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Andrew MacKillop :Where is $130 Oil?


Way back in September 2011, Goldman Sachs let us all know its Nice Price for 2012: $130 per barrel for Brent and $126.50 for WTI, allowing us to cling to the famous Brent premium, but shrunk to the price of 2 cups of Starbucks cheapest takeout coffee, without the beigel !

Unfortunately for GS petro-dreamers, oil faces fundamentals that all point downward: maybe 2013 ?

Plenty of deep-sea monsters swim in the oil pool, but tweaking what they mean is difficult. The oil inventories monster, still growing and sinking under its own weight, can be looked at several ways and for petro-boomers the best way is looking at how fast oil traders react to really small stock moves: changes in US inventories representing 9 or 10 million barrels or 12 hours of US consumption, if they are upward, can trigger several days of downward price movement, or at best a flat-line.

Conversely, a mega-indicator like world rubber demand and prices moving down - meaning China is building, buying and exporting cars, scooters, bicycles at a markedly slower rate, in the same way European carmakers are taking massive double-digit percentage hits to their sales volumes - hardly adds any downward spin to oil market price trends. The shrinking value of the euro against the USD, which in real world terms bolsters the still high, still strong and always unrealistic Brent premium, is another unreal world factor making oil price forecasting a game for deep sea monsters.

HIGH ON IRAN - OR IS IT NIGERIA AND SYRIA ?  

Petro-boomers believe in risk premiums. The premium right now is high and could be anywhere up to $15 per barrel. Curiously, as the Libyan story of 2011 showed, their scare level or fright quotient tends to unravel and shrink well before the threat, which they exaggerated, finally quits the news scene. Surprise is the game for scare premiums on the oil price, and Iran is about the most unsurprising, longest-running scare story in world oil. Exporting anywhere from 2.2 to 2.6 million barrels a day of crude, depending how much you want to exaggerate Iran's role, but importing a lot of refined products (about 0.75 - 1 Mbd), Iran is a regional oil business player with surprising potential add-on price impacts to refined products markets across Eurasia.

Even more curious, Nigeria's civil strife and Al Qaeda-inspired conflicts, or at least riots triggered by doubling the price of gasoline, or trying to, quickly fall off the newswires and out of the risk premium for world oil, especially Brent. Like Iran, Nigeria also exports 2.2 to 2.6 million barrels a day, we can read and believe if we want. More believable, we find that exactly like Iran, Nigeria imports a lot of refined products, even depending on refined exports from up-river Niger - which imports its crude from down-river Nigeria. Meaning, in fact, that global refined products output and shipments are a track for finding the real fundamentals. In the current global macro context, refined products and refinery utilization data are handy indicators of real trends.

Syria is in Arab Revolt-2, the civil war version which took over from the 2011 Jasmine Uprising, but the internal politics, and regional geopolitics of Syria are so complicated that petro-boomers stay away from the subject: after all this only concerns about 0.15 Mbd of crude oil supply, if that, but exactly like Iran and Nigeria, Syria is a big importer of refined products. However, the regional impacts from final breakdown of the unlovable Syrian regime are potentially huge, sweeping the region and easily impacting Israel and Lebanon, making Syria the best hope for GS petro-boomers trying to get their numbers right in 2012.

HIGH ON THE ASIAN LOCOMOTIVE

Thank goodness for China and India - but already India is falling off the teleprompter of oil price boomers. Predictably opaque information about India's real oil demand, stocks, refining capacity and crude supplier sources does not help, but shrinking economic growth in India is more transparent and easier verified than the clouding Chinese economic outlook. To be sure, predicting a hard landing for China is one of those games where, if you say it long enough you could be right one day, inch'allah. Today, we are getting nearer that day, and one of the leading most-real indicators is China's oil imports, refinery output and stocks.

These look flat and could be flat, which if true is one of the biggest deep-sea monsters threatening the fragile life raft of the petro-boomers.

Like we know, the Asian loco is coal-fired, in fact if Asian industry was not so high on King Coal its oil demand would be out of sight - but this leaves one other player: natural gas. Current gas consumption in China and India, on a per capita average basis, is minuscule at about one-twentyfifth the average for the US, against a mere one-seventh for average per capita oil consumption, for China, and one-twelfth for India. And world gas resources are growing, including big new stranded gas finds, and big potentials for Asian shale and coalseam gas development.

World LNG capacity is something like world production capacity for solar cells and windmills - out of sight relative to market potentials at present LNG prices. Just like giveaway solar panel prices and high profile business failures in the wind and solar industry, LNG prices have to fall.

For Asia this will be an energy turning point, where gas takes over some of the strain from growing oil import dependence and its upward pressure on traded oil prices. When gas prices in Asia really start moving downward from highs well above $14.50 per million BTU, Asian oil demand growth is going to receive another wooden stake in its heart. Even if the 130-dollar monster barrel of Goldman Sachs isnt dead, it will be ever more groggy, at least this Quarter !


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Andrew MacKillop is energy and natural resource sector professional with over 30 years experience in more than 12 countries, with a first degree in economics (master equivalent), University College London (UCL), London UK. Is a founder member of the International Association of Energy Economist. In 1981-1986, was in-house Expert-Policy and Programmes, Divison A-Policy and DG XVII Energy at the European Commission, Brusels. Mr MacKillop was recently a syndicated columnist at the I-Media, Dubai newspaper Alrroya Aleqtissadiya, covering Energy and Economic, Finance and Development issues. To contact Mr. MacKillop wriite to xtran9@gmail.com. Petroleumworld not necessarily share these views.

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Petroleumworld News 02/07/2011

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