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Economic & Petroleum trends collide this week, or do they?

Some very interesting coincidences this past week.

US recent economic growth has been revised upward to close to 4%, while the IEA has been once again warning that high oil prices will ruin growth (presumably trying to scare OPEC into thinking that, despite the data, they are killing the goose that laid the golden egg). Obviously the current prices of petroleum is not slowing growth significantly.

Interestingly enough, and contrary to what many individuals are experiencing in their own live, the US Govt. reported lower inflation number this week, to go along with the higher revised growth. One would think that, it would be through inflation that high oil and gas prices would cause economic damage. So far, apparently the damage has been light. Certainly not enough to scare OPEC into taking a gigantic pay cut by reducing prices. Remember that the only way to reduce prices is for the Saudis to produce more. This might maintain their income, but all the other exporters would see reduced revenue because they can't increase their production.

Do you think that Govt. and Industry observers have been able to put two and two together and start to understand the import of the "Peak Oil" concept at this late date? With only one country as swing producer for World Petroleum supply, is it any wonder that forward looking governments, like those in Asia, are out spreading around cash, trying to guarantee their own future supplies, while there are still some uncommitted? If you look at the Backwardization of the prices in oil future contracts in the farther out months and years, you will note that the prices decline farther out into the future, although Contango (increasing prices) has shown up in the near months. With the futures markets allowing you to buy crude for future delivery, at prices significantly cheaper than you can today, the inescapable conclusion is that more traders (and their brokerage houses, financial institutions, and hedge funds that buy and sell the contracts) apparently still don't get it. The are banking (literally) on their belief that prices will decline significantly and stay there. The evidence for this apparently is that prices have declined in the past and that nothing ever really changes. Since oil used to sell for $3 for many years, this belief is not difficult to demolish with actual facts.

Also this past week, we saw the Department Of Energy issue their weekly petroleum storage and inventory numbers a day late because of the holiday on Monday. The levels came in at amounts that should have been bearish for oil and gas, but the commodities moved higher and stayed well above $50. Could the Markets be starting to consider the secular trend rather than minor daily changes in demand due to weather and "lumpy" shipment schedules (where an extra ship or two unloading can temporarily change the storage numbers, until the next week when there are a couple fewer landings)?

The Saudi OPEC representative, in an interview this past week, said that they'd be content with $45 to $50 oil, moving the prior $40 OPEC floor higher than any other OPEC member statement to date, at least that I have seen. I have contended that we have a $40 (spot WTI price) floor on crude and that the Saudis, as the only OPEC swing producer, will cut production only if prices fall below that level. Lately they seem to have added a storage ceiling to the Intervention Trigger. If storage exceeds 51 days of supply, they will restrict supply in order to reduce inventories and support the price.

As usual, the Analysts seem behind the curve, so here is a story that gives (only) some of the reasons why almost every Major Broker firm analyst has been consistantly wrong about petroleum prices (and therefore petroleum companiy profits) for the past few years.
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Oil price surge defies forecasters
Even investors aren't factoring in $50 crude
By Lisa Sanders, MarketWatch
Last Update: 12:01 AM ET Feb. 26, 2005


DALLAS (MarketWatch) - As crude-oil futures climbed above $51 a barrel this week, analysts threw up their hands and wondered why.

"None of the historical correlations analysts have used - inventories primarily for oil, storage for natural gas, natural-gas and oil prices for rig counts -- work," said Jim Wicklund, managing director of energy research at Banc of America Securities.

"No one can really explain, with anything but a very broad brush, why crude oil prices are as high as they are."

Pointing to the Energy Department and American Petroleum weekly U.S. inventory reports, James Williams, an energy economist at WTRG Economics, said nothing in the data supports prices at this level. See Futures Movers.

That view is widely shared. Nevertheless, the benchmark light, sweet crude oil contract for April delivery finished the week up 10 cents at $51.49 a barrel despite the Energy Department's report of a build in crude supplies. For the week, the contract was up 5 percent.

A few analysts upped their price forecasts this week, including Deutsche Bank and Prudential Equity Group. Prudential increased its outlook for 2005 oil to $42 a barrel from $35 amid an upgrade of integrated oil stocks. See Ratings Game.

Still, analysts polled by Thomson First Call said they expect oil to average $40 a barrel. That's $1 higher than the January estimate and $2.43 more than the December estimate. See archived story.

Raymond James is ahead of most brokers' estimates with a $44 oil price forecast for 2005.

"But we're still too low," said Marshall Adkins, managing director of energy equity research at Raymond James. "There has been a fundamental shift in the oil markets."

One reason for the disparity between forecasts and the current price of crude is a bias on the part of analysts. Most analysts believe that oil will return to normal levels, though he said there's no longer a good way to gauge what is normal.

"This time is different than other times," Adkins said. "We've always had an oil bubble in our existence, where there was more supply capacity than demand, and that's essentially not the case anymore."

Secondly, demand from China has skyrocketed. And thirdly, in some areas of the world, supply growth has hit a wall.

Analysts are biased in another way.

"We're as guilty of this as anyone," Adkins said. "As analysts, you would rather be too conservative on your forecasts than too aggressive because you have to do more explaining on the high side than on the low side."

Even oil and gas equity investors aren't factoring in $50 oil or $7 natural gas into their equations, though the meteoric rise in the share prices of those companies, including Exxon Mobil Corp. (XOM: news, chart, profile) , give some pause. See Energy Stocks.

Adkins estimated that most investors are still using $30 oil and $5.50 natural gas prices as their market yardsticks.

"If you plugged in $50 oil and $7 gas into the numbers for exploration and production companies and the majors and carry that through to the service companies, you would end up with phenomenally large earnings," he said.

Under that scenario, oil and gas earnings would account for 20 to 25 percent of all S&P 500 earnings. Last year, they accounted for about 15 percent of the S&P 500 earnings.

Looking ahead, Raymond James has an oil price forecast of $40 for 2006 and beyond.

"We view that specifically as a floor, recognizing that in all probability, the prices will be meaningfully higher," Adkins said. "It's a floor because that is the price OPEC now seems willing to defend."

posted by agrossfarm @ 6:52 AM