers. Thus allowing the financial criminals to play cleanup to further oppress all people on the planet.

I can't wait for when the price changes when I am pumping.  Like a futures ninjatrader trade dom at the pump.

Mr Lennon Hendrix's picture

People that invest in crude are terrists because if you do then you are disrupting the supply chain and the West needs oil to continue to be #1!

GeneMarchbanks's picture

Dying FIAT = Crude becomes currency = higher price?

Mr Lennon Hendrix's picture

Crude won't function as a very sound currency.

kito's picture

maybe not, but it sure makes for enticing barter.............

GeneMarchbanks's picture

Depends on who you are. I'm pretty sure the days of crude for FIAT are over, at least between sovereigns.

francis_sawyer's picture

except for the ones with the fat ass ray guns...

Mr Lennon Hendrix's picture

That is a strawman; fiat is barely currency as it is.

BW's picture

In gold, no.  In USD, we will see.

SheepDog-One's picture

I dont understand this flow chart...you seem to have left out the 'Steve Liesman' box?

kito's picture

sheepie, funniest line of the day by this article.......The growing likelihood of QE3..............

SheepDog-One's picture

LOL I just wrote about it below!

Jason T's picture

Have you seen the oil consumption numbers for the US??  We don't need oil when we have a magic money tree.

Mr Lennon Hendrix's picture

Ah yes!  The magic money tree!  It's leaves green and full of everlasting life!

LawsofPhysics's picture

Morgan Stanley looking fo another entry point?  Time to buy.

blindfaith's picture

$8.00 oil destroyed the USSR. $150 oil will destroy China. The USA has to much natural gas and is near 80% independent. So goes the plan....

GeneMarchbanks's picture

Thanks for pointing that out. You have an uncanny way pointing out the simplicity of a solution. All in just four sentences too...

LawsofPhysics's picture

perhaps, but ignoring the capital and energy cost to set-up the infrastructure, what is the energy capacity of this gas again?  How fast would the world burn through it given current demand?  The devil is in the details, hopefully the government is not in charge of this, otherwise we all know how it will turn out, real losses will be made up for with higher taxes.

Bicycle Repairman's picture

The context here is defeating China.  If $150 oil beats China, this is not a decades long process.  We have enough natural gas to accomplish that.  Easily.

Flakmeister's picture

For shits and giggles, could you provide the source of your information??

The most conservative estimate for US NG supply is 23 years.... unless of course all that shale stuff becomes economical....

Small detail...

But details are a real bitch...

http://www.theoildrum.com/node/8914

Oh in case you are wondering the guy that penned the above article is a former editor of the Oil and Gas journal... i.e. an industry insider....

Edit:

Anyone really interested in the NG situation should also read this

http://www.theoildrum.com/node/8859

falak pema's picture

+10.

you're faster on the draw than I am !!

falak pema's picture

I think your energy paradigm is screwed. Usa has no 100 year time line on gas. Its back up is neither gas nor shale oil; its Coal. Read the facts on the energy shift in USA since the mid 80s. If energy constraints were to hamstrung a debt ridden USA which couldn't import all its needs; it'll spell good bye economic recovery. Read my comment on the importance of petrodollar hegemony. 

Read this for Primary energy US potential : http://www.theoildrum.com/

The article on alternative energy matrix. 

ZippyBananaPants's picture

Does anyone think 'they' are pushing up Apple to $500 so CNBC and Bloomberg can talk about all day and for the next week while Greece burns?

 

 

EyeQ's picture

What's happening in Greece?

(Anonymous CNBC reporter)

 

SheepDog-One's picture

'The growing likelihood of QE3'? Where? Based upon what?

Give me a break...you people are going to keep peddling 'QE3 comin any minute folks' until the minute nukes are raining down on major US cities.

kito's picture

i just scrolled down to see this comment after stating the same thing............

Mr Lennon Hendrix's picture

Do you guys understand how Treasury auctions are working?  You are aware that POMO continues?  Do you know how this sets up OT2?  I guess my real question is, are you guys fuckin' serious???

kito's picture

right lennon, the printing presses continue, sure......thats why gold is off its 1900 highs. and silver off its 49 high. and why the dollar hangs around 80. are you serious? the entire world is shaking in fear under the umbrella of u.s. debt paper right now. all hail the one eyed king. no qe coming lennon this year. give it up....

LawsofPhysics's picture

Right, what is the CME doing again?  The silver I purchased at $8 still looks pretty damn good.  Let's see what will those same $8 do for me now?  Rrrriiiiiggghhhht.

kito's picture

Your 8 buck silver jumped thanks to qe1 and 2. It hasnt moved higher because there has been no qe3

LawsofPhysics's picture

Funny, still purchases the same.  All I care about in the event of a calamity.

SheepDog-One's picture

Yea! I DO get it! Thats why this talk of 'The growing likelihood of QE3 at any minute is RIDICULOUS!

I mean, I got to LAUGH! Here Ive been saying for over a year that 'QE3' is not going to happen, it hasnt, and now I am the one people thinks doesnt get it? Wow!

kito's picture

we are always wrong because it will happen...bwwhaaahahaha. 

IAmNotMark's picture

The problem is:  The guys with their fingers on the QE triggers are as insane as the guys with their fingers on the nuke triggers.  So, which ones pull the triggers first?

SheepDog-One's picture

There is no one with their finger on a 'QE trigger', theyre just pumping whatever they feel like now, there wont be any 'package' free gift for stocks, its just going on under the table so no one can see it. 

scatterbrains's picture

Using M1 money supply this guy is suggesting we are below 08 peaks. What is the real money supply with all the printing and queezing that the world central bankers have been engaged in and lets overlay crude prices against THAT chart and see if oil might still be way too cheap.

Northeaster's picture

Don't these banks need to recoup their money from the SPR release before? Didn't they buy at $105/bbl? Or did they recoup that aready?

Mr Lennon Hendrix's picture

Don't these banks need to recoup their money from the SPR release before?

The Blueblood Banking Houses, as Rick Santelli called them today, act as proxy for the fascist oligarchs, as does the Fed, and the government of the US.  As long as the banker henchmen get their bonuses, the only thing that matters is that thy will be done. 

The current goal is to mitigate peak oil and hold the flood wall of the Fiat Ponzi up long enough to fully establish the Police State.  Selling oil is not done for revenue, it is done to buy time.  Shorting silver is not done for profit, it is done to buy time.  Yes, there is a little money to be made on the way, but why does that matter, when they can have bailout taxes ad infinum?

francis_sawyer's picture

So at the point that it finally all does topple, all the oligarchs will have all the gold, silver, & resources they need...

Some ZHers will still have their hands on some of the silver & gold... Does that mean we get to be "Dukes"?

In that case... Who around here is 'Mortimer'?