Oil - Solid Support

[HenryTo]

Bank Credit Analyst on Oil:

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20041222.GIF

Says that speculative positions are now net short and that Chinese demand has recovered in November from a lackluster previous six months.

[HenryTo]

A rebuttal from Smartmoney.com on the Goldman Sachs report:

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Hundred-Dollar Oil My Foot

WHEN THE NASDAQ was trading at 5000 five years ago, there were some who called it a bubble and said it couldn't last. But for most people who earn their livings in the markets, the temptation to go with the flow is irresistible. By far the dominant voices then were those who argued that Nasdaq 10,000 was the next easy step.
I was reminded of those times Thursday when I read that Goldman Sachs (GS) had put out a report for clients declaring oil to be in a "super-spike period," and calling for crude oil prices to trade in a range from today's $55 to as high as $105.

Their rationale is that demand is so strong in the face of high prices that, surely, higher prices still must be in the offing. Of course that's just the kind of thing people said five years ago about the seemingly infinite demand for Internet routers, wave division multiplexers and less esoteric electronic gadgets like cellphones and Palm (PLMO) Pilots.

I don't remember precisely what Goldman was saying about the Nasdaq five years ago — but I'm sure it had as many hot IPOs to promote as anyone else. And I don't recall what Goldman said two years before that when the oil price got down to $11, but I think it's a safe bet they weren't talking about a "super-spike."

But this isn't about Goldman Sachs or any particular firm, anyway. It's about how very easy it is to extrapolate the future from the past, and how very hard it is to recognize the critical turning points that occur when, suddenly, all the obvious patterns seem to reverse.

To some extent it's based in simple animal physiology. Right now everyone in the world who has been long oil and long oil stocks is a winner, and is feeling intense pleasure. Conversely, everyone in the world who has been short them is a loser, and is feeling considerable pain. People, like animals, tend to repeat experiences that have felt good, and avoid experiences that have caused pain.

So now the course of least resistance is to be bullish on oil. It's animal instinct. And frankly, most of the rationales offered to support that instinct are just that — rationales. I've never met Goldman's analyst — I don't even know his name. But I'll bet his mind was made up before he even thought about it. Seek pleasure. Avoid pain.

But the market is an animal, too — and a particularly aggressive one. It delights in laying traps that trick investors, using the incentive of pleasure and the punishment of pain. Inevitably, the very thing that investors are most certain will bring pleasure will be the thing that causes them the most pain. Anyone who jumps on the oil bandwagon now with pleasurable visions of $105 in his head is setting himself up for nothing less than agony.

Look, I don't doubt that there's a demand story here. We're in the midst of a surging global economic growth, in which a lot of countries are demanding a lot of oil all at the same time. Some of these countries, like China and India, haven't been much of a factor in the oil markets in the past, and they are definitely factors now.

But I also know that the world's oil producers are producing more than enough oil to meet all that demand. There is no shortage.
But there's something else that's just as important — and I'll bet Goldman Sachs and all the other oil analysts completely ignore it: inflation.

A good part of the rise in the oil price has been the result of simple inflation, totally separate and apart from anything going on in the supply and demand for oil itself. I know this is true because the oil price measured in dollars has nearly doubled over the last two years, but when measured in euros it's up only by about half. The difference is the inflation that has eroded the value of the dollar, but has not touched the euro.

If such a large fraction of the rise in the dollar price of oil is really the dollar's fault — and not oil's — then to think that the oil price will double from here would seem to require that the U.S. dollar collapse to catastrophic lows. For that to happen, we'd have to have significantly more inflation than we've already had over the last two years.

At the moment, I'm willing to take that possibility off the table. As readers know, I've been warning about inflation for the last year and a half, and I've been right. But now I'm changing my view, even though I've had a lot of animal pleasure being right on this one.

I'm changing because, as I wrote on Monday, I can see that the Federal Reserve has suddenly come around to my way of thinking, and is cracking down on inflation. That means I have to think that half the story underlying the surge in oil prices is about to go away. That doesn't mean the oil price will collapse back to where it was two years ago before the inflation. No, there's no going back. But $105? I don't think so.

It's not just oil. I feel the same way about other commodities like gold, metals, foodstuffs and all the basic materials. Energy and basic materials have been the best performing sectors by a long shot during this bull market. But that's over. I'm calling the top. Without accelerating inflation pumping up prices, those sectors are going to have to make it on the merits just like any other, from here on out.

So I'm looking for opportunities to sell winners in the energy and basic materials sectors, and there have been some big ones in both. But if I'm right about all this, there may be an opportunity to buy them back cheaper at some point later this year.

As I said, there's no going back to the price of two years ago — inflation has made that impossible. So if the Energy and Basic Materials stocks collapse here on sentiment that commodities prices are going all the way back down, then that's an opportunity to buy.

Oil and commodities prices — in dollars — are destined to be higher, on average, than they have been in the past. That's inflation talking.

But are we in a "super spike"? Yeah, right.

[HenryTo]

Latest from Business Week Asia. As I recall, Lee Raymond is one of the few oil CEOs or analysts who are still cautious on the oil price:

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ExxonMobil: The Cautious King Of The Oil Patch
With its wide resource base, the oil giant doesn't sacrifice returns to win new drilling opportunities

Don't expect record oil prices and predictions of permanently tight supplies to change the course of Exxon Mobil Corp. (XOM ) The largest publicly traded oil giant hasn't produced industry-leading returns in booms and busts by zigzagging with every price change. "Focus and discipline are even more important in these buoyant industry conditions," Chief Executive Lee R. Raymond told analysts on Mar. 9.

For some companies, boom times can be as damaging as busts if they make poor short-term decisions. But Exxon excels through all phases of the commodity cycle. Surging oil and natural gas prices and robust refining margins factored into last year's record $25.3 billion in net income and a leading 24% return on capital employed. But the company's stringent investment criteria, cost controls, and $600 million spent on research and development played a big role, vaulting Exxon to No. 7 on the BusinessWeek 50, from No. 23 in 2004. "Their business model is not predicated on any specific oil price," says analyst Fadel Gheit of Oppenheimer & Co. "They will still be the head of the class, no matter how difficult the exam."

Tough Negotiator
True to form, Exxon's staggering cash flow hasn't led to a gusher of new projects. The company generated more than $43 billion last year from operations and asset sales. But it returned some $15 billion to shareholders in the form of dividends and share buybacks -- as much as it invested in capital spending. Raymond insisted that the company is not "opportunity constrained," a view held by some analysts. But, he said, "only those projects we are confident will grow shareholder value make the grade." Every investment decision at Exxon greater than $50 million goes before the management committee. Raymond declined to be interviewed.

Still, at Exxon's size, with $271 billion in revenues last year, only megaprojects such as its $7 billion gas-to-liquids foray in Qatar are big enough to affect the company's bottom line. And the company is famous for being a tough negotiator in such places as Russia and Venezuela, where it insists that projects reap healthy profits no matter where oil prices head. Smaller oil companies, meanwhile, are increasingly willing to spend more and to sacrifice returns to win drilling opportunities. "There's not a country in the world that we just have to have a presence in," President Rex W. Tillerson told analysts.

Exxon is cautious partly because its leaders aren't convinced high oil prices are here to stay. Raymond recalls the devastating oil price collapse of 1985, when prices fell to $10 a barrel following predictions that they would hit $100. "It's hard to identify any single commodity that has ever maintained a very high price over a very long period of time," he told analysts.

The company can afford to be patient. With a diverse resource base equivalent to 73 billion barrels of oil and exploration rights in more than 30 countries, "Exxon is already sitting on top of a very large pool of potential development," says analyst Robert A. Kessler of investment bank Simmons & Co. Exxon's proven reserves, 22.2 billion bbl., could sustain 14 years of production at current rates. Excluding acquisitions, Exxon by 2011 will be one of the few majors to exceed its volumes today, predicts Kessler.

Analysts do expect one major change at Exxon later this year: the retirement of Raymond and the likely ascension of Tillerson, 52, to the top post. The company won't talk about its succession plans. But in true Exxon style, few expect a leadership switch to make a difference. "Exxon is a machine. It has been operating well for over 100 years," says Kessler. The job of Raymond's successor? Simply keep this machine humming.

[Gizmo]

This oil rally is demand driven and sustainable for years to come.


Or untill the next big thing in renewable energy sources arrives.....
_________________
Gizmo

[HenryTo]

Goldman Sachs: Oil Could Spike to $105

Thu Mar 31,10:39 AM ET Business - Reuters

LONDON (Reuters) - Oil markets have entered a "super-spike" period that could see 1970's-style price surges as high as $105 a barrel, investment bank Goldman Sachs said in a research report.

Goldman's Global Investment Research note also raised the bank's 2005 and 2006 New York Mercantile Exchange crude price forecasts to $50 and $55 respectively, from $41 and $40.

These forecasts sit at the top of a table of predictions from 25 analysts, consultants and government bodies surveyed by Reuters.

"We believe oil markets may have entered the early stages of what we have referred to as a "super spike" period -- a multi-year trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower energy prices return," Goldman's analysts wrote.

The analysts said resilient demand had led them to revise their super-spike range to $50-$105 per barrel from $50-$80 previously, noting strength in oil demand and economic growth in the United States and China especially.

U.S. oil futures on the New York Mercantile Exchange have averaged $50.03 per barrel so far in 2005.

Goldman Sachs is the biggest trader of energy derivatives, and its Goldman Sachs Commodities Index is a widely-watched barometer of energy and commodities prices.

Goldman pointed out thin spare capacity in the energy supply chain, and long response times for bringing on supply additions, as well as robust demand in the United States and in developing heavyweights China and India, despite the recent rapid increase in energy costs.

HARKS BACK TO 1970s

Goldman said the current oil market environment looked more like that seen in the 1970s -- when oil prices spiked dramatically following the Arab oil embargoes on supply to the West and Iran's revolution.

High energy prices threw the world into recession, and triggered several years of declining oil demand.

Supply growth continued unabated and bolstered spare capacity, which in turn stabilized oil markets at lower prices -- a phase of the market cycle that Goldman's researchers said had only just ended.

The bank also said its super-spike forecast range was conservative, noting declining U.S. gasoline spending as a proportion of GDP and consumer spending.

During 1980-1981, gasoline spending in the United States corresponded to an average 4.5 percent of GDP, 7.2 percent of consumer expenditures, and 6.2 percent of personal disposable income, Goldman said.

"Our new $50-$105 per bbl super spike range perhaps conservatively corresponds to gasoline spending in the United States that reaches 3.6 percent of forecasted GDP, 5.3 percent of consumer expenditures, and 5.0 percent of personal disposable income.

Goldman said that were it to assume gasoline spending needed to reach 1970s levels to destroy demand, its upside super-spike estimate would be $135 per barrel for New York crude.

"Perhaps the ultimate answer to high how oil prices need to go before demand destruction occurs is derived from knowing when American consumers will stop buying gas guzzling sport utility vehicles and instead seek fuel efficient alternatives.

"Based on our analysis of gasoline spending and the economy noted above, we estimate that U.S. gasoline prices may need to exceed $4 per gallon."

[HenryTo]

Oil now back up at $55 a barrel - after hitting a low of $53.52 earlier this morning on the following OPEC "news." Amazing stuff.

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OPEC Likely to Boost Its Output Ceiling
Monday March 14, 2:44 pm ET
By George Jahn, Associated Press Writer
OPEC Likely to Raise Output Ceiling by 500,000 Barrels a Day if Prices Stay at Present Levels

ISFAHAN, Iran (AP) -- The Organization of Petroleum Exporting Countries will likely raise its output ceiling by 500,000 barrels a day if prices stay at present levels, the oil cartel's president said Monday.
With OPEC already overshooting quotas by about 700,000 barrels a day, any such move would mostly have a psychological effect by signaling that the organization is formally ready to pump more in an effort to regulate prices.

Prices have shot up by nearly 20 percent in the past five weeks to around $54 a barrel in New York -- a little more than a dollar shy of all-time records -- putting pressure on the 11-nation organization to take action.

Ministers had signaled the group was likely to keep its output quotas steady and merely agree to leak out more oil when it meets Wednesday on production policy for the spring. But Saudi Arabian Oil Minister Ali Naimi changed the terms of the debate Monday by calling for a formal increase in quotas, and OPEC's president, Kuwaiti oil minister Sheik Ahmed Fahd Al Ahmed Al Sabah on Monday signaled consensus was building around that idea.

"If the prices continue at the present rate, then we will increase our production," Al Sabah said on arrival at the airport in Isfahan. "If necessary, we will increase by 500,000."

The group's other option on Wednesday is to leave its output ceiling unchanged, Al Sabah said.

Alluding to the group's present overproduction above the formal output ceiling of 27 million barrels a day Iranian Oil Minister Bijan Namdar Zangeneh, appearing with Al Sabah at the airport, said neither proposal would put any additional oil on the market.

The increase to the ceiling proposed by Saudi Arabia is probably just intended to legitimize some of that overproduction, Zangeneh said. The group would be unwise to raise output aggressively now in what is traditionally the weakest season of the year for oil demand, he said.

"Both proposals mean we should keep the existing level of production within OPEC," the Iranian oil minister said.

Oil analysts say they expect tight supplies throughout 2005 because the world's economic expansion is only moderately slower than the year before. Global demand is expected to exceed 84 million barrels a day in 2005.

Light, sweet crude for April delivery fell 88 cents to $53.55 a barrel on the New York Mercantile Exchange.

Naimi said current oil prices were "unjustified."

"There is a need for raising the OPEC ceiling by half a million barrels a day at the upcoming ministerial meeting," the official Saudi Press Agency quoted him as saying. He did not specify a date when the kingdom would increase its production.

Kuwait's oil minister said that while in Iran, he will meet with Iranian oil officials to discuss a pending deal for supplying Kuwait with Iranian natural gas. No details have been made public about this agreement.

"If we do not sign a protocol, we will (at least) finish the final draft during this visit," he said before leaving Kuwait.

Kuwait is rich in oil but poor in natural gas. It has been seeking to import it for generating electrical power, instead of using oil, which is more expensive.