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Frankenstorm And The Oil Patch

By Andrew MacKillopCommoditiesNov 08, 2012 02:50PM ET
Frankenstorm And The Oil Patch
By Andrew MacKillop   |  Nov 08, 2012 02:50PM ET
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We can call it Frankenstorm And The Oil Patch, because the continuing U.S. storm event throws up so many twists and turns in U.S. oil and energy and global oil and energy. For oil in particular, we stay logical by noting that the U.S. still consumes around 20% of global oil output, and its oil imports although declining still take about 23% of global traded export supply, estimated at a total near 50 - 52 million barrels/day.

However, from that point on we have the Halloween factor, including unexpected numbers like the ever-growing export supply of mostly refined oil products, and some crude, from the U.S., where the actual numbers are a complex minestrone soup. What oil traders mostly and firstly trade are ideas, views, opinions, fears and hopes, which the Hurricane Sandy event has supplied in large doses.

Early oil analyst newsbytes (or opinion bytes) were that the storm would or could bump up oil prices because it would bump up demand, at least in the U.S. Northeast. Within a few days this was disproven by the real world, even if gasoline prices rose due to a mix of factors in no way led or dominated by rising demand and consumption of gasoline. What we will likely find in the U.S. is rising inventories led by rising crude oil stocks -- because oil demand has declined. The price bump came, of course, but it disappeared faster than a Halloween pumpkin after the party.

The global macroeconomic picture is about as bad for oil prices as any witch could imagine, even in the heartlands of Eastern Europe's Frankenstein country. Europe in 2012 "celebrates" its sixth straight consecutive year of declining oil consumption: it only goes down. Arguments that the euro "is a strong currency" can still be heard, and a weak dollar is always good for bidding up oil prices in dollars, but the length of forward time that the "euro -- dollar premium" holds up, like the "Brent -- WTI premium", is counted. Convergence on a downward tilted playfield is the story going forward.

Adding up the Three Horrors of the global macroeconomy today -- the US fiscal cliff, Europe's ongoing and intensifying recession, and China rebalancing -- all of these are bad for oil and almost anything else. At one time, Bernanke had a headstart on others. His QE was the only show in town and had no rivals, but that has completely changed, today. This in fact made it really unimportant who won the recent U.S. presidentials - whoever won, the U.S. dollar would tend to strengthen and oil prices (and gold prices) would tend to weaken. Europeans were counting on an Obama win, to help rationalize their own massive ECB version of QE featuring the same unbridled money printing effort, targeted at sovereign debt buying, and the economic trick-or-treat mix of swingeing austerity cures for most, and huge handouts of public cash for some, in the always-stricken bank and finance sector across Europe.

Why the euro should command a 28% premium on the US dollar is Halloween-esque questioning (rather than philosophical). Asking why Brent oil should have a 26% premium on WTI grade oil remains philosophical, but the real world moves on. Even Goldman Sachs has now done its mea culpa (in October) regarding the famous Brent/WTI premium, announcing this could shrink to "about $5" by the end of Q1 13. How come these strange premiums and held sway for so long?

Today, oil boomers looking and hoping for something that can boost prices, even on a few-days-only basis, have to scrape around in the geopolitical warchest. Syria's civil war might overflow Syria's borders, possibly triggering a kind of Arab Spring-2 in the Gulf Petromonarchies by Q2 13. Obama, with newfound confidence and cross-party support might get back on the Iran bombing trail, also. Anything is possible but these are frail hopes for the oil boomers.

The real action will come from Russia and Saudi Arabia when crude oil prices have sufficiently shrunk to ring warning bells among Kremlin and Wahabite powerbrokers, the Motley Crue which dominates global oil export price setting -- for the moment. The probable outcome is possibly surprising to some, and certainly disappointing to the oil boomers. Both of these secret -- and-sinister oil price setter powers are likely to accept without serious qualms that oil supply/demand fundamentals and global energy fundamentals dictate a New Normal "equilibrium price" for oil of around $75 per barrel for Brent.

Lower than that however, they are likely to get irritated or hostile, which both of them know how to do. Also irritated or highly stressed, the CEOs of almost any major Big Energy corporation worldwide will be anxiously looking for the floor price that oil hits on the downside. The stakes are mighty high: below oil prices as high as $75 a barrel -- sky high compared with any other form and type of energy -- oil exploration and development (E&P) spending will go into a tailspin and the heavily overstretched, overleveraged oil sector will be in a very tight financial situation. Prices below about $60 a barrel will make this party nastier than a bad Halloween, for Big Energy producers and oil exporter countries.

To be sure, none of this might happen. Oil prices might tremble along and down, slowly, as the background noise of news and views continue to rumble. Crash scenarios for prices, we can suggest are possible but are not likely, but the witches are watching.
Frankenstorm And The Oil Patch

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Frankenstorm And The Oil Patch

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