Blame It On OPEP

In a recent past, the conflicts which take place in the Middle East would be more than enough to trigger an oil supply shock and prices would rise to the point of putting in check the growth of the major world economies. It was like that in the 1970’s. There is no way to forget, for example, the oil embargo during the Yom Kippur War, when Egypt and Syria attacked Israel, which brought about the price tripling of the oil barrel, in October 1973. Then, in 1979, the Iranian revolution which got Shah Reza Pahlevi ousted and turned Iran into a Theocratic Republic, ending up in the war between this country and Iraq and doubling the barrel price at the time.

The Gulf War in 1990, along with a series of oil production cuts by the producing countries in 1998, weren’t enough to recover the price spikes which occurred in the 1980’s and were only good to increase the then historically low barrel prices (close to 11-12 dollar a barrel) to 30 something dollars. After the 9-11 Terror, the prices jumped from 25 to 60 dollars a barrel and just about stayed on this level up until early 2007. Then China came into the picture with its vigorous growth.

The two-digit economic growth led by it (China) and its southern neighbor – India – for a decade drove up the energy consumption and commodities in general. Oil followed this upward course and the world believed that the oil barrel would reach US$ 230, as late Lehman Brothers used to say. At that time, there was already talk about a possible shortage of fuel and the need to look for renewable energy. The renowned newspaper The Economist even published two cover stories referring to the oil great high: one said the world was watching “the end of the cheap food”; the other issue showed the oil barrel at 135 dollars a barrel as a “recoil”. That’s where the sugar-alcohol sector comes into play believing in another silliness of Lula’s about Brazil becoming ethanol Saudi Arabia. Well, everybody is fed up with hearing about this story.

With oil under 70 dollars a barrel, now there is another issue. Iran, for instance, in order to meet the social and budgetary demands of the country needs almost 140 dollars a barrel. Venezuela and Nigeria need oil at 120 dollars a barrel. Czar Putin’s Russia demands 100 dollars. Saudi Arabia demands a little over 90 dollars. That is, except for the United States which is witnessing an economic recovery and oil production growth by more than 11% being the world’s greatest producer today, everybody is in a dramatic situation. The Brazilian pre-salt, discovery which made Lula turn his back on the sector and blew those who invested their time, sweat and blood off, needs oil to stay over 70 dollars a barrel so it can be economically viable.

The problem now is with the United States which is the greatest producer, importer and consumer of oil. It is producing 1-2 million barrels of oil over what they used to produce last year. And the world economy is shrinking. There will have to be a shock, that is, oil price will need to fall until oil production becomes viable in other producing countries so that the price curve can be brought back to a balance again.

And now, the one-million-dollar question: what is this level? We should also remember that in lots of the producing countries energy price is heavily subsidized. With a plummeting oil price, the social cost will be enormous. Just to name the first ones: Venezuela, Saudi Arabia, Iran and Iraq.

This is a catastrophe. Petrobras (NYSE:PZE) in the mud, losing money on account of the subsidy it gives to gas consumers and whose lag is at about 10% today, still has to pick up the pieces spread around by the scandals sponsored by the crooks who took over the company, is going through a period of heavy clouds and mistrust from investors and financers abroad.

That is why the sugar market in NY closed at an almost 3.5% fall this Friday, nailing 15.56 cents per pound for March/2015. This is a 12-dollar-fall per ton over the week. Along the three-year-long curve presented by Sugar in NY, the falls have ranged between 8 and 13 dollars per ton.

It is worth reminding you what was said here last week: “Brought to present value by BC interest rates, a fixation for March 2016 (the end of the 2015/2016 harvest) is still over R$1,000 per ton. This looks like a good fixation option for the mills since any spasm that there might be on the sugar market in NY for fundamentalist reasons will affect much more the months with shorter maturity than those with longer maturity”.

As an experienced trader on the market would say, “risk management is not everything but 100% is”.