'Bear trap' looming for misguided oil markets?

The events of the first half of November suggest that oil markets and geopolitical realities are on divergent paths.

And the result may be that oil markets are backing into a "bear trap."

In response to Iraqi President Saddam Hussein's acceptance of the United Nations Security Council resolution mandating the return of UN weapons inspectors to Iraq, oil prices immediately fell to a 5 month low in New York and an 8 month low in London.

By mid-November oil prices had fallen nearly 20% in 6 weeks. The decline is apparently a response to rising OPEC production and to diminishing fears of a military campaign against Iraq—with the latter buttressed by Baghdad's apparent cave-in.

But is the ostensible acquiescence by Baghdad the endpoint of the game? Or merely the beginning? That all depends on one's view as to whether it will stave off war indefinitely or just for the short term—and therein lies the dilemma for oil markets. Any military action against Iraq is likely to spike oil prices briefly. But the longer-term outlook for oil prices following an attack on Iraq is uncertain.

Discount vs. premium

Marshall Adkins, analyst with Raymond James & Associates Inc., St. Petersburg, Fla., contends that oil markets continue to have it backwards on Iraq. Noting that Iraq slashed oil exports by 1 million b/d in March, he suggested that markets should have been incorporating a discount in oil prices because a war—in all likelihood short-lived—would soon restore those volumes to the market.

But when Iraq reversed itself and boosted exports again by almost 1 million b/d in October, that should have reinstated a war premium in oil prices, Adkins said: "Now that Iraq is producing all out, the only possible impact of a war with Iraq on oil would be to reduce oil supply and drive up oil pricing."

Meantime, OPEC has continued to ramp up production in disregard for its collective quota. As a result, global oil supply is now 3 million b/d more than in the spring. And yet the current state of inventories and projected demand for oil in the second half would suggest that the extra volumes will be needed. Adkins maintains that current US stock levels would suggest an oil price $4-5/bbl higher than they are at present; instead, markets are pricing in a substantial inventory build over the next 6 months.

'Bear trap' ahead?

Merrill Lynch analysts offer a similar view, saying that the sell-off towards $25/bbl (New York Mercantile Exchange next-month futures contract) has the makings of a "bear trap."

They noted that the production cuts early this year by Iraq and the rest of OPEC have slashed oil stocks in the Organization for Economic Cooperation and Development countries to a level 45 million bbl below normal at the end of September from a level 93 million bbl above normal at the end of March. Typically, September sees a stockbuild of 9 million bbl and instead underwent a drop of 39 million bbl. And this situation holds at the outset of a season when demand always rises sharply.

Merrill Lynch contends the oil supply security factor seems to have "fallen off the oil market's radar screen" under the misapprehension that the Bush administration is easing its hawkish stance vs. Iraq.

Cat-and-mouse vs. mandates

In the weeks to come, there no doubt will be many opportunities for Saddam to play the cat-and-mouse game over inspections that he perfected in the 1990s. Compliance with the UN resolution calls for key milestones for Iraq to meet in December prior to an initial report by inspectors no later than Feb. 21. There can be little doubt that deception and obstructionism will continue; what choice does Saddam really have, given the "mandate" of terror and defiance of the world order with which he rules?

There can be no doubt about US resolve on zero tolerance towards Saddam. President George W. Bush also has mandates. The first came Nov. 5 at the ballot box. The second came Nov. 8, with the 15-0 UN Security Council vote favoring almost everything the US asked for.

Whether through war, coup, or assassination, upheaval in Iraq in the next 3 months is all but certain. And that means a supply disruption amid an already tight market.

OGJ Hotline Market Pulse
Latest Prices as of Nov. 15, 2002

Click here to enlarge image

null

Click here to enlarge image

null

Nymex unleaded

Click here to enlarge image

null

Nymex heating oil

Click here to enlarge image

null

IPE gas oil

Click here to enlarge image

null

Nymex natural gas

Click here to enlarge image

null

NOTE: Because of holidays, lack of data availability, or rescheduling of chart publication, prices shown may not always reflect the immediate preceding 5 days.

*Futures price, next month delivery. #Spot price. @New contract

Related Articles

TAEP: TPI still peaking, but ‘contraction unavoidable’ as oil prices fall

12/12/2014 The Texas Petro Index (TPI), a composite index based on a comprehensive group of upstream economic indicators released by the Texas Alliance of Ene...

MARKET WATCH: NYMEX crude oil price extends slump

12/12/2014 Crude oil prices extended their slump on the New York market with a Dec. 11 settlement of less than $60/bbl for January, and prices continued downw...

US needs more data before ending crude export ban, House panel told

12/11/2014 Much more environmental impact information is needed before the US can reasonably remove crude oil export limits, a witness told a House Energy and...

Rosneft, Essar sign terms of oil supply agreement

12/11/2014 OAO Rosneft and Essar Energy PLC have signed key terms of an oil supply agreement in New Delhi. Rosneft said shipments to India may begin in 2015.

Barton introduces bill to remove US crude export limits

12/11/2014

US Rep. Joe Barton (R-Tex.) introduced legislation that would remove US crude oil export limits that have been in place for nearly 40 years.

MARKET WATCH: NYMEX crude oil price slides below $61/bbl

12/11/2014 Crude oil prices fell below $61/bbl for January delivery on the New York market Dec. 10 after the Organization of Petroleum Exporting Countries low...

MARKET WATCH: US crude oil prices rebound modestly awaiting inventory report

12/10/2014 Crude oil prices rose modestly on the New York market Dec. 9 while analysts awaited the US government weekly inventory report on crude oil and prod...

ExxonMobil forecasts 35% higher world energy demand by 2040

12/10/2014 A significantly bigger global middle class, expanded emerging economies, and 2 billion more people will contribute to 35% higher world energy deman...

MARKET WATCH: Crude oil prices briefly dip to 5-year lows

12/09/2014 Oil prices on the New York and London markets remained volatile, briefly trading around lows not seen since 2009 although prices were attempting to...

White Papers

AVEVA NET Accesses and Manages the Digital Asset

Global demand for new process plants, power plants and infrastructure is increasing steadily with the ...
Sponsored by

AVEVA’s Approach for the Digital Asset

To meet the requirements for leaner project execution and more efficient operations while transferring...
Sponsored by

Diversification - the technology aspects

In tough times, businesses seek to diversify into adjacent markets or to apply their skills and resour...
Sponsored by

Engineering & Design for Lean Construction

Modern marketing rhetoric claims that, in order to cut out expensive costs and reduce risks during the...
Sponsored by

Object Lessons - Why control of engineering design at the object level is essential for efficient project execution

Whatever the task, there is usually only one way to do it right and many more to do it wrong. In the c...
Sponsored by

Plant Design for Lean Construction - at your fingertips

One area which can provide improvements to the adoption of Lean principles is the application of mobil...
Sponsored by

How to Keep Your Mud System Vibrator Hose from Getting Hammered to Death

To prevent the vibrating hoses on your oilfield mud circulation systems from failing, you must examine...
Sponsored by

Duty of Care

Good corporate social responsibility means implementing effective workplace health and safety measures...
Sponsored by

Available Webcasts


On Demand

Optimizing your asset management practices to mitigate the effects of a down market

Thu, Dec 11, 2014

The oil and gas market is in constant flux, and as the price of BOE (Barrel of Oil Equivalent) goes down it is increasingly important to optimize your asset management strategy to stay afloat.  Attend this webinar to learn how developing a solid asset management plan can help your company mitigate costs in any market.

register:WEBCAST


Parylene Conformal Coatings for the Oil & Gas Industry

Thu, Nov 20, 2014

In this concise 30-minute webinar, participants have an opportunity to learn more about how Parylene coatings are applied, their features, and the value they add to devices and components.

register:WEBCAST


Utilizing Predictive Analytics to Optimize Productivity in Oil & Gas Operations

Tue, Nov 18, 2014

Join IBM on Tuesday, November 18 @ 1pm CST to explore how Predictive Analytics can help your organization maximize productivity, operational performance & associated processes to drive enterprise wide productivity and profitability.

register:WEBCAST


US HYDROCARBON EXPORTS Part 3 — LNG

Fri, Nov 14, 2014

US LNG Exports, the third in a trilogy of webcasts focusing on the broad topic of US Hydrocarbon Exports.

A discussion of the problems and potential for the export of US-produced liquefied natural gas.

These and other topics will be discussed, with the latest thoughts on U.S. LNG export policy.

register:WEBCAST


Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected