Argent in the News
Where to next for oil – $50 or $100
12 October 2011
(Market Watch)
“The emerging markets have faster growth potential than developed markets and represent the incremental buyer of oil,” said Ken Crawford, a senior portfolio manager at St. Louis-based Argent Capital Management. “I think that trent will continue for decades to come.” ……. For better or worse, political unrest is endemic where cheap and available oil can be found. Any disruption in that flow or heightened concern about that flow will have an upward pressure on oil prices.”
October 07, 2011 (Myra Saefong)
The U.S. oil market has been struggling for the last five months to get itself back above the $100-a-barrel level, but it doesn’t have to look very far to find the fuel it needs to do it.
Demand growth in emerging markets, high global oil prices, smaller spare production capacity from the world’s big oil producers and further political tensions in the Middle East and North Africa are just a few good reasons why many analysts expect oil prices to head higher in the long term.
But just when they begin that turn higher is a much more difficult thing to predict.
A quick look at a chart of oil prices traded on the New York Mercantile Exchange paints a clear picture of crude’s inability to regain the heights it had during the height of the tensions in the Middle East and North Africa earlier this year.
Crude-oil futures ended last year at $91.38 a barrel on Nymex, then climbed 25% to a high near $114 by the end of April and sank 34% to trade back below $76 this past week.
“The market is seeing some deflation from aggressive expectations about the possibility for fourth-quarter [supply] tightening, which were predicated on a continued outage of Libyan crude supplies and somewhat robust demand growth,” said Michael Lynch, president of Strategic Energy & Economic Research.
And at the moment, “the reversal of those expectations, along with commodity deflation in general, is leading investors to move away from oil,” he said.
Oil’s settlement below $76 on Tuesday was its lowest closing level in more than a year.
Oil has had a wild ride with the trend clearly down,” said James Williams, an energy economist at WTRG Economics, but for the rest of the year, a price near the current level is most likely.
Problems in Europe or with the U.S. economy could drive them lower, while they could rise if the Saudis cut too much production in anticipation of the return of Libyan output or if there are further uprisings in the Middle East and North Africa, he said.
Nymex crude’s out of touch
The $80 or so crude price seen on Nymex, however, doesn’t really reflect the true prices paid for oil so they’re not really as low as they seem, and prices for oil products haven’t dropped much either.
Brent crude on London’s ICE Futures exchange has traded above $100 for the bulk of the year.
“Nymex oil prices are somewhat unrepresentative of global oil prices,” said Dan Gundersen, vice president of energy finance for Sandstorm Metals & Energy.
The disparity between world oil prices — benchmarks such as Brent and Nymex oil prices has “increased dramatically over the past year or so with the current spread exceeding $20 per barrel, and an unprecedented spread of over $26 a couple [of] months ago,” he said.
That’s mainly due to regional supply and transportation issues at Cushing, Okla., the delivery hub for Nymex crude. “There is a glut of landlocked oil around Cushing that is commanding a lower price than worldwide prices,” said Gundersen.
All the while, global oil prices have been well over $100 for most of the summer.
And if a refinery pays $100 a barrel for crude, their break-even wholesale price for gasoline needs to be at least $105, or about $2.50 a gallon, according to Tom Kloza, chief oil analyst at the Oil Price Information Service.
Add in average taxes and freight of 45 cents a gallon and a retail mark up of maybe 15 cents a gallon, you come up with a retail number of $3.10 or so, he said in a blog earlier this week.
So “if wholesale prices were frozen in time, we might expect to see gas prices drop to about $3.10 a gallon on average,” he said.
On Thursday, the average retail price for a gallon of regular gasoline stood at $3.39, down 27 cents from a month ago, though still up 64 cents from a year ago, according to data from AAA and the Oil Price Information Service (OPIS).
But solutions to this current Nymex versus global price “anomaly are just a matter of time,” said Gundersen, implying that TransCanada Corp.’s Keystone pipeline project is just one potential solution.
The Keystone XL crude oil pipeline aims to link Canadian crude oil with the largest refining markets in the United States and if construction on it begins in early 2012, TransCanada expects it to be operational in 2013.
Finding direction
Longer-term however, there are many more moving parts in the oil market, and quite a few, if not most, point to higher prices, analysts said.
While demand from developed nations such as the U.S. has slowed, it’s climbed from emerging markets — and that’s growth analysts expect to continue.
“The emerging markets have faster growth potential than developed markets and represent the incremental buyer of oil,” said Ken Crawford, a senior portfolio manager at St. Louis-based Argent Capital Management. “I think that trend will continue for decades to come.”
In an August report, the International Energy Agency cut its forecast for China’s oil demand in 2011 to an average of 9.62 million barrels a day, but that was still above the 2010 average of 9.07 million and the IEA expected daily oil demand to average 10.1 million barrels in 2012.
China is “experiencing screaming growth and its massive economy and growth expectations are through the roof,” said Seth Rabinowitz, a partner at management consulting firm Silicon Associates.
On a wider scale, global GDP growth is slowing but it’s “still positive, which will keep demand strong and prevent oil prices from falling too far,” said Andrew Schrage, editor and founder of Money Crashers, a personal finance blog.
And “even though we see some movement towards efficiency in cars around the world, it is an extremely slow-moving trend,” he said. “There are no legitimate substitutes for oil in the foreseeable future.”
Strong economic growth in Brazil, Russia and India as well as China and South Africa, Rabinowitz said, comes at time when oil producers who aren’t members of the Organization of the Petroleum Exporting Countries (OPEC) are slowing oil production.
“We’ll see $100 a barrel before we see $50 a barrel, if we see the latter at all,” he said. Still, oil’s next move will be “a slow upward climb, with no jolts in either direction, unless we see a cascading precipitous fall of a number of OPEC dictatorships, which we don’t foresee in the near future.”
OPEC member Libya has managed to bump up production, though it’s nowhere near the estimated 1.6 million barrels a day it produced before the start of the rebellion against the regime of Col. Moammar Gadhafi.
“By winter, we can expect to see a worry wall about the potential for Arab Spring II,” said OPIS’s Kloza, referring to a potential second wave of demonstrations and protests in the Arab world similar to those earlier this year.
“For better or worse, political unrest is endemic where cheap and available oil can be found,” Crawford said. “Any disruption in that flow or heightened concern about that flow will have an upward pressure on oil prices.”
Meanwhile, investors may discover that the global economy is “not as bad as feared,” and oil prices may even increase based on the “not getting worse” trade, said Mickey Cargile, managing partner at Cargile investment Management.
For now, he expects WTI prices to range between $70 and $90.
