Where Is Oil Headed To For The Rest Of 2010?

Oil broke through the US$85/barrel mark in intraday trading on April 1, 2010, sparked by positive economic signs from China and reduced jobless claims in the United States. An acceleration in manufacturing activity in China, according to two industrial surveys, and Japan's most recent report on business sentiment prompted investors to think that increased industrial activity could push up oil demand. A dip in U.S. jobless claims also added to confidence. The Wall Street Journal says the rise comes despite other lackluster data from the United States; a March 31 data release from the U.S. Department of Energy showed a greater-than-expected rise in oil inventories and gasoline stockpiles.



Oil prices dropped more than US$10 per barrel in a week to US$76 on May 7, 2010 on Greek debt worries, unraveling oil's price gains to US$87 since news of an oil leak in the Gulf of Mexico. Nonetheless, oil remains above its US$33/barrel nadir at the beginning of 2009 thanks to the gradual global recovery and increasing demand from non-OECD countries, particularly China. Oil futures prices gained 7% in 2009. Oil supply is likely to recover further in 2011, along with a slight pick-up in demand.

Many expect WTI crude to trade between US$70-US$95, a narrower range than in 2009, and average closer to US$80 per barrel in 2010, higher than the 2009 average of about US$62 but well below that of 2008 (just under US$100 per barrel). The monetary policy stance of the Fed will continue to support energy commodities, but uncertainty about U.S. and Chinese monetary tightening and regulatory changes poses a risk. Increased production from OPEC and non-OPEC members should offset a continued, gradual demand recovery.

Erste Group, in its March 2010 special report on oil, project oil prices to continue increasing mildly in the first half of 2010, targeting at US$90-100. During the second half of 2010, they expect oil prices to dip to the US$60 area or even lower due to expected divergences between supply and demand.

Erste Group projected in its March 2010 special report on oil that oil supply will recover further in 2010. There is enough oil around, but problems associated with the structure of supply, such as the decreasing new oil field ratio, make a clear case for higher prices in the long term. They forecast that, assuming at the current new field ratio, production volume will increase to 125 million barrels by 2030, up from the current 86 million barrels. Demand should pick up again slightly in 2010. OECD demand will rise for the first time since 2005, but the upswing will mainly be supported by countries outside the OECD, especially China. If the economic recovery continues, the high inventories can be gradually drawn down in 2010. The IEA expects global energy demand to double by 2050. The IEA also expects oil demand to increase from 85 million barrels currently to 105 million barrels by 2030.

Oil Price Breakout, Signaling Commodities Uptrend

Oil prices jumped to near US$86 a barrel Monday in Asia, extending gains from last week as investors bet an improving US job market will herald growing crude demand.

Benchmark crude for May delivery was up 80 US cents to US$85.67 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract climbed up US$1.11 to settle at US$84.87 on Thursday following a gain of US$1.39 on Wednesday. Global oil trading was closed for the Good Friday holiday.

Oil broke out of its multi-month trading range today. Oil bulls are hoping this is the start of another run higher, while most consumers are probably thinking "not again."

Crude has jumped from US$69 a barrel in early February on expectations a growing US economy will eventually spark higher oil consumption.

On Friday, the US Labour Department said employers added 162,000 jobs in March, the largest job gain in three years. The unemployment rate stayed at 9.7 per cent for the third straight month.

'The market was positive before but now it's been confirmed,' said Clarence Chu, a trader with market maker Hudson Capital Energy in Singapore. 'If the job growth can be sustained for several months, we'll definitely see crude demand pick up.'

In other Nymex trading in May contracts, heating oil rose 2.09 US cents to US$2.2376 a gallon, and gasoline gained 2.10 US cent to US$2.3442 a gallon. Natural gas jumped 1.5 US cents to US$4.101 per 1,000 cubic feet. In London, Brent crude was up 71 US cents at US$84.72 on the ICE futures exchange.

Oil is the leader for all commodities, the following weeks should see the other commodities, including soft commodities, finding reasons to surge alongside oil.

Oil, Auto, Main Street, Global Economy

I have been trying to bring in the price of oil to my arguments to show how the world is changing, and how the media can be over-focused on certain issues when it blows up, to the detriment of other broader issues, just as important.

We have seen massive de-leveraging from all assets classes over the last few weeks. Three of the top US investment banks now no longer exist. Demand destruction in commodities everywhere. Real estate collapsing not just in the US but parts of Europe, in particular UK and Spain. Hedge funds saw massive redemptions. The Icelandic internet banking fiasco. Credit frozen, nobody wants to lend. Emerging markets all down nearly 40%-50% already this year. All taking about recession for sure and maybe even depression... why then is the price of oil today still about US$10 higher than what it was a year ago???

1) It tells you that the inherent demand, though weakened, is still very firm, especially from China and other emerging markets. It also tells you that the global economy is not as small as it was 10 years ago. Since 2000 till now, the global economy has grown by 70% in size - guess where the bulk of the growth in trade came from? Even though you may see absolute devastation in US property market, much of the wealth destruction hit investment banks and mortgage lenders capital base. Yes many of the broader property owners are feeling the pinch as well, it is not debilitating so.

2) Watch for the auto sector - this is where the pain will shift to. Big companies will fail or be merged and job losses will be massive - the auto sector consolidation has been brought forward by the events over the last couple of weeks. The auto sector combustion will cause the media to focus away from the carnage on Wall Street to carnage on Main Street. Expect markets to be wobbled by this. Keep cash at least 50%, trade out on weak signs - the worst may be over, but the general conditions still shifty. Jobs is where we should really look at. We can expect more job losses in the coming weeks and even months. I forsee some industries will see MASSIVE failure - the first to go will be the US auto makers.... pension problems, no credit or loans for people to buy cars, consumers delaying changing of cars now, problems with unions... very difficult to refinance their lines of credit moving forward... watch for at least two of them being merged or absorbed by a foreign competitor at cut throat prices. The auto industry are big employers, and that will hurt employment, and drag property prices weakness in those states where auto industry is strong.

3) The price of oil is higher today than a year ago because th cost of bringing oil to the market is now "very high". Forget about the easy low hanging fruits where the cost is less than US$20 per barrel. The average cost of a barrel to the market is now in the US$65-70 per barrel. If the price of oil drops below US$70, OPEC would just prefer not to produce. In fact many of the smaller producers may even produce less. Better to leave them in the ground. If that being the case, we can safely say the price of oil will not dip below US$75. I would also like to go very long on oil contracts again at US$80-81, rolling till March next year. From that alone, we can safely say that things are bad, but not as bad as the Western media makes them out to be. Focusing maniacally on one issue can desensitise us to other issues.

p/s photo: Uli Auliani

Getting Our Perspectives Right

(Important Posting)

The US economy is in shock. Is $900 bn enough to create a bottom for the markets? Will there be more failures in store? Will Bernanke lose all of his beard due to stress? Will Bush Junior say "thank God I'm outta here in a few weeks"? Will Paulson quit to take up the high paying CEO post at Nomura-Lehman International? Will Palin attempt to say something sensible about the bailout and end up arguing it being a strong advantage for her to have been living so close to Russia??!!? ... and on that subject if McCain is elected (vomit), and with him having a high probability of dying in office ... can Americans really accept Palin as the new President??? If McCain decides to step through the Pearly Gates during his reign as President, can the CIA/FBI whisk Palin and lock her up for a few years in a warehouse in San Francisco (they will never look for her there), and install Tina Fey as the President instead.... but I digress.

Just how bad is the US economy and the global economy for that matter. Recent events over the last couple of weeks have been hard to stomach. The uncertainty is palpable. Will we still have our jobs in 3 months time? What about 6 months time? How delayed will be the delay effect? Is there a sledgehammer hanging over me?

We need to get some perspective on the whole situation. We are like being tossed and turned by a hurricane in a teacup. We don't know where we are, or whether we will get out unscathed. A simple way to make some sense of the whole thing is to look at the price of oil. Oil is still the engine of the global economy. Its a brilliant indicator of the pulse of the global economy, although there have been bouts of excessive speculation which may have distorted prices somewhat but as an indicator it is still very useful.

We can say that the US economy and some parts of the gobal economy have been trying to factor in the weakness and potential recession everywhere. Things look pretty dire and bleak. Pessimism rules the day. In fact we may even argue that investors in general are trying to discount more than what is necessary in all assets. With all that doom and gloom, the price of oil has fallen from artificial high of $147 to just $93 or thereabouts.

At current levels, many industries are breathing a huge sigh of relief. Mind you OPEC has not cut production, and the major hurricanes in recent months did not disturb production. Even the Iran-Israel thing did not boilover yet. Hence supply is more than adequate ... and yet despite the streams of bad news on the US economy, global economy, contagion effects, demand destruction ... the price of oil is at $93!!!???

What is so significant about $93? A year ago the price of oil was at $70 ... now compare the economic conditions a year ago and now ... why are we still at $93??? When oil burst through $100, its mainly a dramatic repricing of oil to the "real cost of finding oil over the next 10 years". At $70 and below, the global demand growth, the new economic order, and the cost of finding oil all combined to push the price of oil to a new "sustainable rate". More importantly is the growth of the global economy.

The world is no longer that dependent on the US. In 2000 till today, the entire global economy has grown by 70%. Seventy percent!!! Much of the growth came from globalisation and the emerging middle class consumers from emerging markets. Year on year, the global economy has been expanding like an enlarging circle, and at the same time diminishing the influence of US on the global economy.

I am in now way saying the decoupling is on. In fact, the decoupling never really happened. Thanks to globalisation, all market are closer than ever before. Just look at ALLL Asian bourses, all of them have lost a lot more in value since the beginning of the year THAN the Dow or S&P500!!! Where is the bailout again? I think it was in the US ..., and why then have Asian markets lost an arm and a leg in the process? Asia as a whole have tried to discount (and over discount) the ill effects of the American dream turning into an American style-horror-movie nightmare.

Emerging markets have MORE than discounted the ill effects. Bailouts passed. Don't know if these bailouts are sufficient. BUT THE PRICE OF OIL IS AT $93. That should tell you something about the underlying global economy. Same time last year it was $70, which is to say with the weight of the world on Atlas shoulders, the price of oil is still up 33% year on year.

Can you imagine if we did not have all the bad news??? The commodities run is not over by a mile. The global economy is more resilient than most would like to think.

p/s photos: Sammi Cheng (as I will be traveling over the next 2 weeks, the postings may be erratic or even under the influence ... )