BreakAway Investor
By Andrew Mickey


Continued investment in new oil production will cause oil prices to fall once again. Its basic supply and demand. OPEC might not like it, but oils headed back to $30. Yep, I said it. Within four years oil prices will be back to OPECs ideal range. Its all part of the boom and bust cycle of the energy industry.


I know it seems unlikely now. But it didnt seem likely in the early years of the Reagan administration either. What will happen when it does fall back to $30? Think about it.


Will you and your portfolio be prepared? Ethanol will cool off and stockholders will be left holding the bag. Home Depots solar panels will likely be found conveniently stored away next to all the other half-finished home improvement projects in millions of half-finished basements across the country. And the $4,000 premium everyone paid to get his hands on a hybrid car will become something I dont like to talk about.


Chrysler will be king of the car world. It wont be able to produce enough gas-guzzlers to satisfy the return of the American demand. Car companies will go back to stuffing as many airbags into a car as possible and filming commercials with close-ups of the J.D. Power & Associates trophy every car seems to win. And dont even get me started about oil sands.


There are a lot of bets being placed on oil prices remaining high, please take note that the big oil companies are not banking on oil prices remaining this high. They realize the downward spiral of oil prices over the past month proves the amount of speculative dollars that were being pumped into buying up oil. They arent even basing their capital budgeting decision on $50 or $60 oil. Theyre planning on $30 to $40 oil.


Theres still plenty of opportunity left in the oil service industry, though. After all, these companies have a lot of work to do to get oil prices back to a reasonable level.


Finally, lets take a look at the inflation-adjusted history of oil prices: In 1974, oil climbed to $40 a barrel. Oil lingered in the $30 to $40 range for almost seven years -- until 1981, when oil surged to $70.


Following that high, oil prices steadily fell back into the $40 to $50 range over the next couple years. Then, about five years after hitting $70, oil was trading at $15 a barrel and wouldnt reach above $40 for any sustainable period of time for almost two decades.


If you want to play oil, and I encourage you to do so, put your money in the companies that will be playing a big role in getting oil prices back down to normal. Oil service stocks will remain highly profitable and will continue to grow, at least for a few more years

Nymex Oil Falls as Iran Standoff May Be Nearing a Resolution - By Robert Tuttle


Sept. 22 (Bloomberg) -- Crude oil fell, ending a fourth week of declines, on signs the standoff with Iran over its nuclear program may be nearing resolution.

Iran is willing to discuss suspending uranium enrichment, the country's president Mahmoud Ahmadinejad said yesterday at the United Nations. The UN Security Council had given Iran until Aug. 31 to suspend enrichment or face possible sanctions. Concern Iran may cut oil exports if faced with sanctions helped push oil to a record this summer.

The Iranians ``seem to be willing to make a few concessions and that's liable to take a little more risk premium out of the market,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.

Crude oil for November delivery fell $1.04, or 1.7 percent, to close at $60.55 a barrel on the New York Mercantile Exchange, down 23 percent from the record of $78.40 a barrel reached on July 14. Futures for delivery in November are down 5.4 percent this week. Oil has declined four straight weeks, dropping 17 percent since Aug. 25.

Crude oil also fell as speculators became more cautious about trading energy futures after Amaranth Advisors LLC, a hedge fund which had $9.5 billion of assets in August, said it lost $6 billion this month in wrong-way bets on natural-gas prices.



Fund Liquidation

Amaranth ``obviously has added to the recent downside pressure,'' said Phil Flynn, a commodities trader for Chicago- based Alaron Trading. ``There has been a lot of fund liquidation.''

The United Nations Security Council is demanding that Iran, the world's fourth-biggest oil producer, stop enriching uranium, a process that can produce nuclear fuel or the core of a nuclear bomb. Iran missed an Aug. 31 UN deadline for suspending enrichment.

``The market concerns on Iran have been largely assuaged,'' said Jason Schenker, an economist with Wachovia Corp. in Charlotte, North Carolina. ``It's in everybody's best interest that there is some sort of resolution'' to the conflict.

In London, Brent crude oil futures for November settlement fell 93 cents, or 1.5 percent, to $60.41 a barrel on the ICE Futures exchange.

``With anything bullish you'll see the market reacting to it, but in your heart of hearts at the moment we are still in a negative trend,'' said Richard Harvey, a broker with ABN Amro in London. The price of ``$60.30 on Brent would be a floor level after which you might see more selling.'' Brent touched $60.30 a barrel on Sept. 20, the lowest since March.

Oil traders have been keeping tabs on comments by Ahmadinejad and Venezuelan President Hugo Chavez, who were in New York this week with other world leaders for the UN General Assembly.



Export Disruptions

The two countries are among places where ideology could disrupt oil exports, analysts say. Leaders of the two countries were both critical of the U.S. government this week, with Chavez referring to President George W. Bush as ``the devil'' and a ``world tyrant.''

Even so, ``not a drop of oil has been shut in by any of the speeches this week,'' Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut, said in a note.

Iran, the Organization of Petroleum Exporting Countries' second-biggest producer, pumped 4.02 million barrels of oil a day in August, according to Bloomberg estimates. Venezuela, OPEC's fourth-biggest producer, produced 2.5 million barrels a day.

OPEC, which pumps about 40 percent of the world's oil, last week forecast global daily demand will rise 1.4 percent to 84.4 million barrels this year, and 1.5 percent next year to 85.7 million barrels.



Production Quotas

The 11-member group left its output target of 28 million barrels a day unchanged at a Sept. 11 meeting.

``With oil above $60, there is going to be considerable external pressure for them to maintain the current production quota,'' Schenker said.

The target will be reviewed again in December. Ministers from Nigeria, Iran and Algeria said they were concerned about the pace of declining prices.

``I think the cartel is a little bit split right now,'' Flynn said. ``Whenever we hear this kind of rhetoric, we are near a point where they may cut back production.''



Supplies Jump

Oil sank to a six-month low of $60 a barrel in New York on Sept. 20 after a U.S. Energy Department report showed the nation's gasoline stockpiles rose a fifth week and distillate supplies, including heating oil and diesel, reached a seven-year high.

U.S. distillate inventories, including diesel and heating oil, jumped 4.1 million barrels to 148.7 million last week, their highest since January 1999, the Energy Department reported on Sept. 20.

Gasoline supplies rose 560,000 barrels to 207.6 million, 6.2 percent higher than a year ago.

Oil supplies, which fell for a third straight week, dropping 2.85 million barrels to 324.9 million barrels, may begin to rise as refineries shut units in the fall for planned maintenance.

``The refinery maintenance is going to be even more bearish pressure on crude prices,'' said David Kirsch, an energy markets analyst at PFC Energy in Washington. ``You are not going to have that demand in Europe and the U.S.''

FT - September 22 2006 - By Chris Flood

Crude sinks towards $60 level


Crude oil threatened to sink below the $60 a barrel level this week for the first time in six months, continuing a retreat in which prices have fallen more than 20 per cent since early August.

Crude has reached a level at which traders suspect Saudi Arabia might start to trim output and put pressure on members of the Organisation of the Petroleum Exporting Counties for a production cut.

Petrologistics, the oil consultancy, estimated that Opec had pumped 400,00 barrels a day less so far this month compared to August, mainly due to lower output from Saudi Arabia and Iran.

Nymex November West Texas Intermediate fell 62 cents to $60.97 a barrel on Friday, taking the decline for the front month contract over the week to 3.7 per cent. ICE November Brent dropped 53 cents to $60.81 a barrel on Friday, falling 4 per cent this week.

Growing confidence that the US is well stocked to meet energy demands this winter, even in the event of prolonged spell of cold weather, dragged Nymex October heating oil 3 per cent lower this week to $1.6520 a gallon. With natural gas stocks on course to reach their highest level since 1974, there was more downward pressure on prices with Nymex October Henry Hub falling 4.6 per cent to $4.75 per million British thermal units this week.

Traders say the start of refineries autumn maintenance programmes should provide support for product prices in the fourth quarter.

Production of biodiesel in the European Union is expected to rise to 4.5m tonnes next year, an increase of more than 40 per cent in two years, raising concerns that there might not be enough vegetable oil produced to meet demand.

Gold rose 1.3 per cent to $586.60 a troy ounce this week, helped by weakness in the dollar. After holding above $570 early in the week, dealers said gold was building a base, helped by a return of consumer interest and physical buying, especially from India for the approaching festival season. This could prove an important support for prices after a fall of almost 30 per cent in world jewellery fabrication in the first half of this year.

Silver rose 2.9 per cent to $11.12 a troy ounce while platinum fell 1.5 per cent to $1,140 but palladium gained 1.6 per cent to $313 a troy ounce.

Aluminium firmed up 0.5 per cent at $2,540 a tonne as a conference held this week in Moscow suggested that the market would remain balanced next year but growing annual demand of 2m tonnes would cause deficits thereafter.

Rusal, the worlds third largest aluminium producer, outlined ambitious investment plans to spend $16.7bn to double annual output to 5m tonnes, as it seeks to become the world No.1 producer.

Base metals were firmer over the week. Copper rose 3.6 per cent to $7,530 a tonne. Nickel rose 8.8 per cent supported by ongoing strike action at Incos Voisey Bay mine in Canada. Nickel remains underpinned by low stocks, strong demand and tight supply.

The Business - 24 September 2006

Saudis plan to boost output by up to 1.5m - By Rupert Steiner


SAUDI Arabia, the worlds largest oil producer, is planning to boost future production capacity by 1.5m barrels a day to counter potential supply disruptions expected from Iran, Venezuela and Iraq. The Kingdom, which owns 25% of the worlds proven reserves, has previously said production capacity would be sustained at 12m barrels. But in a private briefing to investment bankers on Thursday, executives at Lehman Brothers in London were told by representatives of the Kingdom that the revised figure for production will be up to 13.5m barrels a day by 2011.

They were presented with an updated assessment document entitled Saudi Arabias Strategic Energy Initiative: Safeguarding Against Supply Disruptions which has been prompted by regional conflict and high oil prices.

The Saudi oil authorities, under Ali al-Naimi, are embarking on $30bn (E44bn, $56bn) of downstream expansion projects over the coming years and are talking to investment banks competing for the project finance work. Saudi oil advisers plan to meet executives from other banks this week.

The higher-than-expected oil capacity will come on stream from three oil fields: Munifa, with 900,000 extra barrels per day, and Shaybah and an unconfirmed third field contributing 300,000 extra barrels each. The increase in production has been prompted by geopolitical tensions. The briefing document, which has been seen by The Business, says: In light of regional conflict and high oil prices, the Saudi leadership has recently issued a directive to decouple energy and foreign policy, and to remove all political considerations from oil production decisions.

To increase production so as to mitigate against effects of major supply disruptions from four key exporters of concern: Iran: threats to use oil as a political weapon; possibility of war with US. Venezuela: Threats to use oil as political weapon. Nigeria: Continuing unrest. Iraq: Successful attacks against oil infrastructure and likelihood of civil war.

New information contained in the briefing says that by June 2007 Saudi Arabia is expected to have enough spare capacity to offset all Iranian exports. By 2009/10 the goal is to satisfy global demand during a potential disruption from Iran and one of the three other major Opec exporters.

Saudi Arabia is one of the few countries which has the means to increase production capacity. Iran and Venezuela lack capital for expansion, face increasing domestic demand and their political environments precludes foreign investment.

Iran currently exports between 2.2m to 2.4m barrels of oil a day. Saudi Arabia exports nearly four times as much, approximately 8.5m and its spare capacity is 1.8m-2m.

Venezeulas president Hugo Chavez has nationalised privately owned oil fields and unilaterally rewritten contracts requiring foreign oil companies to pay the state higher royalties than they originally agreed. He has also threatened to use the oil as a weapon against the US.

Nigeria and Iraq lack the capital, security and stability necessary for capacity expansion.

Saboteurs have dented oil production in Nigeria. Oil production is down by around 550,000 barrels a day, because members of the Movement for the Emancipation of the Niger Delta seek to emancipate the oil-rich region from what it sees as exploitative foreign oil companies. It wants to return the countrys oil wealth to the people and is attacking pipelines and kidnapping foreign oil workers.

In Iraq, oil production is at least 500,000 barrels a day lower than the 2m produced when Saddam Hussein was in power. The US and Iraqi military find it hard to stop saboteurs blowing up pipelines after they are repaired.

Saudi Arabia has eight refineries with a combined crude throughput capacity of 2.1m barrels a day and about 1.75m of overseas refining capacity. The Kingdom plans to upgrade and expand the Rabigh refinery by 425,000 barrels a day.

It will expand its refining capacity in North America, building two new domestic and three new overseas refineries in the next five years creating the worlds largest refinery.

Some in the oil industry warn Saudi Arabias targets are overambitious a number of variables stand between it setting bold production goals and achieving them. But in the past three years, Saudi Aramco, the state-owned oil company, has increased its sustained capacity by 800,000 barrels a day. And it is investing heavily between 2004 and 2009, the Saudi government will have spent more than $17bn (9bn, e13.3bn) to increase its upstream capacity.

Dai,

I think this is the key sentence!


"executives at Lehman Brothers in London were told by representatives of the Kingdom that the revised figure for production will be up to 13.5m barrels a day by 2011"


2011 is five years away, and with the continuing world demand, is unlikely to depress the price much, if at all, when this extra production is brought online IMO.

There are people that say the saudis are having propblems with their existing fields, including Ghawar!

One example can be found by clicking HERE

Another by clicking HERE

Andy - 2011, yes that's very key.

I have seen articles stating the poo will drop fiuther and then they go and talk about the recent big find in the GOM being an integral party of the imminent change down per barrel.

Makes me laugh!

New York Times - Published: September 25, 2006 - By HEATHER TIMMONS and CARTER DOUGHERTY

Oil Prices Fall as Speculators Retreat


LONDON, Crude oil prices traded below $60 a barrel today for the first time in six months, as speculators continued their retreat from the commodity markets, worried by cooling economies and an improving picture for oil supplies.

Today, the market reacted to news that Iran had agreed to hold talks about its nuclear program, and that the oil giant BP would resume pumping oil from Prudhoe Bay, Alaska, ahead of schedule. But analysts said the decline had as much or more to do with underlying economic factors, particularly slowing economic growth in the United States.

The benchmark price for a barrel of light, low-sulfur crude to be delivered in November traded as low as $59.52 a barrel on the New York Mercantile Exchange, before rallying in the last 90 minutes to reach $61.40 a barrel at the close of floor trading, a gain of 76 cents.

More broadly, oil prices have fallen 24 percent from their peak in July, when they were driven up on heavy speculation by traders and hedge funds over signs that geopolitical tensions and hurricanes would crimp supply. As it happened, few supply problems actually developed.

Where oil prices may be headed next is a matter of considerable debate among experts.

The oil markets fundamentals have finally asserted themselves, the Center for Global Energy Studies wrote today in a report. The upward momentum of oil prices disappeared, and it will therefore take a combination of special factors to bring it back, said the report by the center, which was founded by a former Saudi petroleum minister.

Other market watchers noted that prices for oil for future delivery, which some economists use for their planning purposes, have not fallen as much as spot prices, and that most futures contracts continue to hover around $66 a barrel.

The story is still very much the same for the futures market, said Eoin OCallaghan, an oil analyst with BNP Paribas. That points to more expensive oil in the coming months.

So-called noncommercial buyers, meaning hedge funds and investors rather than the producers and refiners who actually ship and use the oil, have poured money into energy and commodities markets in recent years, believing that growth in places like China, India and Brazil had put the world into a super cycle that would continue to drive up prices even if major industrial nations faltered. In recent weeks, many of the noncommercials have bailed out again as prices started to fall.

The members of the Organization of Petroleum Exporting Countries have been in telephone contact about the market trend but as yet they have no plans to convene an emergency meeting to address falling prices, an OPEC spokesman said today. The cartel last met on Sept. 11.

About 22,000 noncommercial buyers now hold long positions that is, bets that crude oil prices will rise according to the most recent report from the Commodity Futures Trading Corporation; in August the figure was 83,000. It is a huge reversal in position, said David Kirsch, an oil markets analyst with PFC Energy in Washington.

PFC noted in a report today that noncommercials have been reducing their long positions for five straight weeks, and have pushed prices below their 200-day moving average, a significant marker to technical analysts of the market.

Kamal Murari, global head of energy marketing for Dresdner Kleinwort, said: The move down that has taken place has been sharp and sudden. The fact that it has moved as significantly as it has means that any forced liquidation has been mostly priced into the market.

Many market participants think OPEC will act to stem the decline if prices fall to $55 a barrel, Mr. Murari said.

He suggested that some of the selling in the oil market may be linked to the recent well-publicized losses by some big investors in natural gas, which may have forced some funds to liquidate other energy assets.

For the consumer, retail fuel prices have fallen markedly in the United States, but less so in Europe, where excise taxes are much higher and crude accounts for a proportionally smaller part of the pump price.

For the larger economy, falling oil prices may do little now to counteract slowing growth on either side of the Atlantic, economists said.

It doesnt feed through that if the crude price falls below X, then economic growth will rise by Y, said Mike Wittner, an energy analyst at Calyon.

Daily Telegraph - Market report - By Simon Goodley - (Filed: 26/09/2006)


London's reliance on Big Oil and metals caused a gloomy session for traders, as the price of a barrel of crude dropped below $60, provoking investors to re-evaluate their positions.

BP, one of the FTSE's biggest losers on the day, dropped 10 to 563p, despite news that the company had moved to restore output at Prudhoe Bay earlier than expected. Rival Shell lost 19p to 17.40. Meanwhile Tullow Oil dropped 7 to 350p after the company said it had agreed to acquire Australian oil and gas company Hardman Resources, up 25 to 78p, in a deal worth $1.11bn (584m).

Mining stocks were also caught up in the fall as base metals slipped on growing nervousness about falling demand. Vedanta, which has been suffering problems at one of its projects in India, was the main casualty, down 81p to 11.12. Elsewhere in the sector Xstrata was off 23p to 20.36, BHP Billiton down 34 to 853p, Anglo American 74p cheaper at 20.60 and Rio Tinto down 55p to 23.52.

Oil and mining sectors account for around 40pc of the FTSE, meaning that the sell-off was particularly keenly felt in London, pushing the benchmark FTSE 100 down 24 points to 5798. The mid-cap FTSE 250 lost 28.2 to close on 9755.8, while in New York the Dow Jones was trading off about 15 points at 11492 as City traders went home.

"The FTSE has given up its support at 5820 and has remained the weakest index in Europe," said Angus Campbell, a market strategist at spread betting group Finspreads. "With so much of the rally in the past 18 months coming from high expectations of increased earnings for oil and mining companies, the reversal of crude and metal prices has really caused investors in these stocks to reconsider their positions. Our clients are becoming defensive, being largely short of the FTSE with the expectation that equity prices will fall further in the weeks ahead."

Traders added that the market has broken its two week downside - a worry considering we are approaching October, traditionally a weak month.

AFX - 27 September 2006

November crude settled up $1.95 at $62.96 a barrel after hitting an intraday high of $63.10 a barrel.

October heating oil settled up 5.63 cents to $1.7141 a gallon. October gasoline settled up 4.81 cents to $1.5399 a gallon.

October natural gas settled down 32.5 cents at $4.201 a million British thermal units.

Bloomberg - Sept. 27

Oil Rises the Most in Six Months as Speculators Buy Contracts - By Mark Shenk


Crude oil rose, climbing the most in six months, as speculators who had sold contracts in a bet that prices would fall bought them back.

Prices failed to drop below $60, prompting the purchases. Futures have declined 20 percent from a record $78.40 a barrel on July 14. Oil fell earlier today after the release of an Energy Department report showing that U.S. inventories of distillate fuel, a category that includes heating oil and diesel, and gasoline rose last week.

``The report was clearly bearish but when the market failed to break into new territory, sentiment shifted,'' said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York. ``Short-term traders look at failure to decline as a bullish signal.''

Crude oil for November delivery rose $1.95, or 3.2 percent, to close at $62.96 a barrel on the New York Mercantile Exchange, the highest since Sept. 18. Prices had the biggest single-session gain since March 23. Oil touched a six-month low of $59.52 on Sept. 25 in New York.

Supplies of distillate fuel jumped 2.62 million barrels to 151.3 million. The gain left stockpiles 18 percent above the five-year average for the month. Gasoline supplies rose 6.3 million barrels to 213.9 million.

Crude oil supplies slipped 109,000 barrels to 324.8 million last week, the report showed. A decline of 1.7 million barrels was expected, according to the median of 13 analysts surveyed by Bloomberg News. The drop left inventories 6.3 percent higher than the five-year average for the date.

The department released its weekly report on petroleum inventories at 10:30 a.m. in Washington.



Iranian Standoff

Iran will not surrender its ``inalienable'' right to develop nuclear technology, President Mahmoud Ahmadinejad said, as diplomats met to try and resolve the international dispute over the country's atomic program. Iran, the world's fourth-biggest oil producer, ignored the United Nations Security Council's Aug. 31 deadline to freeze uranium enrichment or face sanctions.

``Iran's path is quite clear, the nation's right is inalienable and Iranians will make optimum use of all capacities,'' the state-run Islamic Republic News Agency quoted Ahmadinejad as saying in a speech today in Tehran.

Iran's nuclear negotiator Ali Larijani was today meeting with European Union foreign policy chief Javier Solana in Berlin for talks. The discussions are aimed at breaking the deadlock over Iran's nuclear activities, which the U.S. and its allies suspect are cover for building a weapon.

``I don't think Ahmadinejad's speech is the primary reason for today's move higher because there's little new in what he's saying,'' said Michael Fitzpatrick, vice president for energy risk management at Fimat USA in New York. ``The main reason for this move is the failure to break through $60.''

Brent crude oil for November settlement rose $2.09, or 3.5 percent, to close at $62.21 a barrel on the London-based ICE Futures exchange.



OPEC Concern

Organization of Petroleum Exporting Countries' President Edmund Daukoru wants action to be taken to prevent a further decline in the crude oil price, Reuters said, citing an interview yesterday in Abuja, Nigeria.

``Something needs to be done to steady the price,'' Reuters reported Daukoru as saying. ``We are already talking among ourselves in the OPEC fold. The price is very low and it's not good for investors.''

OPEC agreed this month to leave its members' production targets unchanged. OPEC ministers will discuss quotas when they meet Dec. 14 in Abuja.

``The big question is where OPEC will decide to put in a floor,'' said Bill O'Grady, an analyst with AG Edwards & Sons in St. Louis.

The Times - September 28, 2006

Falling oil price a real boon but can Opec live with it? - James Harding


THE September surprise has been the fall in the oil price. Since mid-July, a barrel of light sweet crude has dropped by more than 20 per cent from just over $78 to nearly $60.

This is the most important business development so far this year, holding out the possibility of an altogether more benign environment for British trade and industry in 2007. The surge in fuel costs has in the past year accounted for more than a third (34 per cent) of the total rise in manufacturing industrys input prices, just less than a third (29 per cent) of the increase in inflation. The rule of thumb is that a 10 per cent increase in the price of oil knocks about 0.1 per cent off global economic growth. By implication, a 20 per cent fall could provide a boost to growth of at least 0.2 per cent.

Just as higher fuel prices have acted as a choke on investment and spending, the fall in the cost of energy promises to lift a burden on both businesses and consumers. Think of it as a tax cut, not from Chancellor Gordon but King Abdullah.

The mystery is that there has been little change to the fear factors that at the beginning of the summer pushed up the price of crude and prompted analysts to forecast Brent soaring past $100 a barrel. The reasons not to be cheerful remain: the Iranian nuclear threat has hardly disappeared; peace has not broken out in the Middle East; Iraq is hardly a safe haven for foreign investment; nor is Nigeria; Commandante Chez and Czar Putin continue their arbitrary rule over national energy assets; the Peak Oil doomsayers have not gone away. So, what has changed?

Market forces are, finally, exerting their power over feelings. A global surplus of supply of 500,000 barrels per day (bpd) in 2005 has risen to about one million bpd in the first half of this year, dispelling the fear premium that accounted for as much as 20 per cent of the recent spike in the price. Inventories are rising stockdays of crude have risen from 70 to 74 days cover. Oil refineries have been running flat out to satisfy summer petrol demand and have built up huge stocks. There is now a glut of heavier oil products, middle distillates and heating oil, which will depress the market this winter. At the same time, there are signs of a slight weakening of demand, particularly as growth falters in the United States.

Meanwhile, non-Opec supply is growing with estimates of about between one million and 1.8 million bpd of extra oil coming on stream in 2007, creating competition for Opec producers. The Centre for Global Energy Studies estimates that that high non-Opec growth could send the oil price falling below $50 per barrel by the third quarter of 2007.

That is, if Opec does not act. The future oil price is, once again, in the hands of the cartel. If the oil producers want to sustain the oil price even at todays level, they will have to cut their output sharply this winter. But they have to agree what price they wish to defend: $60 a barrel? $50? The problem for Opec is that many of its members have grown accustomed to the extraordinary revenue. Venezuela, Iran, Iraq and Nigeria cannot easily afford to cut output. Algeria and Libya may talk a lot about a cut, but do little. It will be left, chiefly, to Saudi Arabia. The question is whether the Saudis, given the economic and demographic strains inside the Kingdom, can afford a $50 million a day loss in income.

When it comes to natural gas, bless the weather. The Met Office has been forecasting a mild winter, notwithstanding the possibility of a cold snap in January. A warm Christmas, as well as a huge increase in supply, have sent UK forward gas prices for this winter tumbling from 88p per therm in April to 61p this week.

Last winters price spikes and the brief emergency declared by National Grid were due to supply bottlenecks and frustration by UK gas shippers to secure supplies on the Continent. This year, the expectation is that more gas will be available to offset the steady decline in UK North Sea output. This week Norsk Hydro sent the first gas through Langeled, a sub-sea pipeline linking Norwegian gasfields to England. The Norwegians are planning to ship every molecule of spare gas down the Langeled pipe this winter. Some gas analysts predict the winter 2006 price could fall to 50p per therm. (The falling natural gas price should help to bring down electricity prices.)

Company finance directors and spendthrift shoppers alike have reason to hope that energy prices will be more manageable in the coming year, a function of the market economy rather than global anxiety. Oil may not fall back to its post-World War II average of $25.56 per barrel. But the surge was exaggerrated by huge volumes of hedge fund speculation. That would suggest the price will not halt here.

FT - September 28 2006

Crude spikes higher on Opec rumours - By Chris Flood


Crude oil spiked by more than $1 on Thursday after Reuters reported that the Organisation of the Petroleum Exporting Countries had agreed an informal production cut. However, the Opec secretariat in Vienna later said it was unaware of any agreement.

Nymex November West Texas Intermediate hit $64 a barrel but retreated to trade $70 cents higher at $63.66 a barrel. ICE November Brent jumped to $63.63 a barrel before easing back to trade $1.04 higher at $63.25.

Saudi Arabia started to trim its production earlier this month and speculation has been growing in the market that the cartel will cut output. But Edmund Daukoru, Opecs president, said yesterday that even if Opec reached an agreement to cut ahead of the cartel December 14 meeting, it would be difficult logistically to lower supplies before November at the earliest.

The expected slowdown in the US economy next year will not be enough to substantially hurt commodity prices, according to Credit Suisse. It said the crude oil market and key metals (copper, zinc and nickel) would continue to face several years of supply deficit.

The deficits are too large to be deluged by a US economic slowdown, especially one which is consumption-led rather than industrially driven, said Jay Bhutani of Credit Suisse.

Natural gas prices were weaker after the release of the latest US weekly inventories data which showed a 77bn cubic feet increase in stocks, slightly below market expectations. The continuing inventory rise means gas in storage is on track to reach 3.3 trillion cubic feet by the end of October, ensuring plentiful supplies even if there is prolonged cold winter weather.

FT - September 29 2006

Hedge fund interest in commodities growing - By Kevin Morrison


Energy and metal prices have had a significant correction since they reached their record or long-term peaks earlier this year but talk of a prolonged downturn may be premature.

Barclays Capital said the 53-month upward trend in the Goldman Sachs Commodity Index had been broken, as institutional investor inflows into commodity product indices slowed. But it said hedge fund activity in commodities was still growing, as was private investor interest.

The fall in the oil price below $60 a barrel this week prompted talk that oil could be heading for the mid-$50s. Such gossip was enough to spur some ministers of the Organisation of the Petroleum Exporting Countries into action to bolster the sagging, but still relatively high, oil price.

Nigeria and Venezuela said on Friday that they would cut oil output by up to 170,000 barrels a day from Saturday, equivalent to about seven per cent of Opecs estimated production.

While other Opec members said they would not formally cut output, they have been quietly lowering production this year.

Saudi Arabia is estimated to have produced an average of about 9.1m b/d in September, down about 200,000 b/d from its August output, and about 400,000 b/d lower than the same period last year.

The announcement by Nigeria and Venezuela had little effect on prices as traders had factored in a cut, after comments by Edmund Daukoru, Nigerias energy minister and Opec president, that Nigeria would look to trim output.

ICE Brent crude futures for November delivery slipped 6 cents to $62.48 a barrel by the close.

Brent touched a six-month low of $59.32 during the week, and is down more than 20 per cent from its recent peak of $78.65, having suffered its biggest price fall for 15 years in the quarter.

November West Texas Intermediate fell 96 cents to $61.80 a barrel in morning trade on the New York Mercantile Exchange, but settled 15 cents up on the day at $62.91 a barrel. During the week it touched a six-month low of $59.52.

Traders said the move by Opec was a sign that it did not want oil prices to fall below $60 a barrel.

Petroleum product prices have also had a poor quarter, with Nymex gasoline futures down by a third on the quarter to $1.4750 a gallon, and US heating oil futures 17 per cent lower at $1.6675 a gallon.

US natural gas futures are down 36 per cent from the beginning of August, but only nine per cent on the quarter.

Bloomberg

Crude Oil Is Steady as Slower Economic Growth May Curb Fuel Use - By Mark Shenk


Crude oil was little changed as slowing economic growth in the U.S., the world's biggest energy consumer, may cut fuel demand.

Consumer spending in the U.S. rose 0.1 percent last month, the smallest gain since November, the Commerce Department said today. Yesterday, the department cut its estimate of the nation's second-quarter economic growth to an annual rate of 2.6 percent.

``The personal spending and GDP numbers are taking some support away from the market because they translate into slackening energy demand,'' said John Kilduff, vice president of risk management at Fimat USA in New York.

Futures have declined 20 percent from a record $78.40 a barrel on July 14 as tensions in the Middle East eased and U.S. fuel stockpiles increased.

Oct. 2 - Bloomberg

Oil Falls to $61.03 on Signs OPEC Cuts May Have Little Impact - By Mark Shenk


Crude oil plunged to $61.03 a barrel in New York on speculation that the decision by Venezuela and Nigeria to cut output will have little impact on supply.

Venezuela and Nigeria will reduce crude production by a combined 170,000 barrels a day, the Organization of Petroleum Exporting Countries said on Sept. 29. The countries were unable to produce as much as their OPEC quotas allowed in August. Saudi Arabia, OPEC's biggest producer, hasn't announced a cut. Rising fuel stockpiles and a slowing economy have also weighed on oil.

``These cuts may prove to be illusory,'' said Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Connecticut, energy consultant. ``The announcements are going to be taken with a grain of salt until the Saudis say they are going to cut, especially since they are voluntary.''

Crude oil for November delivery fell $1.88, or 3 percent, the biggest drop in almost two weeks, on the New York Mercantile Exchange. It was the lowest close since Sept. 26. Prices are down 7.9 percent from a year ago. Futures have declined 22 percent from a record $78.40 a barrel on July 14 as tensions in the Middle East eased and U.S. fuel stockpiles increased.

There is a global oil surplus of at least 500,000 barrels a day, Venezuelan Oil Minister Rafael Ramirez said in a statement Sept. 29 as he explained the country's decision to cut production. The country will reduce output by 50,000 barrels a day, and Nigeria will cut 120,000 barrels, OPEC spokesman Omar Farouk Ibrahim said.



Production Targets

Venezuela produced 2.5 million barrels a day in August, 723,000 barrels below the quota set by OPEC, according to a Bloomberg News survey. Nigerian output averaged 2.2 million barrels a day in August, 106,000 barrels less than allowed by the quota. The two nations were the fourth- and fifth-biggest sources of U.S. oil imports during the first seven months of the year.

``There is clear skepticism about the Nigerian and Venezuelan production cuts,'' said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York. ``We don't know if their statements are credible or if it would be sufficient to affect supply.''

Iran, OPEC's second-biggest oil producer, considers international oil prices too low and said it will support ``any'' OPEC measure that helps raise them. Iran produced 4.02 million barrels of oil a day in August, 90,000 barrels below its OPEC quota. Other OPEC members such as Saudi Arabia are exceeding their limits.



Iranian Support

``The Islamic Republic of Iran will support any effort by OPEC members to strengthen the oil market and return prices to an acceptable and rational level,'' Iran's OPEC Governor Hossein Kazempour Ardebili said, the state-run Islamic Republic News Agency IRNA reported today. Ardebili didn't specify whether Iran would change its current oil output to affect prices.

On Sept. 11, OPEC members agreed to leave their production targets unchanged at 28 million barrels a day. OPEC's next scheduled meeting is on Dec. 14 in Abuja, Nigeria. The group is responsible for about 40 percent of global oil output.

``Remember it's Venezuela and Nigeria that made the announcement, neither of whom has much credibility,'' said Kyle Cooper, director of research at IAF Advisors in Houston. ``The fundamentals look poor. Supply is there and the demand is not.''

U.S. inventories of gasoline and distillate fuel, a category that includes heating oil and diesel, probably rose last week, according to a Bloomberg News survey. Crude oil, gasoline, heating oil, diesel and natural gas supplies in the week ended Sept. 22 were above the five-year average for the period, the Energy Department said.

``Inventories are really comfortable,'' Evans said. ``The accumulation on the product side is particularly important because that means the fuel is close to the consumer. There is less worry about a refinery or pipeline outage with these inventories.''

Brent crude oil for November settlement declined $2.03, or 3.3 percent, to close at $60.45 a barrel on the London-based ICE Futures exchange.

FT - October 3 2006

Oil falls as hurricane threat receeds - By Chris Flood


Crude oil sank below the $59 a barrel level on Tuesday, extending Mondays sharp falls amid growing confidence that this years hurricane season will end without a major storm.

Colorado State University, the leading academic forecasters, said on Tuesday that no more major hurricanes will form in the Atlantic this season.

Following hurricane Katrina last year, the US goverment sold 11m barrels of oil from its strategic stockpiles but it is to delay buying replacement supplies, making more crude available for refineries providing winter heating oil.

Ahead of the latest US weekly inventories data, due out on Wednesday, traders saw high existing levels of US crude and distillate stocks as reasons to drive oil prices to their lowest since February.

ICE November Brent traded $1.81 lower at $58.63 a barrel after it hit a low of $58.37. Nymex November West Texas sank to $58.84 before recovering to trade $1.83 lower at $59.20 a barrel.

The impact of Venezuela and Nigerias recent proposals to cut oil output by a total of 170,000 barrels a day was played down by analysts.

Mike Wittner, global head of energy market research at Calyon, said Nigeria and Venezuela were usually early advocates for production cuts but they had little usable spare capacity, so the burden would fall on Saudi Arabia, with some help from Kuwait and the UAE.

Saudi Arabia is rumoured to be trimming output already, reflected in lower tanker volumes in September, but it is likely to proceed cautiously ahead of the US mid-term elections, as energy prices have become a campaign issue.

A warm winter could potentially drive US crude prices temporarily below $50 a barrel, according to Francisco Blanch, commodity strategist at Merrill Lynch. With US and European distillate inventories already at high levels, a mild winter could reduce distillate demand by 245,000 barrels a day compared to normal. This would force heating oil prices lower and also have a knock-on impact on gasoline prices.

Opec may not be able to prevent a price collapse, as non-Opec crude producers are likely to be able to bring a significant amount of new capacity on stream, said Mr Blanch.

Nymex November heating oil fell almost 5 cents to $1.6550 a gallon, with distillate stocks expected to have risen 1.3m barrels last week. Nymex November unleaded gasoline fell just over 4 cents to $1.4650 a gallon, with stocks forecast to have risen by 0.9m barrels last week.

Gold fell 2.1 per cent to $592.70 a troy ounce as oils retreat put precious metals under pressure. Silver dropped 3.6 per cent to $11.05, while platinum sank 2.4 per cent to $1,120 a troy ounce.

Trading volumes for base metals were light due to holidays in China. Copper sank 2.4 per cent to $7,340 a tonne, while nickel fell 1.5 per cent to $28,800 a tonne.

Oil bounces back
Kuwait says it may follow OPEC members Venezuela and Nigeria in production cuts; inventories on tap.
October 4 2006: 9:25 AM EDT
LONDON (Reuters) -- Oil rose above $59 a barrel Wednesday after Kuwait said it may join other OPEC countries in cutting output if prices continue their three-month slide.

Kuwait's announcement offset expectations for a further rise in U.S. distillate and gasoline stockpiles, which helped prices dip to an eight-month low earlier in the session.

U.S. crude climbed 36 cents to $59.04. London Brent rose 42 cents to $58.91, after hitting this year's low of $57.78 earlier in the session.

Oil's 25 percent drop from its mid-July peak of $78.40 prompted OPEC President Edmund Daukoru on Tuesday to call on other OPEC members to follow the lead set by Nigeria and Venezuela in cutting exports.

But an OPEC source said Wednesday that other producers were unlikely yet to publicly pledge to trim supplies.

Kuwait's oil minister said it may take action if prices fall further below $60 a barrel.

"Kuwait may voluntarily lower (oil output) in order to maintain the market's stability," Sheikh Ali al-Jarrah al-Sabah told Reuters in an interview.

"The current situation with prices and the big retreat that has taken place is uncomfortable for OPEC nations," he added.

Pressed on price, he said $60 a barrel for U.S. crude was comfortable but $50 was worrying.

Venezuelan President Hugo Chavez said the price of oil should not fall below $60 a barrel, while the country's energy minister said markets were oversupplied by 500,000 barrels.

"What's frightened OPEC is the speed of the price decline - and it's easy to rationalize because stocks are high. There is definite cause for concern," said energy consultant Geoff Pyne.

"But oil at $60 is still high in absolute terms, so it's a difficult political decision for some producers to cut supply - especially Saudi Arabia."

Brimming U.S. stockpiles
U.S. data, set for release at 10:30 a.m. ET, are expected to show a 1.5 million barrel build in distillate stocks, according to a Reuters poll of analysts.

If the forecast holds, distillates such as heating oil will have risen for the past two months.

Gasoline supplies are seen up 700,000 barrels, while crude stockpiles are expected to fall 500,000 barrels.

Japan, the world's third-largest energy consumer, also has healthy heating oil stocks, which are at the highest level since last November.

"Inventories are huge - sentiment is completely bearish," said Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo.

But given a risk of further supply disruptions and higher winter demand, some analysts expect a rebound.

"I would think anything below $60 is a buying opportunity so on a technical perspective, prices would see a rebound soon," said Gerard Burg, a commodities analyst at the National Australia Bank.

Oil price forecasts raised for 2007 on rising demand

Wednesday, October 04, 2006

Oil analysts are raising their price estimates for next year in anticipation of increased demand that may outpace the development of new deposits.
Crude oil will average US$64 a barrel in New York in 2007, according to the median forecast of 29 analysts surveyed last week.

That is US$2 (HK$15.60) higher than predicted at the end of the second quarter. Analysts failed to predict the rise in oil throughout a five-year rally during which prices tripled.

"We see a very tight market continuing into next year," said Kevin Norrish, a director of commodities research for Barclays Capital in London. Barclays expects oil next year to average US$76.70 a barrel, the highest forecast in the survey.

"The recent fall in prices is due to short-term factors," he said. "We're looking for fairly strong global growth, and we don't see capacity expanding by much."

Benchmark oil futures touched a record US$78.40 a barrel July 14 on the New York Mercantile Exchange on concern that fighting between Israel and Hezbollah in Lebanon would spread through the Middle East.

Prices fell after fighting ended in Lebanon and the Gulf of Mexico storm season passed without a repeat of last year's hurricanes, which crippled oil production and refineries.

Oil's climb from less than US$20 a barrel at the end of 2001 has been driven by the failure of producers to generate new supplies fast enough to keep pace with rising demand, especially in China.

Analysts are betting that trend will continue. They forecast oil would be US$58 a barrel at the start of 2006, according to the median in a survey last December. So far, crude oil has averaged US$68.26, higher than any prior year.

"We just haven't seen dramatic increases in supply," said James Rollyson, an analyst at Raymond James Financial in Houston. Raymond James is predicting US$70 oil next year after forecasting US$58 at the beginning of this year.

Oil consumption worldwide rose 9percent to an average 83.8 million barrels a day between 2000 and 2005, led by China and the United States, according to the US Energy Department. Global oil supply rose 8.6 percent to 84.5 million barrels.

Prices surged during the first half as Iran, the fourth-largest oil producer, pushed ahead with nuclear fuel enrichment, heightening tensions with the US.

Talks in Berlin between Iran and European Union officials aimed at breaking the deadlock over the atomic program produced some progress.

Oil will average US$65.50 a barrel in the fourth quarter, according to the median estimate in the survey.

Analysts in June said oil would average US$67.65 a barrel during the third quarter. Prices averaged US$70.60 during the past three months, a record.

Strategists who forecast a drop in prices next year say a slowing US economy will coincide with increased output.

US economic growth slowed to a 2.6 percent pace in the second quarter, three percentage points lower than the first three months of the year, the Commerce Department said on September 28.

"We're very pessimistic about the US and global economy next year," said Eoin O'Callaghan, an analyst with BNP Paribas in London who expects oil to average US$59.80 next year.

Rising fuel stockpiles in the US, which is responsible for 25 percent of global energy use, helped cause the decline in prices in the third quarter.

Spot prices are cheaper than futures for oil delivered later in the year, a market condition called "contango."

This has led to increased inventories, but it may end in coming months, said Adam Sieminski, chief energy economist at Deutsche Bank Securities AG in New York. He expects oil to average US$61 a barrel in 2007.

BLOOMBERG