Oil prices hold at $70 with uncertainty over recovery 'green shoots'
Hong Kong - June 22, 2009
Benchmark crude oil prices appear to have consolidated around the $70 per barrel (/b) mark, unable to break out into higher territory because of a lack of consensus on whether the perceived "green shoots" of an economic recovery are real or just imaginary. Market bulls point to the slowdown in the rate of decline for many key economic indicators as a sign that the worst is over; even the Organization for Petroleum Exporting Countries (OPEC) said earlier this month that "the worst appears to be behind us." But in stark contrast to this view, the head of the International Monetary Fund said last week that "the large part of the worst is not yet behind us."
Part of the problem is that the global economic malaise has spread unevenly among the Organization for Economic Cooperation and Development (OECD) countries, with Europe feeling the bite in terms of unemployment more so than the United States. Moreover, while the Chinese economy is showing clear signs of improvement, ultimately its fate will depend on a real and sustained recovery in the U.S. and Europe, upon which it will continue to depend for the foreseeable future.
Returning to the market, benchmark West Texas Intermediate (WTI) and Brent closed last Friday (June 19) just below $70/b at $69.55/b and $69.19/b, respectively, after having peaked the previous day at $71.37/b and $71.06/b. Last Friday's dip in WTI was attributed to falling gasoline futures prices, due in turn to swelling US gasoline inventories as Americans drive less. Prices were also hurt by some strength in the dollar. By Monday in Asia (June 22) WTI was being traded slighter lower at $69.18/barrel while Brent was at $68.95/b.
However, some bullish factors remain in the background. Regional equity markets were largely stronger Monday, and ongoing geopolitical tensions in Iran and Nigeria remain key factors to watch. Iran, OPEC's second largest oil producer after Saudi Arabia, is reeling from the after math of its recent presidential election. In addition, three attacks were carried out against Royal Dutch Shell's oil facilities in Nigeria on Sunday, according to news reports.
U.S. enters gasoline peak demand season
Despite the decline in U.S. gasoline prices that pulled down WTI values last Friday, overall, prices have been on the rise in recent weeks. Moreover, the rise has been driven by solid market fundamentals, not speculation, American Petroleum Institute (API) economist John Felmy said last week. The underlying fundamentals behind gasoline's rally include rising crude oil prices, increased demand, and the introduction of summer-grade gasoline. Felmy attributed the tighter gasoline market to production cuts by OPEC and also said the low-volatility summer gasoline is more expensive to produce. The summer gasoline season began June 1 at the retail level and runs until mid-September or October 1, depending on the region of the country.
In the run-up since April, the price of gasoline in the U.S. has increased 61 cents per (/) gallon, close in magnitude to the concurrent rise in crude oil prices, equivalent to 64 cents/gallon. "It's a fairly straightforward story," Felmy said, similar to what happened last year. Felmy discounted "excessive speculation" as a cause. "If you look at inventories, it doesn't show a significant build. What it tells you is that we're probably at equilibrium at the interaction of the supply and demand curves," he said.
U.S. crude inventories have declined about 17 million barrels to 375 million barrels since April, and are about 10% from average levels last year, Ron Planting, API statistics manager, said. Planting said U.S. refinery utilization rates are about 84.1%, or about 20% better than the average factory utilization rates for all manufacturing. "Refiners would love to move more product if there were more buyers," Planting said. Felmy said he could not comment on media reports about fully loaded tankers being kept at sea in order to tighten the market and cause prices to rise.
Russia, China eye more energy cooperation
While much press coverage has been devoted to the state of the U.S. economy, attention shifted last week to the emerging countries of Brazil, Russia, India and China (BRIC), whose leaders gathered in Russia for their first official summit. Although the BRIC members are united in their desire to have a bigger say in world affairs, they are extremely diverse in terms of their political systems and economic orientations. China and India are huge energy consumers, while Russia and Brazil are heavily dependent on oil exports, which has led to some diplomatic maneuvering to avoid a potential clash of agendas.
Leaders of the BRIC countries vowed to reduce their reliance on the U.S. dollar and to seek to strengthen their role in global financial institutions. Coinciding with the gathering, Moscow and Beijing said they are set to strengthen further their cooperation in the energy sector, having already signed deals worth around $100 billion this year. Russian President Dmitry Medvedev and his Chinese counterpart "will discuss ways to expand cooperation in the oil and gas sector as well as in coal and power industries," the Kremlin's press office said June 16. The latest deal between the two countries will see Russia's Lukoil supply 3 million mt (21.9 million barrels) of Russian crude oil to China by June 30, 2010.
"We are also ready to discuss with our Chinese partners a possible cooperation in upstream projects," Lukoil vice president Ravil Maganov said in a statement. In September 2007, Lukoil signed a strategic partnership agreement with China's biggest oil producer, CNPC, to expand cooperation at their existing projects in Kazakhstan and Uzbekistan and look at possible upstream and downstream projects in other countries.
U.S. seeks to strengthen regulation of financial derivatives
Meanwhile, the U.S. continues to forge ahead with plans to regulate financial derivatives as part of a larger overhaul of the country's financial system. Bringing greater regulation to over-the-counter derivatives -- which include energy and other commodities -- is a key part of a broad plan for revamping the United States_ financial regulatory foundation, the Obama administration said last week. "It is an indisputable fact that one of the most significant contributors to our economic downturn was an unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess," Obama said in remarks at the White House. "A culture of irresponsibility took root from Wall Street to Washington to Main Street. And a regulatory regime basically crafted in the wake of a 20th century economic crisis -- the Great Depression -- was overwhelmed by the speed, scope and sophistication of a 21st century global economy." The evolution of over-the-counter (OTC) derivatives, the administration said, is one such example.
The administration's proposal would give the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) authority to regulate OTC derivatives. The administration wants standardized OTC derivatives to clear through regulated central counterparties, or CCPs, while more exotic derivatives would be reported to a regulated trade repository and be subject to higher capital standards. Standardized OTC contracts would be moved onto regulated exchanges or regulated electronic trading systems for OTC derivatives. These products would be subject to "robust margin requirements" and increased recordkeeping and reporting requirements, the plan said. Also, the plan would require hedge funds and other private capital pools to register with the SEC, allowing authorities to see how funds are evolving and to determine whether they are becoming too large, leveraged or interconnected.
The plan also would create a Financial Services Oversight Council, headed by the Treasury Department, to fill in gaps in supervision and oversight of the wider financial markets. Its membership would include the heads of the CFTC, SEC, Federal Reserve, National Bank Supervisor, Federal Deposit Insurance Corporation, Federal Housing Finance Agency and a newly created Consumer Financial Protection Agency. The plan does not call for merging the CFTC and the SEC, something the administration was believed to have been considering, and would instead promote greater cooperation between the two agencies.