Wednesday, May 21, 2008

Separating the men from the boys.

CNBC: $12 Gas and Rationing? Possible, Says Expert.


"The prices that we're paying at the pump today are, I think, going to be 'the good old days,' because others who watch this very closely forecast that we're going to be hitting $12 and $15 a gallon, and then, after that, when world oil production goes into decline, we're going to talk about rationing," Robert Hirsch, Management Information Services Senior Energy Advisor, said on CNBC's "Squawk Box." "In other words, not only are we going to be paying high prices and have considerable economic problems, but in addition to that, we're not going to be able to get the fuel when we want it."

Hirsch argued that the maximum in world oil production has already been hit.

"The idea is that [world oil production] would hit a sharp peak and then drop off, and what's happened is, we've hit a plateau in world oil production, and that plateau has been ongoing since about the middle of 2004," he said.

Those who argue that new technology and new types of energy will solve the problem aren't on solid ground, Hirsch suggested.

"There's no single thing that's going to solve this problem, because it's as massive as one can possibly imagine," he said.

Wall Street Journal: U.S. Military Launches Alternative-Fuel Push.


Some Pentagon officers have embraced planning around the "peak oil" theory, which holds that the world's oil production is about to plateau due to shrinking resources and limited investment in many of the most oil-rich regions of the Middle East. Earlier this year, they brought Houston investment banker Matthew Simmons to the Pentagon for a presentation on peak oil; he warned that under the theory, "energy security becomes an oxymoron."

MarketWatch: Crude futures top $130 a barrel.


The Bank of England on Wednesday became the latest to signal their fears, with the central bank saying in minutes of its last meeting that tight supplies rather than speculation is driving prices higher.

"According to the Bank's market contacts, speculative purchases did not seem to be the prime cause of the recent increases in the oil price," the central bank said, referring to the rise in oil prices during the month of April.

"More fundamental demand and supply factors had probably been at the root of its steep rise during recent months, and there remained considerable uncertainty about the oil price outlook," it said.

New York Times: The Cassandra of Oil Prices.


Mr. Murti falls into the camp of oil analysts who believe that supply is likely to remain tight because of geopolitical factors. These analysts predict higher prices because production is declining in non-OPEC countries like Britain, Norway and Mexico.

The analysts who predict lower prices say there are supplies of oil that the bullish analysts are missing. “This year will be a year in which supply will be put into the market by stealth by OPEC and by countries we call black-hole countries,” said Edward L. Morse, chief energy economist at Lehman Brothers. China is one example, he said.

But while oil and gas prices have been rising for a while now, Americans have only just begun to reduce gasoline consumption, so their efforts to conserve have not dragged down oil prices.

“The fact that the U.S. gasoline demand can be down and that the U.S. gasoline consumer is no longer driving world oil prices is a monumental event,” Mr. Murti says. He spends most of his time talking to money managers and analysts, many of whom keep asking him if oil prices will stay high if speculators abandon the market, and says he applauds investors for driving up oil prices, since that will spur investment in alternative sources of energy.

High prices, he says, “send a message to consumers that you should try your best to buy fuel-efficient cars or otherwise conserve on energy.” Washington should create tax incentives to encourage people to buy hybrid cars and develop more nuclear energy, he said.

Of course, if lawmakers heed his advice, oil analysts like him might one day be a thing of the past. That’s fine with Mr. Murti.

“The greatest thing in the world would be if in 15 years we no longer needed oil analysts,” he says.

MarketWatch: Oil of oy vey.


As a trader, I'm not as concerned with the ultimate destination as much as the path that we take to get there. I've generally avoided the energy space this year and focused my attention on the financials and select technology, taking what the market gave me while preserving capital and keeping my powder dry.

Toward the end of last week, I began building short-side exposure in the energy realm. Catching cusps is a dangerous proposition, whether it's grasping at a falling knife or getting in the way of parabolic frolic. It's a generally accepted trading axiom that money is made between the twenties and we should avoid the red zone whenever possible.

With that said, I share these thoughts with two caveats. First, I'm typically early, which is as damaging as being wrong if you're not there to cash in your chips. Second, while a seismic structural shift could occur at any time, my motivation is to simply capture a trade.

The bull case for energy is loud and proud as a function of the price action. There are supply constraints, emerging market needs, incremental demand from China (following the earthquake), pressure on the U.S. dollar (the price of socialization), unreliable alternative sources, psychology (furthered by a recent Goldman Sachs report) and perhaps the biggest risk, in my view, the potential for geopolitical tension in Iran.

On the other side of that ride, we have political agendas into the election, incessant (unconfirmed) chatter that margins on crude futures will be raised, faltering demand by an already strapped U.S. consumer and the unfortunate truth that all roads will ultimately lead to debt destruction through deflation.


Again, the single biggest caveat to the short energy thesis, in my view, is an uptick in Middle East acrimony.

As the market is a prescient beast, that unfortunate thought would certainly explain the incessant bid we've seen to date.

[I think he's wrong there. It's Chinese demand and the idea that we'll have another cold winter that I think is driving this relentless move upwards. But I've been thinking about reducing positions too, though not actual shorting. So much focus on oil smells of some kind of top.]

CNBC: Fast Money Final Trade.


"Short Hess."

CNBC: OPEC Oil Supply Rising in May: Petrologistics.


OPEC oil supply in May is expected to rise by 700,000 barrels per day (bpd), led by higher output from members including Nigeria and Saudi Arabia, an industry consultant said on Wednesday.

The increase comes during a month in which oil has soared to record highs and indicates OPEC is again pumping more than its supply limit after a strike in Nigeria lowered output and Saudi Arabia opted to pump more.

All 13 OPEC members are expected to pump 32.4 million bpd this month compared with a revised 31.7 million bpd in April, Conrad Gerber of tanker tracker Petrologistics, told Reuters.

"There is a strong rebound in supply," Gerber said. "Iraq is having a good export performance and Nigeria is coming back up.