Five reasons high oil prices are probably here to stay

Five reasons high oil prices are probably here to stay - Frank Holmes

   

The new geopolitics of oil, the continued decline of the U.S. dollar and increasing demand arejust some of the reasons why higher oil prices are likely to be with us for some time

Author: Frank Holmes
Posted:  Tuesday , 12 Apr 2011

SAN ANTONIO (U.S. Global Investors) - 

A number of forces continued to push oil prices higher last week, reaching their highest levels in the U.S. since September 2008.
One factor fueling the run has been the continued decline of the U.S. dollar. You can see from the chart that oil and the dollar historically are negatively correlated. This means that a rise in oil prices generally coincides with a decline in the dollar, and vice versa. The U.S. dollar has seen a dramatic decline since the beginning of the year as oil prices have moved some 30 percent higher. This could be due to fact that roughly two-thirds of the U.S. trade deficit is related to oil imports.

Despite the run up, oil's upward rate of change is still within its normal trading pattern over the past 60 trading days. Accordingly, this may imply that it isn't a spike and we haven't crossed into the extreme territory like we experienced in 2008 and 2009.
Conversely, oil prices are positively correlated with gold prices, which also saw a bounce this week. Looking back over the past one- and 10-year periods, oil and gold have roughly a 75 percent correlation. This means that three out of four times, when prices for one go up, prices for the other increase as well.
Another factor pushing prices higher is the seasonal strength that oil prices historically experience leading into the summer driving season. This chart shows the five-, 15- and 28-year patterns for oil prices. You can see that prices historically bottom in February before rising through the end of the summer.

We discussed in detail how these seasonal factors affect oil prices a few weeks ago. Click here to read "Oil's March Madness a Boost for Refiners."
Rising oil prices are also a result of what the Financial Times calls the "new geopolitics of oil." The FT says three elements creating this new environment are becoming clear:
Young populations with high unemployment rates and a skewed distribution of income are a volatile combination for the people in power.
To placate these groups, oil-producing countries are increasing public expenditures.
Governments are also to extend energy subsidies to shelter the country's consumers from rising energy prices.

A Deutsche Bank chart plots the share of population under the age of 30 for selected North African and Middle Eastern countries against the unemployment rate of this group. You can see that large oil producers such as Saudi Arabia have a high level of unemployment among youth populations.
This is why King Abdullah of Saudi Arabia has announced a total of $125 billion worth (27 percent of the country's GDP) on social programs for the public. For King Abdullah, this is the cost of keeping peace but has driven up the breakeven price for Saudi oil production to $88 per barrel, according to the FT.
Keeping these young populations happy and working is not only domestically important for these governments but for global oil markets as well. You can see from this chart that a significant portion of the world's oil production comes from the Middle East.

With the unrest in Libya-a top-20 oil producer-essentially knocking out the country's entire production, any further unrest in another country could threaten global supply. Upcoming elections in Nigeria have the potential to disrupt production for the world's fifteenth-largest producer.
But it's not just geopolitics that is threatening production. Natural decline rates from mature fields such as Mexico's Cantarell oil field are starting to make a dent in global production. Reuters reported this morning that Norway, the world's eleventh-largest oil producer, is experiencing a significant slowdown in production from the Oseberg oil field in the North Sea. Production is expected to be cut by 26 percent in May to only 118,000 barrels per day.
Meanwhile, oil demand has been picking up significantly in both emerging and developed markets. Oil demand in China and the U.S. has been rising since mid-2009, well before the uprisings began in the Middle East.
In China, a big driver has been growth in the Chinese automobile market. Auto sales increased 2.6 percent in February, and March data released by the Chinese Auto Association over the weekend shows auto sales grew 5.36 percent on a year-over-year basis in March.
The G7 economies have been in an up cycle since last year. In the U.S., employment rates and consumer spending have been steadily improving. Oil prices rising too fast remains a threat to this recovery but BCA Research estimates that oil prices need to rise above $120 per barrel before "significantly undermining consumer and business confidence."
Frank Holmes is CEO and Chief Investment Officer, U.S. Global Investors - www.usfunds.com 
Mineweb.com - The world's premier mining and mining investment website Five reasons high oil prices are probably here to stay - Frank Holmes - ENERGY | Mineweb

Share

_______________________________________

Check it out on The MasterCharts

Hedge Funds Cut Bets on Rising Gas by 23% as Prices Fall: Energy Markets - Bloomberg

Hedge Funds Cut Bets on Rising Gas by 23% as Prices Fall: Energy Markets

By Asjylyn Loder - Aug 16, 2010

Hedge funds slashed their bets on rising natural gas to the lowest level this year as prices fell, a sign the fuel may repeat last year’s 19 percent August slide during a so-far quiet hurricane season in the Gulf of Mexico.

Hedge funds and other large speculators cut their bullish bets by 23 percent in the week ended Aug. 10, the Commodity Futures Trading Commission reported. Natural Gas has declined 14 percent this month, dropping to $4.228 per million British thermal units today on the New York Mercantile Exchange.

Investors retreated from gas markets this year as prices declined 22 percent amid forecasts that stockpiles will be near record highs by the end of October. Demand for the fuel will be slow to recover as consumer confidence hovers near an eight- month low.

“Last year, we saw prices go significantly below $4,” said Andy Lipow, president of consulting firm Lipow Oil Associates LLC in Houston. “There’s a significant amount of supply out there and the overall economy is really having trouble recovering and growing. The increases in demand for natural gas are going to be slower than people expect.”

Net-long positions in futures and options combined in four natural-gas contracts decreased by 28,719 futures equivalents, or 23 percent, to 94,058 in the week ended Aug. 10, the CFTC data showed.

Whether hedge funds and other large speculators will profit from their short bets remains to be seen, Lipow said.

“We’ve seen funds be big winners and big losers in the natural gas markets,” Lipow said.

Gas futures last year dropped to $2.508 per million Btu on Sept. 3, the lowest price in more than seven years.

Vulnerable Positions

The increase in short positions leaves hedge funds vulnerable to sharp moves higher in prices that would probably accompany the threat of a hurricane heading toward the Gulf of Mexico, said Teri Viswanath, director of commodities research at Credit Suisse Securities USA in Houston.

“We’re right around the corner from the heaviest portion of the hurricane season,” Viswanath said. “Given that possibility, is the market getting ripe for a short squeeze? I think it is.”

The U.S. on Aug. 5 reduced its forecast for the 2010 Atlantic hurricane season to 14 to 20 named storms, down from 14 to 23, because of less activity than expected in the first two months of the season.

Eight to 12 of those storms are expected to become hurricanes, according to Gerry Bell, the lead seasonal hurricane forecaster for the U.S. Climate Prediction Center in Camp Springs, Maryland.

Reduced Gulf Output

The sluggish economy, combined with rising production and inventories, will continue to weigh on gas, Lipow said. The bullish impact of any hurricane will be muted since the Gulf of Mexico accounts for 10 percent of U.S. gas production, down from 17 percent in 2005.

Consumer spending, which makes up 70 percent of the world’s largest economy, may not pick up in the absence of a recovery in the labor market, according to the Federal Reserve. Fed policy makers last week made their first attempt to shore up a recovery they said was likely to be “more modest” than earlier anticipated.

Natural gas inventories rose 37 billion cubic feet to 2.985 trillion in the week ended Aug. 6, the Energy Department reported Aug. 12. U.S. gas stockpiles at the end of October may reach 3.752 trillion cubic feet, the department said in an outlook on Aug. 10. Supplies touched a record 3.84 trillion cubic feet in November 2009.

Price Pressure

“Pressure is likely to continue on the natural gas prices,” Lipow said. “Supply disruptions are minimal and we’re seeing the forecast for storms decline.”

The Atlantic hurricane season so far has had less of an impact than expected on gas production, the department said in the outlook last week. Hurricane Alex and Tropical Storm Bonnie this year reduced production by 8 billion cubic feet, less than the 20 billion the government had expected, the report showed.

The funds’ “view of the market is bearish,” said Tim Evans, an energy analyst at City Futures Perspective in New York. “It’s a flow of selling that has weighed on prices, and we’ve got to get through that before prices can rise.”

The measure of net longs includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swaps, Nymex Henry Hub Penultimate Swaps, and ICE Henry Hub Swaps. Henry Hub in Erath, Louisiana, is the delivery point for the Nymex futures, a benchmark price for the fuel.

To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net

Hedge Funds Cut Bets on Rising Gas by 23% as Prices Fall: Energy Markets - Bloomberg

Share|

_______________________________________

Check it out on The MasterTech Blog