INDONESIA - The Oil Market Perspective.
The week ended on March 11 with front-month WTI on NYMEX settling at $54.43/b and IPE Brent closing at $53.10/b. The two light/sweet crude oil futures - now markers for world oil trade and the global energy business - rocketted on March 9 as Brent broke through $54 and WTI neared a record high at $55.65 despite rising US oil inventories. April WTI came within a whisker of the record high of $55.67 set last Oct. 25. NYMEX on March 9 cancelled a reported transaction of $55.70 which was announced as a new record, and prices slipped to $55.30, a gain of 71 cents. April Brent on March 9 rose $1.21 to $54.05 at 17.30 GMT in London - exceeding the previous record of 53.36.
In New York, dealers blamed soaring oil prices on sustained demand and a cold snap which hit the US North-East, the world's biggest market for heating oil. The surge in prices came despite a greater-than-expected increase in US crude inventories. But the real culprits behind rising oil futures are the speculators (see below).
US crude oil inventories rose 3.2m barrels to 302.6m in the week to March 4, the EIA said in its weekly report on March 9. Distillates, which include heating oil and diesel, dropped 800,000 barrels to 109.2m, the EIA said, as the cold wave heightened demand for heat. The distillate number was not very different from expectations. US stocks of gasoline dipped by 200,000 barrels to 224.3m. World oil prices have now more than doubled since early 2002.
The speculators in oil futures trading are in two main categories. Together they have become far more powerful than the people and companies who are producing or trading in physical oil, natural gas or their derivatives. They are in the following order of importance relative to oil pricing:
The hedge funds, i.e., those huge funds and investment banks which are specialised in hedging against price risks. It is not a betting game. Hedging is a kind of insurance against the risk of a loss resulting from a fall, or a rise, in the price of the commodity - be that oil, natural gas, cattle, coffee, steel, etc. Even producers of physical oil, including state-owned companies like Pemex of Mexico, have hedged their oil output against price volatility. Price volatility is the main reason for hedging. Hence the importance of futures trading. Commodity price hedging in the US is more than 140 years old. Hedging against currency fluctuations began in a big way after the US in 1971 suspended the US dollar's convertibility to gold. Currency futures are actually paper currencies - so oil futures are paper oil, as against physical oil.
Investors having moved from equity and securities into commodity markets for profit. Because of low profit in stocks or bonds, as a result of low interest rates, investors put their money in a wide variety of commodities which have been quite profitable. This is particularly in the case of crude oil, petroleum products, natural gas, etc. Whereas all the major airlines and many oil companies have joined the first category, to hedge their business against rising fuel prices, many companies rich in cash have joined the second category to make more profit. This second category of speculators has built up long positions, in many cases 12- to 24-month futures. There are also three- to five-year futures and some even longer than 10 years.
The first category is much bigger, in terms of futures contracts and the size of money involved, than the second category. But most of the contracts in the first category are short-term, or short positions. Combined, the two categories now hold a volume of paper oil which is several times bigger than the volume of physical oil trading world-wide. And there is speculation that a $100/b front-month WTI could come this year.
What this means is that speculation can at times become far more powerful than the physical reality, which means perception can at times be more important than reality. This is the logic of the speculation business. What makes the situation potentially dangerous, however, is that the second category is primarily motivated by profit which means the investor involved wants his/or her perception to become a reality. But the actual situation is not as simple as that; when perception of demand suddenly turns bearish and futures prices decline, the fall becomes precipitate and, as a result, prices of physical oil collapse - sometimes against the logic of those involved in producing or trading in physical oil.
Prices collapse because the speculator has perceived a global recession. When will that happen? It is a trillion dollar question.
Traders have noted substantial buying interest seizing on every downturn the market has taken, with dealers attributing the bullishness to big money investment funds. Every time front-month WTI shows signs of moving down, the dips get bought quickly and WTI goes up again.
The futures markets are more focused on macro factors like OPEC having little spare capacity and strong demand from the US, China and India. High prices have led OPEC to back away from talk of output cut for the second quarter. Indonesia, Kuwait, Qatar and Venezuela favour keeping OPEC's output quotas unchanged when the group's oil ministers meet in Isfahan on March 16. Acting Secretary-General Adnan Shihab-Eldin has said OPEC saw a consensus that a $40-50 range was sustainable, backing up recent comments by Saudi Oil Minister Ali Al-Naimi that prices could stay in that range this year.
Europe is heading for a reasonably light spring oil refinery turnaround, alleviating worries over gasoline supply in the peak summer season. While heavy shutdown last year contributed to a products-led run-up in world oil prices to record highs, end-May US gasoline stocks are this year expected by the EIA to be 11.4m barrels up year-on-year.
An average of 520,000 b/d, 3.6% of west European crude distillation capacity, will be down this April, the peak month for refinery turnarounds during this year's spring shutdown season. The estimated total, according to Reuters, is based on planned maintenance programmes confirmed by oil majors or reported by traders familiar with their company's refinery operations. The April figure could, however, rise to as much as 750,000 b/d, or 5.1% of west European distillation capacity of around 14.6m b/d, if industry reports of additional planned turnarounds in Germany are confirmed.
"It looks like a reasonably light maintenance programme this spring", said Magnus Berge, editor of ICIS-LOR's monthly refinery report. He said autumn maintenance was likely to be heavier than in the spring, but would be somewhat lighter than last year when European refineries rushed to upgrade plants to meet 2005 fuel specifications.
The Reuters estimate for west European capacity taken down in March is 435,000 b/d, or 3%, while the current expected total for May is 145,000 b/d or just 1% of capacity. The figures, which exclude shutdowns in east Europe, mainly in Poland and Croatia, are down on spring and autumn of 2004. According to Reuters, 1.1m b/d, or 7.5%, of west European refining capacity was taken down in October 2004, followed by 750,000 b/d, or 5.1%, in November. Some industry analysts said as much as 1.5m b/d had been taken down in October, and plants with a total of up to 2.5m b/d may have been affected by maintenance work in last spring's peak maintenance month of May.
According to ICIS-LOR estimates, a higher 1.1m b/d of crude distillation capacity will be down in March followed by 924,000 b/d in April. The ICIS-LOR figures are, however, inclusive of east European and Mediterranean refineries in North Africa, as well as key export refineries in the former Soviet Union (FSU). The total crude distillation capacity in this wider area is 19.5m b/d.
The ICIS-LOR estimates mean that 5.6% of capacity will be shut in March, followed by 4.7% in April. BP has been among refiners kicking off Europe's first half-2005 maintenance season not long after its 400,000 b/d Nerefco plant in Rotterdam brought the curtain down on last year's programme with a partial shutdown until late December.
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|Publication:||APS Review Oil Market Trends|
|Date:||Mar 14, 2005|
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