- Energy Demand - Supply balance is pointing to Supply overhang
- New Oil findings in China and end to Syria could force Iran's hand (if logic prevails)
- After stripping out start of year euphoria for fiscal cliff resolution we should see energy prices drift lower
- Selling spreads would insulate better from noise and reduce volatility
- Sensible would be selling Nov-Dec in gasoline, Aug-Sept in heat and Dec13-Jun14 in crude oil
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Next year will probably see most of all a certain amount of predictability especially in terms of economic growth. We have reason to believe that uncertainties about war could come to an end as Syria has lost its last supporter (Russia) while the opposition party has already been formed in London (as it is so often in these kind of disputes). China will probably grow anywhere between 7.5 and 8.5% while the USA will probably be somewhere between 1.5-2.5% and the EU between -1.5 - 0%. Interest rates will remain where they are for most developed nations (ie in effect around zero). We also believe that the Iran issue could be solved some time in 2013. Overall this means relatively predictable demand projections for energy consumption while reduced supply disruptions. (This environment combined with small yields should also be supportive of equities at least in the first half of the year).
Crude oil on a demand-supply basis does not look strong into 2013.
Demand:With Europe in a recession, with fiscal drag capping US growth and with China's lacklustre export growth and limited domestic demand pick-up, we should expect demand growth for oil at around 1.0-1.5mill b/d. On the margin we are seeing Japan's new political party quite popular and hence powerful enough to affect some much needed changes in the country. Apart from FX devaluation the party is more in support of nuclear energy which will reduce Japan's imports of energy and assist her current account deficit to heal. China has stopped filling up its crude stockpile which was adding more than 100k b/d in marginal demand and the list goes on.
Supply increases are expected to increase by around 2mill b/d and there is speculation that this might be even higher. (Refinery capacity is also expected to increase by around 2mill b/d in 2013). We can see increases in production in Lybia, Iraq and the USA in substantial measure. In lybia production is rising faster than expected and pre-war levels are nearly reached. In Iraq new production methods and increased investment look as if the country may finally realise its potential in terms of oil production. Particularly in the Kurdish regions where this year there are 24 rigs and next year there will be around 40...the Kurdish region has plans to be exporting 1mill b/d by 2015 from its current 200k b/d. But the biggest and more permanent game-changer is shale gas and shale oil technology which is currently primarily affecting the USA which is increasing production each year by around 500-800k b/d which is a lot of additional oil on the margin without enough demand pick-up world wide.
Forward Looking Supply: As if this was not enough we are seeing new oil finds wherever we look (granted that these supplies will take years to come to market but findings alleviate fears about peak oil theories). China has declared that its geologists believe there are vast reserves in the Red China Seas and have commissioned their first domestically built deepwater drilling rig this year. Additionally China has put in place a Shale oil and gas programme where she will in future take advantage of the vast reserves found in her interior territories (and with no environmental lobby they should be fast in getting construction done in any region they see fit). Poland has discovered that they are sitting on large reserves of oil/gas that can be accessed via shale technology and this could mean europe will be less dependent on Russia for its energy needs. It seems clear that with technological changes we have no problems procurring oil at prices around 90$ (brent). Short term price falls to even 75$ would not mean that Shale projects would come to a stand-still nor Tar sands production in Canada come to a halt, since the ongoing projects are now still viable at those prices and longer term supply contracts have meant locked-in prices for years to come.
OPEC: The regulator of any supply overhang would have to occur from OPEC who is keen to keep prices around 100$ (Brent) as they struggle with their own internal expenditure requirements. Although this is the case OPEC has been notoriously slow in being able to reign in production in a uniform way. Usually all of the pressure falls on Saudi Arabia to enact such actions. But even if Saudi's should reduce oil supply this would increase spare capacity of oil which is in effect a buffer against oil shocks and would assist in reducing risk premium that is currently still priced into the market.
Geopolitical Risk: Iran is the main item here and Iranians have been suffering through the embargo. Her exports of oil have halved from 2mill b/d to 1mill b/d, her currency has devalued by more than 50% in value and her customer base has narrowed to in effect one: China. We cannot imagine that China is the kindest of customers and given her knowledge that she is the only one Iran has she should be pressuring prices as and when she sees fit. And now that China has found more oil in her backyard and now that China is implementing Shale technology and now that China has already filled substantial stocks of oil on her own...We simply cannot see Iran holding out for too much longer, but then we are assuming a reasonable response.
In summary: We expect low stock levels in any products that exist currently to replenished in 2013 due to supply outweighing demand increases. We expect some geopolitical risk to be priced out of the market some time in the next year. And we do expect lower prices during 2013.
One of the better risk reward plays is to sell forward spreads in both crude and products. This assists in avoiding the inevitable noise created by politicians and their debates about the fiscal cliff for instance. It also allows the trade more room to trade and reduces volatility of returns. We suggest selling nov-dec gasoline and dec13-june14 crude as well as aug-sept heating oil.
Crude oil on a demand-supply basis does not look strong into 2013.
Demand:With Europe in a recession, with fiscal drag capping US growth and with China's lacklustre export growth and limited domestic demand pick-up, we should expect demand growth for oil at around 1.0-1.5mill b/d. On the margin we are seeing Japan's new political party quite popular and hence powerful enough to affect some much needed changes in the country. Apart from FX devaluation the party is more in support of nuclear energy which will reduce Japan's imports of energy and assist her current account deficit to heal. China has stopped filling up its crude stockpile which was adding more than 100k b/d in marginal demand and the list goes on.
Supply increases are expected to increase by around 2mill b/d and there is speculation that this might be even higher. (Refinery capacity is also expected to increase by around 2mill b/d in 2013). We can see increases in production in Lybia, Iraq and the USA in substantial measure. In lybia production is rising faster than expected and pre-war levels are nearly reached. In Iraq new production methods and increased investment look as if the country may finally realise its potential in terms of oil production. Particularly in the Kurdish regions where this year there are 24 rigs and next year there will be around 40...the Kurdish region has plans to be exporting 1mill b/d by 2015 from its current 200k b/d. But the biggest and more permanent game-changer is shale gas and shale oil technology which is currently primarily affecting the USA which is increasing production each year by around 500-800k b/d which is a lot of additional oil on the margin without enough demand pick-up world wide.
Forward Looking Supply: As if this was not enough we are seeing new oil finds wherever we look (granted that these supplies will take years to come to market but findings alleviate fears about peak oil theories). China has declared that its geologists believe there are vast reserves in the Red China Seas and have commissioned their first domestically built deepwater drilling rig this year. Additionally China has put in place a Shale oil and gas programme where she will in future take advantage of the vast reserves found in her interior territories (and with no environmental lobby they should be fast in getting construction done in any region they see fit). Poland has discovered that they are sitting on large reserves of oil/gas that can be accessed via shale technology and this could mean europe will be less dependent on Russia for its energy needs. It seems clear that with technological changes we have no problems procurring oil at prices around 90$ (brent). Short term price falls to even 75$ would not mean that Shale projects would come to a stand-still nor Tar sands production in Canada come to a halt, since the ongoing projects are now still viable at those prices and longer term supply contracts have meant locked-in prices for years to come.
OPEC: The regulator of any supply overhang would have to occur from OPEC who is keen to keep prices around 100$ (Brent) as they struggle with their own internal expenditure requirements. Although this is the case OPEC has been notoriously slow in being able to reign in production in a uniform way. Usually all of the pressure falls on Saudi Arabia to enact such actions. But even if Saudi's should reduce oil supply this would increase spare capacity of oil which is in effect a buffer against oil shocks and would assist in reducing risk premium that is currently still priced into the market.
Geopolitical Risk: Iran is the main item here and Iranians have been suffering through the embargo. Her exports of oil have halved from 2mill b/d to 1mill b/d, her currency has devalued by more than 50% in value and her customer base has narrowed to in effect one: China. We cannot imagine that China is the kindest of customers and given her knowledge that she is the only one Iran has she should be pressuring prices as and when she sees fit. And now that China has found more oil in her backyard and now that China is implementing Shale technology and now that China has already filled substantial stocks of oil on her own...We simply cannot see Iran holding out for too much longer, but then we are assuming a reasonable response.
In summary: We expect low stock levels in any products that exist currently to replenished in 2013 due to supply outweighing demand increases. We expect some geopolitical risk to be priced out of the market some time in the next year. And we do expect lower prices during 2013.
One of the better risk reward plays is to sell forward spreads in both crude and products. This assists in avoiding the inevitable noise created by politicians and their debates about the fiscal cliff for instance. It also allows the trade more room to trade and reduces volatility of returns. We suggest selling nov-dec gasoline and dec13-june14 crude as well as aug-sept heating oil.
Disclaimer: This posting is for information purposes only and is not intended as an offer,recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation or warranty is made that this information is complete or accurate. Any views or opinions expressed do not necessarily represent those of Archbridge Capital AG. This information is not intended, tax or legal advice. You also acknowledge that the information should not be construed as a solicitation or offer by Archbridge Capital AG to buy or sell any securities or any other financial instruments or provide any investment advice or service. Unless otherwise stated, any pricing information given in this posting is indicative only, is subject to changes and does not constitute an offer to deal at any price quoted. You should be aware that returns can be volatile and you may lose all or a portion of your investment. Past performance of any investment or trading tool is not necessarily indicative of future performance or results.