Sunday, February 17, 2013

Banality of forecasts predicated on short-termism

Oh dear! Oh dear! Oh dear! So the Brent crude price sank to a weekly loss last week; the first such instance in roughly a month. Is the Oilholic surprised? Not one jot. What yours truly is surprised about is that people are surprised! One sparrow does not make spring nor should we say one set of relatively positive Chinese data, released earlier this month, implies bullish trends are on a firm footing.
The Chinese news was used as a pretext by some to go long on the Brent forward month futures contract for March as it neared its closure (within touching distance of US$120 per barrel). And here we are a few days later with the Brent April contract dipping to a February 15 intraday price of US$116.83 on the back of poor industrial data from the US.
 
The briefest of spikes of the week before was accompanied by widespread commentary on business news channels that the price would breach and stay above the US$120 mark, possibly even rise above US$125. Now with the dip of the past week with us, the TV networks are awash with commentary about a realistic possibility that Brent may plummet to US$80 per barrel. You cannot but help laughing when spike n’ dips, as seen over the past few weeks, trigger a topsy-turvy muddle of commentators’ quotes.
 
Sometimes the Oilholic thinks many in the analyst community only cater to the spread betters! Look at the here, the now and have a flutter! Don’t put faith in the wider real economy, don’t examine the macroeconomic environment, just give a running commentary on price based on the news of the day! Nothing wrong with that, absolutely nothing – except don’t try to pass it off as some sort of a science! This blogger has consistently harped on – even at times sounding like a broken record to those who read his thoughts often – that the risk premium provided by the Iranian nuclear standoff is broadly neutral.
 
So much so, that the reason the Brent price has not fallen below US$100 is because the floor is actually being provided by the Iranian situation on a near constant basis. But that’s where it ends unless the country is attacked by Israel; the likelihood of which has receded of late. Syria’s trouble has implications in terms of its civil war starting a broader regional melee, but its production is near negligible in terms of crude supply-side arguments.
 
Taking all factors into account, as the Oilholic did last month, it is realistic to expect a Brent price in the range of US$105 to US$115. To cite a balanced quote, Han Pin Hsi, the global head of commodities research at Standard Chartered bank, said that oil should be trading at US$100 per barrel at the present moment in time were supply-demand fundamentals the only considering factors.
 
In recent research, Hsi has also noted that relatively lower economic growth as well as the current level of tension in the Middle East has already been “priced in” to the Brent price by the wider market. Unless either alters significantly, he sees an average price of US$111 per barrel for 2013.
 
Additionally, analysts at Société Générale note that along with the usual suspects – sorry bullish factors – now priced in, Brent could see some retracement on profit-taking, though “momentum and sentiment are still bullish”. The French bank’s analyst, Mike Wittner, notes that just as the Saudis have (currently) cut production, concerns over prices being “too high” will cause them to increase production. “In short, our view is that Brent has already priced in all the positive news, and it looks and feels toppy to us,” he wrote in an investment note. “Toppy” – like the expression (slang for markets reaching unstable highs whereupon a decline can be expected if not imminent)!
 
On a related note, in its short-term energy outlook released on February 12, the EIA estimates the spread between WTI and Brent spot price could be reduced by around 50% by 2014. The US agency estimates that the WTI will average US$93 and US$92 in 2013 and 2014 respectively, down from US$94 in 2012. It expects Brent to trade at US$109 in 2013 and edge lower to US$101 in 2014, down from the 2012 average of US$112.
 
Elsewhere in the report, the EIA estimates that the total US crude oil production averaged 6.4 million barrels per day (bpd) in 2012, an increase of 0.8 million bpd over 2011. The agency’s projection for domestic crude oil production was revised to 7.3 million bpd in 2013 and 7.8 million bpd in 2014.
 
Meanwhile, money managers have raised bullish positions on Brent crude to their highest level in two years for a third successive week. The charge, as usual, is lead by hedge funds, according to data published by ICE Futures Europe for the week ended February 5.
 
Net-long positions, in futures and options combined, outnumbered net-short positions by 192,195 lots versus a figure of 179,235 the week before; a rise of 6.9% according to ICE’s latest Commitment of Traders report. It brings net-long positions to the highest level since January 2011, the month the current data series began.
 
On the other hand, net-short positions by producers, merchants, processors and users of the crude stuff outnumbered bullish positions by 249,350, compared with 235,348 a week earlier. It is the eighth successive weekly increase in their net-short position, ICE Futures Europe said.
 
Moving away from pricing matters, a few corporate snippets worth flagging up - starting with Gazprom. In a call to investors and analysts earlier this month, the Russian state energy giant finally appeared to be facing-up to greater competition in the European gas market as spot prices and more flexible pricing strategies from Norway’s Statoil and the Qataris put Gazprom’s defence of its conventional oil-indexation pricing policy to the test.
 
Gazprom ceded market share in defence of prices last year, although it did offer rebates to selected customers. However, it appears to be taking a slightly different line this year and aims to cede more ground on prices in a push to bag a higher market share and prop up its overall gas exports by volume.
 
Gazprom revealed that it had paid out US$2.7 billion in 2012 in refunds to customers in Europe, with the company planning another US$4.7 billion in potential price cuts this year in order to make its pipeline gas prices competitive with spot prices and incentivise European customers to make more voluminous gas purchases.
 
Commenting on the move, analysts at IHS CERA noted, “Increasing gas sales volumes by retaining the oil-indexation pricing strategy and then retroactively offering price discounts may be a difficult proposition, however, particularly if Ukraine, Gazprom’s largest gas export customer, continues to reduce its Russian gas purchases in response to Gazprom’s refusal to cut prices.”
 
“Rather than continuing to react to changing market conditions by offering lower prices to customers, Gazprom may need to take a more proactive approach to reducing its gas export prices in order to incentivise customers to buy more gas from the Russian gas firm this year,” they concluded.
 
Finally, TAQA, the Abu Dhabi National Energy Company, said in a statement over the weekend that a new oilfield has been discovered in the North Sea. It reported that two columns of oil have been found since drilling began in November at the Darwin field, about 80 miles north-east of the Shetlands.
 
The field is a joint venture between the Abu Dhabi state-owned company and Fairfield Energy. TAQA acquired some of BP’s North Sea assets for US$1.1 billion in November 2012. That’s all for the moment folks! Keep reading, keep it ‘crude’!
 
To follow The Oilholic on Twitter click here.
 
© Gaurav Sharma 2013. Photo: Andrew Rig, North Sea © BP.  Graph: World crude oil benchmarks © Société Générale Cross Asset Research February 14, 2013.

No comments:

Contact:

For comments or for professional queries, please email: gaurav.sharma@oilholicssynonymous.com

To follow The Oilholic on Twitter click here
To follow The Oilholic on Google+ click here
To follow The Oilholic on Forbes click here