Spot Life CL Apr 09

The reported causes of the first 10 days that the CL Apr 09 contract was front, or spot, month is below. The main story for that time was twofold: more bad news on the economic front and analyst estimations that OPEC had made good on as much as 85% of its supply allocation reductions made in the December 17 meeting. Most OPEC members sounded as if they were ready to cut further in the March 15 meeting in Vienna, though Iran, very atypically, suggested that "a solution" would be proposed at the upcoming meeting which would not require further cuts on the part of the cartel. Russia indicated that it would present some sort of proposal for cooperation at the meeting with the cartel, saying that its interests were completely aligned with the organization in the matter of supply.

The Obama Administration made some conciliatory moves in the Middle East, including dispatching two officials to discuss the situation with Syria, following on the French initiative and indicating that they were interested in bringing Iran into "big tent" discussions on Afghanistan. Saudi Aramco sent its first cargo of oil to its joint venture refinery expansion project in Fujian and the National Reform and Development Committee approved a slew of further refinery expansions and greenfield construction, including a potential plan with Rosneft in northern China.

The general economic news was very bad everywhere with Japan reporting a nearly 50% drop in exports in January. South Korea announced exports fell a further 17% in February after dismal showings in the last couple months. German industrial orders also contracted sharply. CDS spreads on a wide variety of sovereign and private debt climbed precipitously. Natural gas in the US fell below $4/MMBtu (~ $23.20/b on a Btu basis) primarily as a result of declining industrial demand.



The giant contango of 2008 continued, though it narrowed considerably from March 2. The one year differential fell from $13.09/b on February 23 to $8.10/b on March 6, or 38%.



After spending a long time at a premium to CL, front month Brent finally dropped to a small discount to front month CL--Brent is historically usually at about a $1-2/b discount to CL/WTI. (The controversy over CL's vulnerability as a price discovery mechanism for the US crude market continued to boil, with the CME announcing that it would have Bob Levin, its Managing Director of CME Group Energy Research and Product Development, lead a 7 hour on line seminar on CL on Thursday to discuss, and presumably defend, the CL contract. Platts proposed another pricing benchmark--the Americas Sour Marker.)



CL Apr 09 exhibited no linkage to the €/$ interbank exchange rate--and I suspect that the past perceived linkage is in a large part due to oil exporting nations purchasing large numbers of euros in order to keep their own currencies from appreciating too steeply--meaning that it would only exist as the price went up and would be led by crude, not the euro. Crude climbed 18.4% between February 23 and March 6. The euro fell by 0.3% from February 21 (a Saturday) and March 6.



Below is a chart of CL, the Russian ruble, Kazakh tenge, and the Nigerian niara percent change from close Jan 1, 08. Astana never really allowed the tenge to float much against other currencies, Moscow and Nigeria have both taken steps recently to reduce speculation against their currencies by domestic banks. (Moscow was especially irked that apparently monies given the banks to bail them out of the current crisis were used to speculate against the ruble.)



On March 6 the April 09 NG contract fell to $3.945/MMBtu (and the ICE Apr NG contract fell to about $3.9626/MMBtu at interbank exchange rates) mostly on the back of a decline in industrial demand. Some analysts forecast that the US NYMEX price might fall as low as $3.50/MMBtu (~ $20.30/b on a Btu basis) over the course of the year and then, on the back of increasing LNG supply, new US supply, and the steep decline in industrial demand to as low as $2/MMBtu (~ $11.60/b on a Btu basis.) Heating oil and diesel (which are nearly identical) cracks have fallen as the price of natural gas declines, though forward differentials are still pretty healthy. RBOB prices arguably resisted further declines in crude prices at the beginning of March, with the price of crude then chasing the crack--as expressed by Apr 09 RBOB - Apr 09 CL--back up.



However, the forecast relative competitiveness of heating oil versus natural gas has not translated into lower heating oil prices for delivery in the winters of 2009-11.



Commitment of traders reports would seem to indicate that the market is unclear of which direction it will go next--positions net long or short account for 0.32% of the market. Even with another OPEC cut (or Russian cooperation, perhaps the "solution" Nozari alluded to) it is unclear to me just where you will see the demand growth or storage availability to see large price gains near term. (If you look at the commitment of traders report for futures and options combined, there is a larger indication with 2.68% of open interest being held by traders net short or long. Given that commercials short to hedge against lower prices and non-commercials are long, the market would be signaling upwards price, but it is still a small share of the traders, given 2008.)



That said, volatility is extremely high just now, with 17 days since January 1 of price changes of 5% or more. Below is a chart of volatility for front month to month 12 delivery for CL from the beginning of the year until March 6.



As you can see from the graph below of price volatility since 1984, we have had more days with price moves of 5% or more than all but four years since 1984 in the first 65 days of 2009. Average volatility for the front month contract has been 4.365% for the first 65 days, well above average volatility for any given year from 1984 on. (Obviously that is not an apples to apples comparison, but I think it's still noteworthy.)

Daily Sources 3/3

1. Eurointelligence reports that according to a story in El Pais the director of the western hemisphere department of the IMF--Nicolás Eyzaguirre--at a conference in Oporto said that the organization would revise its global economic growth numbers downward shortly. The current forecast is 0.5% growth, the revised number may well be negative.

2. Greg Quinn at Bloomberg reports that the Bank of Canada reduce its benchmark rate by 0.5% to 0.5% today.

"'The Bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing,' the Ottawa-based central bank said in a statement. Details of how such a plan would be used will be released in April with a new economic forecast, the bank said"

3. Joshua Gallu at Bloomberg reports that Swiss GDP contracted by 0.3% in the fourth quarter from the third. "Exports fell 8.1% and investment declined 3.1%."

4. Peter Baker at the New York Times reports that Russian President Medvedev told Interfax that Moscow is "'working very closely with our U.S. colleagues on the issue of Iran’s nuclear program,' but not in the context of the American missile defense plan." Medvedev, who was in Spain, was quoted as saying:

"No one links these issues to any exchange, especially on the Iran issue. What we are getting from our US partners shows at least one thing: Our US partners are ready to discuss the issue. It’s good, because several months ago we were getting different signals—-that the decision has been made, there is nothing to speak about, that we have done everything as we have decided."

5. Mark Landler at the New York Times reports that Secretary of State Clinton said today that the Obama Administration will send two senior officials to Damascus to begin discussions with Syrian President Bashar al-Assad.

"'We don’t engage in discussions for the sake of having conversations,' Mrs. Clinton said, after a meeting with the Israeli foreign minister, Tzipi Livni. 'There has to be a purpose to them, there has to be some benefit accruing to the United State and our allies.'

The officials are Daniel Shapiro, who oversees Middle East issues at the National Security Council, and Jeffrey D. Feltman, the acting assistant secretary of state for Near East affairs. Mr. Feltman is a former ambassador to Lebanon, while Mr. Shapiro advised the Obama campaign on the region."

6. Barak Ravid at Haaretz reports that Israel has drawn up a set of "red lines" it will present to the Obama Administration regarding its potential talks with Tehran.

"1. Any dialogue must be both preceded by and accompanied by harsher sanctions against Iran, both within the framework of the UN Security Council and outside it. Otherwise, the talks are liable to be perceived by both Iran and the international community as acceptance of Iran's nuclear program.

2. Before the dialogue begins, the US should formulate an action plan with Russia, China, France, Germany and Britain regarding what to do if the talks fail. Specifically, there must be an agreement that the talks' failure will prompt extremely harsh international sanctions on Iran.

3. A time limit must be set for the talks, to prevent Iran from merely buying time to complete its nuclear development. The talks should also be defined as a 'one-time opportunity' for Tehran.

4. Timing is critical, and the US should consider whether it makes sense to begin the talks before Iran's presidential election in June."

Advice, of course, is one thing ... "red lines?" The strange news about the mode of advice coming from Israel is fairly reminiscent of the story in January about then-Prime Minister Olmert calling up then-President Bush to put the kibosh on US efforts at the UN regarding Gaza (see Daily Sources 1/13 #9.) Meanwhile, Glenn Kessler at the Washington Post reports that Secretary Clinton expressed doubts about the likelihood of talks with Iran working out in a private meeting with the foreign minister of the UAE.

"Clinton 'said she is doubtful that Iran will respond to any kind of engagement and opening the hand out and reaching out to them,' said a senior State Department official, who requested anonymity because he was describing a closed-door conversation."

Though I think it is wise to regard the potential of talks of Iran as particularly compelling, the repeated suggestion on the part of Israeli leadership that they are driving US policy is extremely unhelpful. James Dobbins has an opinion piece in the Washington Post which makes the point: To Talk With Iran, Stop Not Talking. "James Dobbins was the Bush administration's first special envoy for Afghanistan, in which capacity he worked with Iranian officials in late 2001 to help form a successor regime to the Taliban in Kabul."

"The time for exchanges of presidential correspondence and even face-to-face meetings may come, but that is not where to begin. Dropping the barriers to routine diplomatic exchanges between responsible officials speaking on the basis of existing policy is the easiest, lowest-risk means of crossing the threshold from not talking to talking. It also offers the possibility of getting the dialogue started now, while delaying higher-visibility, higher-risk initiatives until after the Iranian election. "

Worth reading in full.

7. Ladane Nasseri at Bloomberg reports that Iranian oil minister Gholamhossein Nozari OPEC will arrive at a "solution" to boosting oil prices at the March 15 meeting, but that it is unlikely to cut production further. Tehran is traditionally a price hawk, continually calling publicly for price increases (even while almost always being the largest cheater on the supply allocation.) Meanwhile, Karyn Peterson and Margot Habiby at Bloomberg report that a survey by the wire service shows that OPEC reduced its exports by 770 kb/d to 27.775 mb/d in February from January, or about 2.7%."Members with output quotas, all except Iraq, pumped 25.390 mb/d, 545 kb/d more than their target of 24.845 mb/d."

8. The Oil & Gas Journal reports that Islamabad is considering imports of Qatari LNG as opposed to Iranian natural gas imports via the proposed Iran-Pakistan-India pipeline. All sides have been arguing about price for years now and the question of price is complicated by arguments within the Iranian parliament over how best to utilize their natural gas resources. I also believe that nearly all Qatari plans for natural gas production capacity from their reserves are already accounted for, which suggests that perhaps Doha asked for a proposal.

"Pakistan has asked Iran to link the gas price to 70% of the price of crude oil against Iran's demand of 78%. According to Pakistan's ministry of petroleum, LNG imports from Qatar may ultimately be cheaper, as the construction and maintenance of the $7.4 billion pipeline would not be required. ...

Petroleum ministry officials sent the prime minister a proposal for importing LNG from Qatar, which would cost $12/MMbtu tied to an oil price of $100/bbl, while the price of Iranian imported pipeline gas would be $11/MMbtu."

On a Btu basis, $100/b of oil is about $17.24/MMBtu. (78% of that is about $13.45/MMbtu; 70% is about $12.07/MMBtu.) Iran apparently is asking for a price revision one year after commencement of the project and every three years subsequent to that--which seems reasonable enough, but is not the way that contracts are generally done in natural gas.

"According to the petroleum ministry, Iranian gas would be feasible only for power generation; it would be too costly for domestic and commercial gas consumers. According to a comparison based on a $40/bbl oil price, the cost of nuclear-based power generation is 4.1¢/kwh; imported gas would cost 8.8¢/kwh; Thar coal, 8.8¢/kwh; imported coal 9¢/kwh; oil 10¢/kwh; and wind-sourced power 12¢/kwh."

Discussions have been going on since forever--and I have written before that I thought the project has been compromised by earlier events--and I would say this news is further evidence of that. And yet the discussions continue.

9. Maher Chmaytelli and Nicholas Comfort at Bloomberg report that the Libyan National Oil Company has urged that ConocoPhillips, Hess Corp. and Marathon Oil Corp. to lower their share of production from the Waha oil venture.

"National Oil Chairman Shokri Ghanem said last year that Libya sought to cut foreign producers’ oil take to less than 20 percent, from as much as 49 percent. Libya has already revised contracts with Eni SpA, Occidental Petroleum Corp., OMV AG, Petro-Canada and Repsol YPF SA.

'The council agreed that negotiations should continue with the companies that are still procrastinating in approving the contractual changes proposed by National Oil,' the state producer said."

10. Desmond Tutu has an opinion piece in the New York Times excoriating other African leaders--which recently gave Sudan the chair of the Group of 77--for not endorsing the actions of the International Criminal Court which is expected to issue a warrant for the arrest of President Omar Hassan al-Bashir today. Franklin Graham, the CEO of the Billy Graham Evangelistic Association has an opinion piece in the New York Times arguing that the US should urge the UN Security Council to suspend the proceedings of the International Criminal Court to put a stop to the warrant, because to issue the warrant would likely plunge Sudan into further violence. He argues that peace needs to come before justice can be dispensed. I would go further and point out just how unlikely it will be to get Bashir to expect international opinion of him to get better in the future, meaning that his future is now tied to control of Sudan at any cost. Both are worth reading.

11. Jane Perlez and Waqar Gillani at the New York Times reports that militants attacked the Sri Lankan cricket team today. Eight people have been killed, of them six were policemen providing security. I can't imagine that such an act would make any organization all that popular in Pakistan.

12. Barry Ritholtz at the Big Picture carries the Bank of America's graphic Federal Open Market Committee guide:



Won't see a sizable number of voting inflation hawks until 2011.

13. Platts has entered the debate over WTI's suitability as a global or American crude oil pricing benchmark with a proposal for an alternative, the Americas Sour Marker (ASM).

"Following an extensive analysis of crude oil pricing in the US, Platts has concluded that WTI pricing is exhibiting a significant disconnect from global oil economics as well as from US Gulf Coast economics, a condition that is likely to persist. Market signals emanating from WTI create a distorted perception, as prices could be falling in Cushing, Oklahoma, while rising elsewhere or rising in Cushing while falling or stable elsewhere as seen in September when the US prices rose intraday by $25/b.

Platts believes that alternative pricing models can serve to provide better representation of the value of crude oil in the broader Americas markets. It is proposing to offer an alternative formed by the most competitive of four crude oil streams, Mars, Poseidon, Southern Green Canyon and Thunder Horse. These four crudes would form the Americas Sour Marker."