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Tuesday, July 08, 2008

Energy Continues Down

Maybe the no-take on North Sea? I wonder if that could have anything to do with it?
Forties North Sea oil fell to the lowest in almost eight years relative to Dated Brent after a decline in refining profitability cut demand for European crude.
Prices fell after Vitol Group offered a cargo for a third day without attracting a seller. The trading company offered a shipment loading between July 20 and July 22 at a discount of $1.90 to the cost of August oil, it said.
The light, sweet crude oil refining margin in northwest Europe fell to a loss of $6.21 a barrel on July 2, according to data based on Bloomberg calculations. That's the biggest loss since Bloomberg records began.
Imagine that. Anyway, here's a place to glance at the action.

"The light, sweet crude oil refining margin in northwest Europe fell to a loss of $6.21"

Can't they make it up on volumne ?

One guesses that they tried it for a little while.

Date: July 8, 2008

Author: John Mangun

BUSINESS MIRROR, Manila, Philippines

“Outside The Box”

Title: “The High Oil Price Deception”

Every time you read the newspaper or listen to the TV or radio, you are being deceived. Every time you put gasoline in your car, you might be a victim of a global 1-2-3 swindle. Every time you nod your head in agreement that oil prices are supposed to be this high, a small group may be laughing all the way to their bank with your money.

We are repeatedly told that China is the reason oil prices are high. Yes, consumption in China and India has increased. However, with a few exceptions, consumption has dropped worldwide.

In what year did the Philippines consume the most crude oil? Wrong! The answer is 1998; we used 381,000 barrels per day (bpd). In 2007, the Philippines consumed 336,000 bpd. And we are not the only country which has passed peak demand. Here is a list of the peak crude oil consumption year for various nations; Japan-1996, Germany-1998, Italy-1995, Thailand-2005, Malaysia-2004, USA-2005, France-1980, United Kingdom-1996, Russia-1992. (U.S. Energy Information Administration, EIA)

Since 2006, China’s consumption of crude is up by about 400,000 bpd. Yet in April 2008, US consumption dropped by a massive 4.3%, over 800,000 bpd (Reuters, June 30). In fact, this drop is almost enough to offset the total worldwide growth in oil consumption from 2006 to 2007 (990,000 bpd; BP Statistical Review 2008). This one-month drop in US consumption is equal to two years of consumption growth in China and the April drop wiped out one year's worth of growth from China (325k bpd), Saudi Arabia (149k bpd) and India (168k bpd) combined. Additionally, Chinese demand is falling. From Reuters: “A decline in China's oil imports in April raised questions over demand. China's April crude oil imports fell by 3.9 percent from a year ago, official Chinese data showed.”

If excess demand may not be the problem, then perhaps there is a shortage of supply, driving prices higher. Except, world oil production has never been any higher than in first quarter 2008. Further, supply is expected to grow from the current 86 million bpd to over 120 million bpd by 2030 according to the EIA. But forget about 2030. What about 2008?

There is some disagreement that the demand/supply equation is in balance. But even with the occasional supply disruption for political (Nigeria, Iraq), weather (hurricanes in the Gulf of Mexico), or other reasons, there is no shortage of crude oil. Common sense says that if there was too little crude oil, why hasn’t there been a single case of consumers not being able to buy the gasoline and other products that they want? If demand is outstripping supply, where are the pictures of people standing in line around the world trying to by gas, as we saw for rice and bread?

And read this from Reuters on June 11, 2008; “Kuwait and Iran on Wednesday joined Saudi Arabia in slashing the price of their heavy crude exports to the deepest discounts in at least nine years. Kuwait cut the Official Selling Price of its crude by 40 cents a barrel to a discount of $4.20 a barrel, the deepest since at least late 1998.”

Now to the ‘dark side’ of oil prices, literally. When you read something like this, “US government regulators have found no wrongdoing in the oil futures market”, you are being mislead.

The commodity futures market is a valuable tool that helps keep both prices and supply stable. Producers (farmers) sell at a guaranteed price and buyers (bakeries) can take delivery of the commodity (wheat) at that price. The contract can be settled in cash but in every transaction, there is a set amount of the physical commodity that backs the trade. If you buy the wheat contract, you could take physical delivery and if you sell that contract, you may have to deliver the physical wheat. Because of this factor and government regulation, the amount of pure speculative investing is kept in check. Not necessarily true for the oil market.

More than 45% of all crude oil futures transactions take place on the semi-regulated Intercontinental Exchange (ICE), which operates outside of the complete oversight and regulation of the US Commodity Futures Trading Commission (CFTC) (Fortune Magazine July 2008). The trading may be legitimate, but the reporting requirements for the trading participants, particularly of what is called “large trade reports” and “speculative transactions” is not fully regulated.

Imagine you and I find a stock trading at 10. We buy and sell back and forth to each other until we reach 20. A similar process could be taking place in oil futures contracts.

The 1936 Commodity Futures Exchange Act and subsequent laws curtailed excessive speculation by placing position limits on traders who were first clearly defined as “speculators”. Speculators could only have a limited amount of open positions and laws limited the total amount of open ‘speculative’ positions on CFTC regulated exchanges. Not so on these less-regulated electronic exchanges. Speculators, not producers and end-users, can control the market.

If overall oil supply and demand is reasonably balanced and demand is dropping as it should in response to high prices, then why do oil prices continue to increase? Is unregulated speculation jacking up prices in a pure market price play? Price movement, inconsistent with underlying intrinsic value, results from excessive market speculation and causes price bubbles.

Speculative price bubbles cannot continue forever. Oil prices will plunge. This type of disproportionate speculation borders on price manipulation. Manipulative fraud cannot continue indefinitely. Oil prices will plunge. World consumer demand is contracting daily. Oil prices will plunge.
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