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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Fri, 02/10/2012 - 10:41 | 2145632 CvlDobd
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AAPL will fix this.

Fri, 02/10/2012 - 10:54 | 2145697 The4thStooge
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Rumor floating around that Kim Jong un has been assasinated.

Fri, 02/10/2012 - 10:59 | 2145720 Mr Lennon Hendrix
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That makes me ronery.

Fri, 02/10/2012 - 11:14 | 2145775 Taint Boil
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Maybe Kim Jong Il comes back as corn.

Fri, 02/10/2012 - 10:59 | 2145718 4realmoney
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Doug Casey discusses his views on Gold and why now is a good time to buy US Real Estate. very interesting:


Fri, 02/10/2012 - 10:59 | 2145721 vast-dom
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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.

Fri, 02/10/2012 - 11:20 | 2145793 Ruffcut
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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.

Fri, 02/10/2012 - 10:42 | 2145636 Mr Lennon Hendrix
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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!

Fri, 02/10/2012 - 10:41 | 2145637 GeneMarchbanks
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Dying FIAT = Crude becomes currency = higher price?

Fri, 02/10/2012 - 10:48 | 2145664 Mr Lennon Hendrix
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Crude won't function as a very sound currency.

Fri, 02/10/2012 - 10:50 | 2145681 kito
kito's picture

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

Fri, 02/10/2012 - 11:00 | 2145725 Mr Lennon Hendrix
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Fri, 02/10/2012 - 10:51 | 2145687 GeneMarchbanks
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Depends on who you are. I'm pretty sure the days of crude for FIAT are over, at least between sovereigns.

Fri, 02/10/2012 - 10:58 | 2145713 francis_sawyer
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except for the ones with the fat ass ray guns...

Fri, 02/10/2012 - 10:58 | 2145714 Mr Lennon Hendrix
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That is a strawman; fiat is barely currency as it is.

Fri, 02/10/2012 - 11:04 | 2145744 BW
BW's picture

In gold, no.  In USD, we will see.

Fri, 02/10/2012 - 10:42 | 2145641 SheepDog-One
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I dont understand this flow chart...you seem to have left out the 'Steve Liesman' box?

Fri, 02/10/2012 - 10:51 | 2145688 kito
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sheepie, funniest line of the day by this article.......The growing likelihood of QE3..............

Fri, 02/10/2012 - 10:52 | 2145692 SheepDog-One
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LOL I just wrote about it below!

Fri, 02/10/2012 - 10:43 | 2145642 Jason T
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Have you seen the oil consumption numbers for the US??  We don't need oil when we have a magic money tree.

Fri, 02/10/2012 - 10:48 | 2145670 Mr Lennon Hendrix
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Ah yes!  The magic money tree!  It's leaves green and full of everlasting life!

Fri, 02/10/2012 - 10:43 | 2145644 LawsofPhysics
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Morgan Stanley looking fo another entry point?  Time to buy.

Fri, 02/10/2012 - 10:44 | 2145645 blindfaith
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$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....

Fri, 02/10/2012 - 10:49 | 2145676 GeneMarchbanks
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Thanks for pointing that out. You have an uncanny way pointing out the simplicity of a solution. All in just four sentences too...

Fri, 02/10/2012 - 10:57 | 2145710 LawsofPhysics
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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.

Fri, 02/10/2012 - 10:59 | 2145722 francis_sawyer
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long 'Snuggies'

Fri, 02/10/2012 - 11:35 | 2145858 Bicycle Repairman
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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.

Fri, 02/10/2012 - 11:58 | 2145940 Flakmeister
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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...


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....


Anyone really interested in the NG situation should also read this


Fri, 02/10/2012 - 12:13 | 2146060 falak pema
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you're faster on the draw than I am !!

Fri, 02/10/2012 - 12:10 | 2145999 falak pema
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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. 

Fri, 02/10/2012 - 10:45 | 2145653 ZippyBananaPants
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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?



Fri, 02/10/2012 - 10:49 | 2145679 EyeQ
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What's happening in Greece?

(Anonymous CNBC reporter)


Fri, 02/10/2012 - 10:49 | 2145667 SheepDog-One
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'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.

Fri, 02/10/2012 - 10:52 | 2145694 kito
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i just scrolled down to see this comment after stating the same thing............

Fri, 02/10/2012 - 10:56 | 2145705 Mr Lennon Hendrix
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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???

Fri, 02/10/2012 - 10:58 | 2145715 LawsofPhysics
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Precisely, QE has never stopped.

Fri, 02/10/2012 - 11:14 | 2145769 kito
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....

Fri, 02/10/2012 - 11:29 | 2145832 LawsofPhysics
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.

Fri, 02/10/2012 - 12:57 | 2146304 kito
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Your 8 buck silver jumped thanks to qe1 and 2. It hasnt moved higher because there has been no qe3

Fri, 02/10/2012 - 13:57 | 2146636 LawsofPhysics
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Funny, still purchases the same.  All I care about in the event of a calamity.

Fri, 02/10/2012 - 11:43 | 2145905 Mr Lennon Hendrix
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Your post is junk.

Fri, 02/10/2012 - 11:18 | 2145791 SheepDog-One
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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!

Fri, 02/10/2012 - 11:24 | 2145817 kito
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we are always wrong because it will happen...bwwhaaahahaha. 

Fri, 02/10/2012 - 11:06 | 2145749 Caviar Emptor
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We been sayin' it, Sheepie

Fri, 02/10/2012 - 11:19 | 2145790 IAmNotMark
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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?

Fri, 02/10/2012 - 11:20 | 2145798 SheepDog-One
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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. 

Fri, 02/10/2012 - 10:48 | 2145668 scatterbrains
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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.

Fri, 02/10/2012 - 10:48 | 2145671 Northeaster
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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?

Fri, 02/10/2012 - 10:54 | 2145698 Mr Lennon Hendrix
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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?

Fri, 02/10/2012 - 11:05 | 2145746 francis_sawyer
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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'?

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