Oil may hit $100 on China, QE and France: JP Morgan

S

S2007S

I would really like that to happen, talk about a drop in consumer sentiment. $80 is high enough, $100 oil would hurt retail and consumers alike putting a huge negative against spending in the overall economy, there is no way this economy could support $100 oil. $100 oil is possible but the likely hood of it staying at that level and higher is not going to happen as the economy is still very, very, very weak.




Oil may hit $100 on China, QE and France: JP Morgan


LONDON | Fri Oct 22, 2010 6:35am EDT

LONDON (Reuters) - Oil may reach $100 a barrel sooner rather than later on Chinese demand, a dollar weakening due to anticipated U.S. quantitative easing and expected restocking of French inventories when strikes end, JP Morgan said.

The bank also raised its forecast for U.S. crude futures to an average $81 a barrel for the current fourth quarter from previous $75 a barrel. The 2010 and 2011 forecasts were raised by roughly $2 to $78.50 and $82.50, respectively.

"The key risk is that we are being too cautious and that the threat of $100 per barrel oil that is implicit in our fourth quarter 2011 oil forecast arrives much sooner than we expect -- driven by not only a weak dollar, but also by rampant Chinese and emerging market demand, the rebuilding of French strategic stocks," Lawrence Eagles of JP Morgan said in a research note. JP Morgan estimated supply disruptions caused by the strike at France's largest oil port Fos-Lavera since September 27 and industrial action at refineries reducing middle distillate inventories there by 8 million barrels in October.

France will have to rebuild fuel stocks as soon as the strikes end.

"In conclusion we can see the need for additional imports of diesel," the bank said.

"But should the strike fade over the coming weekend then the overall impact to French inventory levels will seem substantial but not catastrophic and should provide an opportunity for additional European imports of ultra-low sulphur diesel in the short term."
 
The price of oil is currently distorted. There is ample supply and no reason for it to trade above 65/bbl. even with China.
 
Without disagreeing with JP Morgan :) it would seem logical that in order for the situation in France to be significant going forward, it would have to have been a significant negative to pricing already.

Currency adjusted pricing (not $ pricing) is the biggest factor in the S/D picture. Oil producing economies will likely feel their own distresses if oil breaks below $70. It seems fairly clear that $100 oil in the US will likely result bring another wave of demand destruction.

It is absolutely unclear if the $ has another 20% down side. It appears the FED is talking up more QE as a threat to obtain support for re-balancing proposals (trade deficit cap's as a % of GDP - with exemptions for commodity exporters) that are being floated in preparation for the November G-20 Leaders Conference. Without another crisis on the horizon it will likely be every man for himself (ie no commitment to trade caps).

The Fed's bluff will get called. Or perhaps the Fed is in the process of creating the next global crisis?
 
Looks like the Fed is not going to carry the day - Bluff Called - Will the Fed carry on unilaterally and precipitate a trade war and another global financial crisis? Is the only alternative a second recession or worse in the US? These are tough and scary times.

Quote from Reuters
GYEONGJU, South Korea | Fri Oct 22, 2010 8:56pm EDT
GYEONGJU, South Korea (Reuters) - Group of 20 finance leaders will pledge on Saturday to commit themselves to pursue market-determined exchange rates and refrain from "competitive devaluation" of their currencies, a G20 source said.

A communique to be issued at the conclusion of G20 finance ministers' and central bank governors' meeting will state: "We're all committed to moving toward market determined exchange rates that reflect underlying fundamentals and refrain from competitive devaluation," said an official, who spoke on condition of anonymity. A U.S. official separately told Reuters the United States had no expectation its proposal of setting numerical targets on external balances would be mentioned in the G20 statement. The U.S. proposal, aimed at pressing countries with surpluses such as China to let their exchange rates rise, met with a cool reception on the first day of a two-day meeting meant to smooth the path for a G20 summit in Seoul on November 11-12.

The U.S. official said Washington knew that including specific targets for imbalances at this stage would be rejected by a number of countries with structurally high trade surpluses, including Germany and major commodity exporters. But it helped focus the discussions which initially were in disarray, he said. Speaking with knowledge of the night-long discussions, the source confirmed that the final statement would water down proposals on tackling external imbalances. "Persistently large imbalances would warrant an assessment,," the communique would state, he said. Such an outcome is what other G20 officials had predicted, given the disparate views of the diverse group.

China was against any limits on imbalances, another G20 source said on Friday. He also said there was a "rift down the middle" on currencies and International Monetary Fund reforms, and the final statement would be "bland." There was, however, broad agreement that "unilateral and uncoordinated responses" to shore up fragile economies could prove damaging for everyone, a source said.

In a letter read to fellow finance ministers of the G20 on Friday, U.S. Treasury Secretary Timothy Geithner said countries should act to reduce their current account imbalances below a specified share of national output. Japanese Finance Minister Yoshihiko Noda said Geithner, backed by host South Korea, proposed capping surpluses and deficits on the current account -- the broadest measure of trade in goods and services -- to 4 percent of national output. Noda also voiced skepticism. "We doubt whether rigid numerical targets should be set.

DOUBTS ABOUND

The criticism underscored the difficulties facing the G20 as it strives to put the world economy on a more stable footing and defuse currency tensions that economists fear could trigger trade wars.
While the G20 won praise for coordination of stimulus packages during the global financial crisis, its unity has been tested by low growth in rich countries and attempts by some emerging market economies to preserve export competitiveness by holding down their exchange rates. Saudi Arabia, Germany and Russia are the G20 members with the biggest current account surpluses, but China is the chief culprit in Washington's eyes -- and the unspoken target of Geithner's proposals -- because of massive currency market intervention to keep a lid on the yuan.

Beijing has amassed $2.65 trillion in official currency reserves as a consequence, and prompted the U.S. House of Representatives to pass a bill threatening retaliation unless China lets its currency off the leash to reduce its huge trade surplus with the United States. Chinese officials made no public comment, but a G20 source said Beijing was opposed to any communique that explicitly bound countries to limits on current account balances or any other form of rules on currency policy.

The source, with direct knowledge of the talks, said the group of rich and emerging economies was split not only on the question of currencies but also on how to give poorer countries more voting power at the IMF. A U.S. delegation official said the United States expected an agreement on the Fund's reforms would have to wait for next month's G20 leaders' summit in Seoul.
More...
 
The value of the dollar controls the price of oil, and by extension gasoline. Since many of our energy products come from other countries, the price of oil and gasoline becomes more expensive when the dollar cheapens.

Part of this is foreign oil producers being unwilling to be paid in less-valuable dollars, so they demand higher prices as compensation.

The other part is that Wall Street speculators already know what I just explained to you, so they jack up oil and other commodities in trading in reaction to American currency weakness and expectations of inflation.

You might have noticed summer is already over. So in normal times the price of oil and gasoline was supposed to decline as we bade farewell to what is known as the "peak driving season."

But because of the dollar's weakness, the supposed-to's turned into didn't-happen's. Oil prices are up nearly 13 percent in the past few weeks; gasoline is 10 cents a gallon higher in just the last 14 days.



Read more: http://www.nypost.com/p/news/busine...pay_more_5BeRRAdqhJLD0CRNgTQHWO#ixzz13BWDgxWE
 
For anyone wanting to build a better picture of oil markets, the United States Energy Information Agency has great set of articles located at the following link: Oil Market Basics

If you want a glimpse of how even global markets can be manipulated, check out this U.S. Senate Permanent Subcommittee on Investigations Report from 2006. This looks like the script that gave us $145 crude oil in early summer of 2008. At the time oil broke $140 the investment houses were predicting $175 / bbl oil before summers end. The "Enron" loophole got closed on June 18th, 2008. By that time oil had been peddled as a "long term" inflation hedge by the pro's to the chumps. Crude oil pricing collapsed from $145 to $106 during "peak driving season". The Role of Market Speculation in Rising Oil and Gas Prices

The '08 oil spike gave the US $4+ / gallon gasoline. This probably helped start the wave of mortgage defaults which lead to a popping of the US housing market bubble, and the financial meltdown that followed.

Everyone forgets the role that pricing has on "demand destruction". In the late 70's everyone was predicting $100 /bbl oil. Instead the US auto industry lost significant (and probably permanent) market share to fuel efficient imported cars.

Continued US$ devaluation will suppress US consumer demand because it will feed forward into commodity pricing placing more pressure on financially strapped consumers.
 
For anyone wanting to build a better picture of oil markets, the United States Energy Information Agency has great set of articles located at the following link:

Oil Market Basics

The Role of Market Speculation in Rising Oil and Gas Prices

----------------------------------------------

Question, I only took a cursory glance but do either of these reports discuss margin requirements? Any mention the role of cheap money on specualtion during this time period.?
 
There is one action that would have a dramatic effect in both bringing down the price of crude imported into the US, in spite of the lower dollar, and would go a very long way toward correcting the U.S. trade imbalance. All we have to do is act.

If the U.S. congress would finally pass a comprehensive energy plan that included Mr. Pickens recommendation that we convert all 18-wheelers and the entire Federal Fleet to natural gas, the price of crude will be held in check, and gasoline prices will come down.

Ultimately natural gas fueled cars should be phased in as well.

The U.S. has huge reserves of natural gas, according to Pickens.

Internal combustion engines are more or less easily converted to run on natural gas. There are already nationwide natural gas pipelines for easy distribution throughout the country.

Natural gas burns more cleanly than gasoline and engines burning natural gas stay cleaner.

Switching to natural gas would not do anything for the CO2 emission problem, but neither will rechargeable electric cars unless the electricity is generated by nuclear fission.

Pickens has not suggested natural gas as the ultimate transportation fuel, but instead as an interim fuel superior to gasoline for cars and trucks.

Pickens is correct. His proposals will be fought tooth and nail by the Big Oil Lobby, and supported by the nat. gas lobby, of course.

The biggest beneficiary would be the U.S. population who in spite of somewhat higher nat. gas prices would benefit enormously in the long run from the trade balance being corrected, and for other reasons as well.

Because this is such an obvious and doable proposal with great benefits, I am quite certain congress will fail to act and instead will spend their time endlessly debating whether a fertilized egg is a human being.
 
Quote from S2007S:

I would really like that to happen, talk about a drop in consumer sentiment. $80 is high enough, $100 oil would hurt retail and consumers alike putting a huge negative against spending in the overall economy, there is no way this economy could support $100 oil. $100 oil is possible but the likely hood of it staying at that level and higher is not going to happen as the economy is still very, very, very weak.




Oil may hit $100 on China, QE and France: JP Morgan


LONDON | Fri Oct 22, 2010 6:35am EDT

LONDON (Reuters) - Oil may reach $100 a barrel sooner rather than later on Chinese demand, a dollar weakening due to anticipated U.S. quantitative easing and expected restocking of French inventories when strikes end, JP Morgan said.

The bank also raised its forecast for U.S. crude futures to an average $81 a barrel for the current fourth quarter from previous $75 a barrel. The 2010 and 2011 forecasts were raised by roughly $2 to $78.50 and $82.50, respectively.

"The key risk is that we are being too cautious and that the threat of $100 per barrel oil that is implicit in our fourth quarter 2011 oil forecast arrives much sooner than we expect -- driven by not only a weak dollar, but also by rampant Chinese and emerging market demand, the rebuilding of French strategic stocks," Lawrence Eagles of JP Morgan said in a research note. JP Morgan estimated supply disruptions caused by the strike at France's largest oil port Fos-Lavera since September 27 and industrial action at refineries reducing middle distillate inventories there by 8 million barrels in October.

France will have to rebuild fuel stocks as soon as the strikes end.

"In conclusion we can see the need for additional imports of diesel," the bank said.

"But should the strike fade over the coming weekend then the overall impact to French inventory levels will seem substantial but not catastrophic and should provide an opportunity for additional European imports of ultra-low sulphur diesel in the short term."
More...
Who says so?
Goldman sachs yet again?

Google pump-and-dump
 
Quote from nutmeg:

For anyone wanting to build a better picture of oil markets, the United States Energy Information Agency has great set of articles located at the following link:

Oil Market Basics

The Role of Market Speculation in Rising Oil and Gas Prices

----------------------------------------------

Question, I only took a cursory glance but do either of these reports discuss margin requirements? Any mention the role of cheap money on speculation during this time period.?
More...

The CFTC has been in the business of monitoring the level of speculation in regulated commodity markets for years. Position limits are created to constrain pure speculation to a level that provides for price discovery without becoming excessive to a point where it can drive pricing beyond commercial supply / demand factors.

The "Enron" loophole provided a mechanism to allow significantly higher speculative positions beyond the oversight of the CFTC in look alike instruments traded in non-US electronic exchanges. This was not an issue of margin requirements (%) or cheap money. It reflects the idea that excessive speculative inflow can distort price discovery mechanisms. At this point most of what was recommended has found it's way into practice. It amazes me that the Senate report was published in June 2006. This corresponded closely to the begining of the rapid price acceleration in CL which peaked in 08. If supplies were so tight to give $140 / bbl in June 08, it's hard to envision that pricing could collapse as rapidly as it did. (Unless of course you accept that excessive speculation was at work here).

attachment.php


Key findings from the Senate report are shown below:

II. FINDINGS AND RECOMMENDATIONS
Based upon its investigation into the role of market speculation in rising oil and gas prices,
the Subcommittee staff makes the following findings and recommendations.
A. Findings
1. Rise in Speculation. Over the past few years speculators have expended tens of
billions of dollars in U.S. energy commodity markets.
2. Speculation Has Increased Prices. Speculation has contributed to rising U.S.
energy prices, but gaps in available market data currently impede analysis of the
specific amount of speculation, the commodity trades involved, the markets affected,
and the extent of price impacts.
3. Price-Inventory Relationship Altered. With respect to crude oil, the influx of
speculative dollars appears to have altered the historical relationship between price and
inventory, leading the current oil market to be characterized by both large inventories
and high prices.
4. Large Trader Reports Essential. CFTC access to daily reports of large trades of
energy commodities is essential to its ability to detect and deter price manipulation.
The CFTC’s ability to detect and deter energy price manipulation is suffering from
critical information gaps, because traders on OTC electronic exchanges and the London
ICE Futures are currently exempt from CFTC reporting requirements. Large trader
reporting is also essential to analyze the effect of speculation on energy prices.
5. ICE Impact on Energy Prices. ICE’s filings with the Securities and Exchange
Commission and other evidence indicate that its over-the-counter electronic exchange
performs a price discovery function – and thereby affects U.S. energy prices – in the
cash market for the energy commodities traded on that exchange.
B. Recommendations
1. Eliminate Enron Loophole. Congress should eliminate the Enron loophole that
currently limits CFTC oversight of key U.S. energy commodity markets and put the
CFTC back on the beat policing these markets.
2. Require Large Trader Reports. Congress should enact legislation to provide that
persons trading energy futures “look-alike” contracts on over-the-counter electronic
exchanges are subject to the CFTC’s large trader reporting requirements.
3. Monitor U.S. Energy Trades on Foreign Exchanges. Congress should enact
legislation to ensure that U.S. persons trading U.S. energy commodities on foreign
exchanges are subject to the CFTC’s large trader reporting requirements.
4. Increase U.S.-U.K. Cooperation. The CFTC should work with the United
Kingdom Financial Services Authority to ensure it has information about all large
trades in U.S. energy commodities on the ICE Futures exchange in London.
5. Make ICE Determination. The CFTC should immediately conduct the hearing
required by its regulations to examine the price discovery function of the ICE OTC
electronic exchange and the need for ICE to publish daily trading data as required by the Commodity Exchange Act.
 

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