“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”~Charles Darwin
All of the normal clichés and phrases that we have been hearing over the last three weeks about the financial crisis can be summed up into two in my mind “disastrous” and “fear and panic driven”. Just about every asset class in the world is in a free fall as investors at every level in every country try desperately to sell hard assets for cash. The term “Cash is King” resonates today! The impact is being felt in most every country in the world. Overnight the free fall sentiment that besieged the Dow yesterday afternoon has spread to equity, commodity and oil markets around the globe.
The market is still viewing the situation as one that will further deteriorate significantly before it improves. Credit is still tight as many of the announced changes are still in the process of working their way through a very complex financial system. Central banks have announced almost everything at their disposal to try to regain the confidence of the marketplace. Unfortunately confidence is lower today than it was just three weeks ago. At some point the markets will stabilize we just do not know when and at what price level. More later in the report on the financial side.
As we have been discussing for over a week OPEC succumbed to the internal pressure of the hawks and announced an emergency meeting to be held on November 18 in Vienna to discuss the impact of the global financial crisis on the oil market. Oil prices are down over $4/bbl in overnight trading with the $80/bbl level clearly in sight. The last time the spot Nymex WTI contract was trading this low was one year ago. Oil has lost over 43% of its value since peaking on July 11 just three months ago.
Much like many investors, OPEC and many non-OPEC producers are in a panic mode as their revenue stream goes up in smoke. The consuming world is spending about $5.5 billion dollars per day less on oil than it was spending on July 11. Since peaking producers have lost about $185 billion dollars in oil revenue with OPEC losing about $70 billion of the $185 billion since they supply about 38% of the world’s oil. Needless to say, the pressure is on OPEC. In the U.S. alone, the consumer has spent $11.4 billion dollars less on retail gasoline purchases cumulatively since July 11. Since Jul 11 there have been 65 trading sessions (including today) with 41 or about 65% of the sessions ending in negative territory.
I believe OPEC will announce a production cut at the Nov. 18 meeting. As I said yesterday, I think they will ease into the cuts starting with a 1 million bpd production cut effective Dec. 1 with another meeting scheduled for Jan to assess their progress. If prices are not stabilized, they will cut further beginning Feb 1. OPEC is in a precarious situation, as any action on their part will only serve to hurt the global economies more than they are already hurting. The fact that the consuming world has spent $185 billion less on their oil bill since July 11 has helped to soften the blow of the Armageddon currently unfolding in the financial markets. However, several OPEC countries are either below the price level they need to fuel their infrastructure or within site of it. Venezuela and Iran need prices in the $90 to $95/bbl range to support their struggling economies, the Saudi price level is between $50 and $55/bbl while a country like Dubai has amassed a massive amount of debt as they re-morph their entire country into the financial and entertainment center of the Middle East and must be getting very nervous. OPEC has their work cut out for them as a group.
I am not sure OPEC is going to regain control of prices with just one meeting and the announcement of just one cut. Evidence by the fact that prices are down over $4/bbl since they announced the emergency meeting. What they do will at least slow the decline in prices but stability in the financial markets will be required for the oil market to truly stabilize. It will be all about how much demand actually declines and for how long and how well OPEC is able to function as a cohesive unit. History has told us that OPEC has not done well as an organization during long periods of time when the market was oversupplied. OPEC is in for a long period of managing a consumption pattern more like what we had in the mid to late 90’s rather than what we had over the last three years. Following is a summary of the numbers OPEC is likely looking at and it is not pretty in their eyes (just the opposite in the consuming world eyes).
Downside Oil and NG Correction
Decline Since Peak on 7/11/08
Change
Change
From
From
Peak, 7/11/08
Peak, 7/11/08
$/bbl
%
WTI
($62.47)
-43.06%
HO
($1.8492)
-44.47%
RBOB
($1.6918)
-46.59%
Peak 7/2/08
Peak 7/2/08
NG
($7.041)
-51.42%
Bottom 7/15/08
Bottom 7/15/08
$/Euro
$0.1108
17.71%
U.S. Avg.
Peak, 7/17/08
Peak, 7/17/08
Retail Gas
($0.7640)
-22.81%
On that note, the International Energy Agency (IEA) released their Monthly Oil Report this morning. Much like the EIA in their report on Tuesday, they lowered their projection for oil consumption for 2008 and 2009. The report is bearish as I predicted it would be. However, when the dust settles I believe demand will be noticeably lower than what is projected today as the real impact of everything that is going on around the globe has not really worked its way through the entire system and down to the consumer. Following are the highlights from today’s release of the IEA Monthly Oil Market Report:
Oil prices declined in September and early October, as demand growth weakened further, offsetting the impact of hurricane-related outages and lower OPEC output. U.S. crude futures fell from around $100/bbl in early September to below $90 in early October. However, prices remain very volatile, with unprecedented daily swings.
Oil demand forecasts for 2008 and 2009 were trimmed by 240,000b/d and 440,000 b/d, respectively, given weaker OECD deliveries and the IMF’s downward revisions to 2009 global GDP assumptions. World oil demand is expected to average 86.5 mb/d in 2008 (+0.5% or +0.4 mb/d vs. 2007) and 87.2 mb/d in 2009 (+0.8% or +0.7 mb/d).
Global oil supply declined by 1.1 mb/d in September to 85.6 mb/d. Hurricane outages in the Gulf of Mexico and renewed stoppages in Azerbaijan and among OPEC producers offset higher supply from Russia and the North Sea. Non-OPEC net output growth is largely wiped out for 2008, now averaging 150 kb/d, plus an extra 310 kb/d from OPEC gas liquids. Combined 2009 growth is +1.45 mb/d.
September OPEC crude supply fell 0.3 mb/d to 32.3 mb/d, largely due to unplanned outages. The 9 September OPEC meeting, which reinforced output targets, will be followed by an extraordinary meeting on 18 November to discuss the impact of the global financial crisis on the oil market. Effective OPEC spare capacity stands at 2.1 mb/d.
OECD stocks fell by 5.1 mb in August to 2,645 mb, including notable draws in European crude and U.S. motor gasoline. Hurricanes drove further dramatic draws in U.S. products and could have reduced OECD total stock cover from 54.9 days at end-August to 53.6 days by end-September, according to preliminary data.
Global refinery crude throughput should average 74.9 mb/d in 4Q08, 0.8 mb/d lower than forecast in last month’s report, on weaker demand, higher maintenance, hurricane-related disruptions and economic run cuts.
Regulators are pulling out all of the stops to get their hands more firmly around the mess. In addition to everything else, it has already announced the U.S. is now weighing two further steps to quell the fear and panic in the financial markets… guaranteeing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits. The U.S. government and other leading governments and Central banks around the world are all working to regain the confidence of the investor and general public. Unfortunately they have not been successful. Eventually they will but no one really knows at one point asset classes with bottom out. If the market does not see any additional major financial failures over the next week or so I believe the selling of assets will slow considerably and bottom pickers may re-emerge into the marketplace.
On the oil side, I believe OPEC eventually will stabilize prices in the $80 to $90/bbl range. I just don’t think they will get it done quickly and not without stability in the financial markets. If the global economies sink into a deep, extended massive global recession than all bets are off and where the price of oil goes is anybody’s guess. I may be optimistically naïve but I do believe the situation will stabilize and I don’t think it is the end of the U.S. or global economy for that matter.
Expect more of the same next week. Volatility will be high, anxiety and uncertainty will set the stage and unfortunately, fear and panic will still be the main emotional motivators of most market participants. It will stop when it stops. The collective market will say when it stops as the market is a powerful force that goes beyond any person, company, group, government or for that matter group of governments. One of the signs I will be looking for is the lack of anymore bad news and credit starting to flow. When the bad news (like financial failures) stops and banks are lending again asset selling will at least slow and possibly stop altogether. For the moment, the last seller has not yet finished selling and every market in the world is over weighted with more sellers than buyers.
Our recommendations remain the same as they have been for weeks…specs should continue to cautiously look for selling opportunities while the buy side hedgers should happily remain on the sidelines as their purchases continue to be cheaper and cheaper as each day goes by.
On a slightly positive note, retail gasoline prices are accelerating their decline. The U.S. national average is down to $3.35/gal this morning. The national average price is now only approximately $0.60/gal above the price for the same time last year. Based on where the spot Nymex gasoline price (wholesale price) is trading (right now -- $1.93/gal) retail gasoline prices should fall at least another $0.75 to $0.90/gal by Thanksgiving, maybe more. We will see retail prices with a 2 in front of it in many parts of the country sometime during the next two weeks.
Currently prices are lower across the board as the dollar regains its footing and surges higher versus the Euro.
Please have a great and stress free weekend.
Current Expected Trading Range
Expected Trading Range
10/10/08
Change
Low
High End
From
End Support
Resistance
7:15 AM
Yesterday
Nov WTI
$82.62
($3.97)
$77.50
$86.00
Nov HO
$2.3094
($0.1092)
$2.2300
$2.4000
Nov RBOB
$1.9392
($0.0881)
$1.8900
$1.9300
Nov NG
$6.653
($0.172)
$6.000
$6.980
Euro/$
1.3582
(0.0108)
1.3350
1.3800
Yen/$
1.0182
0.0156
1.0000
1.0400
Dominick A. Chirichella
Energy Management Institute
dchirichella@mailaec.com
www.energyinstitution.org
The Energy Management Institute operates a fleet of daily, weekly and biweekly energy publications covering various angles of the energy market, including over a decade of natural gas and power price indexing. In addition, EMI provides higher learning for energy professionals with comprehensive, fully accredited, energy education programs from basic to advanced level. It also provides critical business information services and thought leadership in the energy segments of oil, gas, power, alternative fuels, soft commodities and metals.
