Month of October, 2007

I spoke at Commodities Week in London in early November. There were many great presentations and topics shared there but of all the presentations the one that interested me the most was by Ed Morse.

Ed is Chief Energy Economist with Lehman Brothers and his presentation covered Oil supply and demand. His main thesis was that new refining capacity set to come onstream over the next few years will significantly change the supply side picture by the turn or just after the turn of the decade. In effect, by 2009, refining capacity additions should outpace demand growth by a factor of 2:1 he argued.

In making this assessment, Lehman has been conservative in looking at new refining capacity excluding projected refinery capacity upgrades in politically sensitive areas like Venezuela for example. Additionally, they see some strong political agendas to support the capacity build out that include;

The release of the EIA’s Short-Term Outlook on Tuesday September 11th provided ongoing confirmation that oil supply markets remain tight in spite of OPEC’s announcement that it will add 500,000 bbls/d to global markets in November. According to its report “World oil consumption rose by 1.2 million barrels per day in Q2 2007 compared with Q2 2006. China, the Middle East, the United States, and India accounted for most of the increase in oil consumption. EIA projects that world oil consumption will increase at a year-over-year rate of 1.8 million bbl/d during the second half of 2007.” However, it does cite recent volatility in financial markets as having an unpredictable influence on demand.

On July 1st, 2007, all member states in the European Union were supposed to have enacted certain European Union directives opening their energy markets to full retail competition. While some European countries, such as the UK, have had very active retail markets for some time, many others – most particularly those in Central and Eastern Europe have not. As of August 1st and, after a review of most European Union retail energy markets, I believe I can say that not much has really happened in terms of customer choice though, on paper, it should have. Meanwhile, the on-going deregulation, privatization and liberalization in European energy markets has had a significant impact in the merger & acquisition arena as energy companies and utilities jockey for (a dominant) position.

Customer Choice and Dominant Suppliers

So here we are again - deja vu... the oil price goes up and who gets the blame - hedge funds and speculators! How many times have I written this article over the last 4-years and how come no one seems to listen?

OK so the oil price is going up again. I wonder why? Could it be that oil is priced in US$ and that currency is at its weakest right now? And if that was the reason for higher oil prices just exactly who is responsible? The very politicians who now want to blame speculators! OK and lets just throw in the fact that Turkey seems to be getting ready to raid Iraq...potentially disrupting oil production from the Kurdish region of Iraq as well as increasing political tensions in an already tense Middle East...and if that is helping push up oil prices then who is to blame? Yes - you got it...those same pesky politicians who like to blame speculators....

Crude oil for December futures rose as high as $91.10 a barrel in electronic trading after ending at a record high of $90.46 a barrel on the New York Mercantile Exchange. The contract was recently at $90.90 a barrel, up 44 cents on continued worries over energy supply and tensions in the Middle East. It can go higher yet....

UtiliPoint IssueAlert by D. GM Vasey, Friday 26th October.

Most of us (especially us Brits, it seems) like to talk about the weather. We listen avidly to weather forecasts on the TV or radio and plan our day accordingly, often later cursing when it turns out that the forecast was wrong, as usual! At times, we pay closer attention to the weather forecast when tropical storms or hurricanes are approaching, or if we are planning our vacation. Weather forecasts are a basic feature of modern life that we simply take for granted but utilize in many ways. And so it seems energy companies do, as well.

As crude oil breaks the $90 barrier one must seriously consider the next ceiling and psychologically important $100 per barrel might be next?

Frankly, in looking at the fundamentals, $100/bbl seems unsustainable - as indeed does $90/bbl. In essence, not much has really changed other than the US$ which is significantly weaker. Yes, there is some renewed tension in and around the Middle East and temporary disruptions in Mexico but is this really sufficient, against the supply/demand backdrop, to justify such prices? I for one think not. In fact, other than for the weakness of the US$, I think prices are already overblown and the bubble is more likely to burst. However, all eyes are on the US Federal Reserve to see if they cut US interest rates again. If they do, all bets are off.