``Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” Lao Tzu, Chinese Philosopher
At the start of the year despite being apprehensive over the prospective performances of global equities markets we remain buoyant on oil prices on two basic premises; one, Peak oil, where about 80% of global oil reserves are held by national oil companies, non-transparency, market distortion from government intervention and politically instability from resource rich countries has continued to placed a restrain on the supply side from adjusting to market requirements.
For instance, would you believe that despite being an oil exporting country starting May 21st
When we say peak oil we mean the end of “cheap oil”. While technology has enabled access to once prohibitively costly oil patches [e.g. deep sea], national policy restrictions have been a huge barrier in expanding supply access even with such added technology at hand.
Take for instance
Yet Mexico’s national oil company Pemex suffers from foreign investment restrictions embedded in its constitution from which its two past chief executives have failed to persuade members of the Congress to have this lifted. As a result
Of course the other factor major factor is the declining US dollar.
Lately, I stumbled across a very compelling argument posed by analyst Elliott Gue of the Energy Letters where he notes of the present disconnect between the benchmark crudes of the WTI (West Texas Intermediate) and Brent Crude which could translate to a significant impact on oil prices.
Figure 3: Energy Letters: WTI-Brent spread breaks!
Figure 3 shows that in the past seven years WTI maintained an average premium of $1.72 relative to the Brent. However recently, the Brent Crude turned negative by a huge amount. Such negative spread reflects of the global demand supply imbalances which could possibly induce higher crude oil prices in the coming months.
Mr. Gue says ``When Brent trades at a significant premium to
Figure 4: Stockcharts.com: US Gasoline prices reach Major Resistance Levels!
Figure 4 shows that in the past 3 years, each time gas prices reach the resistance levels, oil prices hit the $70 or more per bbl area, however today we see a virtual lag in the WTI prices. Technicians may see today’s actions as a sell based on previous price behavior over the past three years, but I wouldn’t bet on it.
While gasoline inventories have been dropping, crude inventories have stayed high due to low refinery utilization or bottlenecks in the supply chain as refiners reduced outputs due to maintenance related outages. However the refiners are expected to pick up the slack by completing their maintenance work soon, and should be expected to use up quickly the higher than average inventories.
On the other hand, global inventories of crude oil have dropped sharply, crude oil inventories fell to about 80.5 million barrels last February. Further, the IEA estimates that the combined supply in the
In short, the negative spread reflects the quickening depletion of crude stocks abroad relative to the
Quoting Mr. Gue, ``But with US oil benchmark (WTI) prices below prevailing international benchmark (Brent) levels, US refiners are going to have trouble finding any oil to import; better oil prices are available internationally than in the US. Of course, there are certain oil supplies (such as Venezuelan heavy crude) that are relatively captive to the
``It's simple economics: If the US is going to attract imports, US benchmark prices will need to rise toward international levels and WTI will have to close its discount to Brent.”
``Moreover, as
So fill up your gas tanks as oil prices are due back to the $70 levels and above. On the hand, you may consider oil stocks as insurance.
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