When is enough enough?

FT.com: Fears of a shortage within five years propelled long-term oil futures prices to almost $140 a barrel on Tuesday, further stoking inflationary pressures in the global economy. Investors rushed to buy oil futures contracts as far forward as December 2016, pushing their prices as high as $139.50 a barrel, up more than $9.50 on the day. The spot price hit a record $129.60 a barrel. Veteran traders said they had never seen such a jump and said investors were increasingly betting that oil production would soon peak because of geopolitical and geological constraints. Neil McMahon, of Sanford Bernstein, said: “Peak oil views – regardless of whether right or wrong – are seeping into the market and supporting high prices.” Anne-Louise Hittle, of Wood Mackenzie, added that investors were shifting their focus from the short-term to the medium-term, where supply fears played a bigger role. Since January, long-term futures oil contracts, such as those for delivery in 2016, have jumped almost 60 per cent, while near-term prices have gone up 35 per cent. That trend was exacerbated by T. Boone Pickens, the influential investor who believes world oil production is about to peak as aging fields run dry. He warned that oil prices would hit $150 a barrel by the end of the year. “Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87m,” Mr Pickens told CNBC. “It’s just that simple.” Mr Pickens’s view is still in the minority in the oil industry. But concerns over future oil supplies are fast moving into the mainstream and influencing investors. Politicians have expressed concern that speculators are forcing prices higher and Joseph Lieberman, the influential senator, said he was considering legislation to limit big institutional investors in commodities markets. Some energy executives have warned that geopolitical supply constraints will mean production will not be able to match demand as early as 2012 to 2015. This comes as demand, especially from China, is set to continue to grow, while that of the US slows. Adam Sieminski, chief energy economist at Deutsche Bank, said: “The price is going to go up until governments that subsidise oil consumption in Asia and the Middle East can no longer afford it.” So far China is doing the opposite, having recently retrenched subsidies. Analysts say Chinese demand could surge further as the country faces shortages of coal and hydropower. Nervousness about Chinese energy demand was exacerbated on Tuesday when officials said 32 power plants had been forced to close because of coal shortages. PetroChina and Sinopec, the two biggest domestic oil groups, also have diverted fuel supplies to the quake-hit Sichuan region.



MyTake: So far, nobody has been able to predict accurately how oil prices fare since 2002. Most analyst gets the oil prices forecast by multiplying a certain percentage of increase to the current prices as it move along. According to Reuters, yesterday was the 11th of the last 13 sessions that crude prices have hit trading or closing records, if not both. It seems to me that speculators are testing or dangling higher prices in the long term futures contracts so as to get the short term contracts to move up north further. Technically, crude oil futures may hike up further in the next few sessions before profit taking sets in as the RSI is showing almost 80 representing overbought situation. As highlighted in the chart above, the crude prices growth has been very smooth since late 2006 resulting many investors/traders/hedge funds having full confidence of its upside potential. In general the supporters of bullish oil/commodities provide the following the reasons for the rise a) increased demand(eg China, India, Middle East and other emerging countries), b) supply interruption(due to social/political situations), c) weakening of a main trading currency USD(due to US monetary loosening policy), d) increased money supply(ie "printing money" into the economy resulting "too much money chasing too few goods" e) declining production by OPEC/Non Opec members and f)speculation. Beside comments from Pickens(an oil man turned corporate raider), some of the renowned "oil gurus" from Goldman Sachs like Arjun Murti has predicted oil's "super spike" to drive crude oil to USD200 per barrel in the next 6-24 months. He also says that oil would average about USD141 in the 2nd half of 2008 due to constraints in production, lack of substitutes and lower production. However, OPEC which has been pressured to increase oil production lately seems to think otherwise. I dare not say they are the innocent party or the hapless victim to all these problems. But it argues that the oil prices increase had more to do with financial volatility rather than fundamentals. It also notes that record oil prices are infact slowing down demand. According to OPEC, price increase is due to speculative buying, weak dollar, hedging tool for inflation and geopolitical fears rather than supply shortage.This "speculative buying" argument is supported recently by Venezuelan's oil minister and even Royal Dutch Shell's chairman who says that he was puzzled by the price volatility as he did not see any supply bottleneck. So to the speculators and OPEC members who are watching the possible destruction of economies due to high oil prices, when is enough enough? They will probably tell you back "when we have enough!".



* Some facts and figures on Malaysian oil production. Production per day is 750,000 bpd and exports is 250,000 bpd. So a price increase of USD1 will increased Malaysia's export revenue by USD91m!? Cost of production is probably US30-50 per barrel only. (Note:Saudi's production per day is 8.1m barrel while Russia is 7.1m barrel).


* Government subsidy on oil is RM45b if the oil prices is between USD110-120 per barrel. Government will fork out RM25b while Petronas will pay RM20b.


* Assuming world's oil reserves is about 1.1T barrels, the consumption of say 85m barrels per day will wipe out oil reserves in 35 years but if you increase world's consumption by 5% each year, the years left with oil reserves would be reduced much drastically.

* According to OSK Research, an increase of US1 in oil prices could strip away RM50m from MAS's bottom line and RM10m from Airasia's assuming no hedging and adjustment in fuel surcharge.


* Ramunia's share received a boost today after it has announced it has terminated its RM2.2 billion contract secured from an Indian concern in January as it was unable to come up with the required performance bank guarantees and insurance certificates. This news is considered favourable as MISC has implied that it wishes to review Ramunia's existing projects especially this Indian project before finalising the Due Deligent. (go here for previous posting). So when can the Due Deligent be out ah?