-->The Energy Report for Tuesday, November 9, 2004
Phil Flynn
Tuesday, November 9, 2004
Which deficit should oil traders focus on? Should they worry most about the US trade and budget deficits that's sending the Euro to all time highs and the dollar plunging? Or should the focus be on the deficit of heating oil supply that is running behind where we need to be. Which ever issue becomes the primary focus, it's all supportive to energy.
Early yesterday the session felt the technical weight of last week's sell off. The petros rallied to higher on the day but couldn't gather strength to stay there. US troops on the move in Fallujah gave a sense that the expected victory will reduce terrorist disruptions of Iraqi oil exports. And the market had to contend with an overly weak natural gas market. Despite the negatives, the market really didn't break down either.
How do you say,"brutal" in French?! Euro Bank President Jean-Claude Trichet raised the art of jaw boning to new heights and that moved a market to new highs! He said,"The recent moves, which tend to be brutal on the exchange markets between the euro and the US dollar, are not welcome from the stand point of the European Central Bank". We're sure the French pronunciation of"brutal" is not"delicate". The French will of course speak for themselves because if you ask US exporters they're going to tell you"brutal" is great for business. They'll also say the Euro zone has been hiding behind the skirts of a strong US dollar for far too long. A falling dollar will also give good support to the energy markets. A down draft will be difficult to continue with a US dollar that is falling.
The Nigerian strike watch is back on again. Oil workers are under a lot pressure by Royal Dutch Shell not to go on strike. The market assumes there will be no strike so if it does end up happening, we could see a pop in the energies. Stay tuned.
The Un oil for food scandal in Iraq is continuing to unravel. Another suspicious link of a country that had a vote in the UN Security Council has surfaced. Today's Wall Street Journal reports a former executive of one of China's largest weapons makers received 8 allotments to buy 23 million barrels of Iraqi oil from Saddam Hussein. This same company was penalized by the US for selling ballistic missile technology to Iran. Are US soldiers risking their lives to bring freedom to the Iraqi people while they try to dodge Chinese missiles bought with dirty Iraqi oil from Saddam Hussein under the approving eye of the UN Security Council? Saddam Hussein had 12 years to abide by the UN approved sanctions due to Iraq's invasion of Kuwait. The reason these sanctions were never enforced and Hussein and his brutal regime were allowed to operate was because our"friends" at the UN were paid off! We're at the truth of why the UN didn't vote to enforce their own sanctions. We look for the whole ugly truth of the matter to shine in the light of day and those guilty parties held accountable. Stay tuned.
Nukes are back. With President Bush back for a second term, we see the nuclear industry getting all charged up. Today's WSJ reports there is a plan to build the first nuclear power plant in 2 decades. Good reading and hope you check it out.
At the risk of sounding like a broken record, we're buying breaks! The correction was bigger than I thought for but believe the reward will end up being much bigger than the risk. We're staying the course and you can too when you open your account with me! Call me at 800-935-6487 and ask for Phil Flynn. Long calls may be the answer for you. Want a free trial of Alaron Energies? Call me. See me on CNN-fn at apprx 8am central and tomorrow on Bloomberg News for Fed talk between 1pm and 2pm central.
We're long dec crude from apprx 4850 - raise stop to 4813.
We're long dec heating oil from apprx 13600 - raise stop to 13430.
We're long dec unleaded from apprx 12600 - stop 12500.
Stopped on long dec natural gas from apprx 787 at apprx 782. Buy dec natural gas at 743 - stop 737.
Have a GREAT day!
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Just how high will oil prices go?
Marc Faber
November, 2004
I maintain the view that we may see sometime in future far higher prices than anybody envisions. The current oil bull market is purely a function of increased demand coming principally from Asia at a time global oil production has practically no spare capacity. China's car population has more than doubled since 2002.
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Since its last major low in 1998 at $12 (when The Economist published a very bearish piece about oil), crude oil prices have climbed to around $50 at present. The question, therefore, arises whether oil prices are headed for a sharp fall, as most analysts seem to think, or whether far higher prices could become reality in the years to come.
Over the last two years we have repeatedly explained how rising demand for oil in Asia would likely lead to higher prices - this especially because we took the view that the oil producing countries in the world were unlikely to be in a position to increase their production meaningfully.
At $50, one might, however, be tempted to think that oil prices are substantially over-bought - certainly from a near term perspective - and ready to decline again. Therefore, I have noted that numerous market participants have been shorting oil futures in the hope of a sharp fall.
I do agree that near term oil prices might succumb to some profit taking. Bullish consensus runs above 80% and oil has become a popular topic of discussion in the media and at every investment conference I attend.
Moreover, the US administration could decide to sell oil from its strategic reserve, which currently exceeds 630 million barrels. Thus to sell daily 2 million barrels into the market amounting in total to 120 million barrels over a two months period would be an option if prices continued to soar.
Also, since Chinese oil imports were up so far in 2004 by more than 40%, I suspect that some inventory accumulation also occurred in the Middle Kingdom.
Therefore, if the Chinese suddenly decided to curtail their oil imports the same way they stopped buying soybeans in March 2004 - an event which led to an almost 50% decline in prices - prices could come under some near term violent pressure! Still, I maintain the view that we may see sometime in future far higher prices than anybody envisions.
First of all, if we look at oil prices in real terms - that is oil prices adjusted for inflation - the real prices is right now still about 50% lower than it was at its January 1980 peak. In fact, oil is now not much higher than it was in the early 1970s, when the last big oil bull market got underway.
But, what is important to understand is that whereas the 1970 oil price increases were coming from a supply shock, which was driven by OPEC cutting its production all the while large production excess capacities existed, the current oil bull market is purely a function of increased demand coming principally from Asia at a time global oil production has practically no spare capacity which could lead to much higher production than the current 80 million barrels per day.
So, whereas we can say that the 1970s oil shock was 'event driven', today's oil price increase is structural in nature. Specifically the current demand driven oil bull market is fueled by the incremental demand coming from the industrialization of China and the rising standards of living around Asia, which increase the population of energy using consumer durables such as motorcycles, air-conditioners, and cars very rapidly.
Just consider that China's car population has more than doubled since 2002 and that it is up tenfold since 1994! Thus, as mentioned above, oil imports of China have risen by 40% so far in 2004. And while I certainly do not believe that Chinese oil imports will rise every year by 40%, it is equally unlikely that oil imports into China will ever decline again meaningfully.
In fact, if we look at what happened to per capita oil consumption during phases of industrialization in the US between 1900 and 1970, we see that per capita consumption rose from one barrel per year to around 28 barrels. In the case of Japan's industrialization between 1950 and 1970 and South-Korea's between 1965 and 1990, per capita oil consumption rose from one barrel to 17 barrels.
In the case of China, oil demand per capita is still only 1.7 barrels per year, and for India it has only reached 0.7 barrels. By comparison Mexico consumes annually about 7 barrels of oil per capita and the entire Latin American continent around 4.5 barrels.
Therefore, starting from such a low base, oil consumption in Asia will, in my opinion, double in the next ten to 15 years from currently 20 million barrels per day to around 40 million barrels per day.
Remember also, that if China's per capita oil consumption went to the level of Mexico's per capita consumption China would consume 24 million barrels of oil daily, which would be close to 30% of global production. And since it is most unlikely that current total global oil production of 80 million barrels per day can be increased much - in fact, it may begin to decline because no major oil field has been discovered since 1965 - I expect that prices will increase further in future - possibly far more than anyone is now expecting.
I would, therefore, be very careful when shorting oil and would rather use any weakness, as a buying opportunity.
Lastly, I do concede that if oil prices tumbled to say USD $40 or possibly even $35, equities around the world might well rally temporary (in fact equities would rally in anticipation of such a decline). However, if I am right that in future oil prices could rise much further than is generally expected, geopolitical tension would likely increase dramatically, as countries such as the US and China would increasingly become concerned about adequate supplies.
And, in the case that oil prices were to rise in real terms to their 1980s highs - well over US$ 100 - then the foundation for World War Three would be laid and most certainly begin to weigh heavily on equity prices for which I cannot share the prevailing widespread optimism anyway. Financial stocks have begun to weaken and this is an indication that something is not quite right!
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Oil Prices Too High,Should Decline Much Further-IEA
Nov 09, 2004
WASHINGTON, Nov 09, 2004 (ODJ Select via COMTEX) -- (Dow Jones)--The head of
the International Energy Agency said Tuesday world oil prices should continue to
decline but remain"much too high."
IEA Executive Director Claude Mandil said prices should fall further given
current supply-demand fundamentals barring unexpected supply shortfalls or an
OPEC production cut.
"Even after falling under $50 a barrel, oil prices are much too high and do not
correspond to the fundamentals. There is more supply than demand today. Prices
should decline much further," Mandil told reporters after speaking to the Center
for Strategic and International Studies.
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gekürzt
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"My understanding is that the U.S. government shares (our) view," Mandil said.
"I do not say it should never be used but, as is the case with any strategic
reserve, it should be used in case of real supply disruptions."
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