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A 'virtual' oil price gain

Sam Fletcher
OGJ Senior Writer

The front-month contract for benchmark US light, sweet crudes traded as high as $80/bbl before closing at $79.36/bbl Dec. 31, 2009, in what many described as a 78% price jump during 2009 and its biggest surge since 1999 on the New York Mercantile Exchange. But Olivier Jakob at Petromatrix, Zug, Switzerland, charged the alleged 78% gain is “purely a virtual number that will look good only on a misleading investment brochure.”

Had a leveraged trader bought a NYMEX crude contract at the end of 2008 and rolled his position on “the penultimate day of expiry” at the end of 2009, his earnings would have totaled $19.44/bbl for the year, a 43.6% gain, Jakob said. A trader who rolled his front West Texas Intermediate position on the first day of the month would have made $16.18/bbl or 36.3%, while one who bought the February 2010 contract at the end of 2008 in order to avoid the contango roll would have made $19.12/bbl “but on a higher flat-price basis, hence a return of 31.74%,” said Jakob.

“The real tradable returns of WTI in 2009 depend on the timing of the roll of the position, but if we average the roll on the first day of the month, on penultimate day, and the unrolled February 2010 returns, then we come to a WTI increase of $18.25/bbl or 40.9% during 2009, which is about half the virtual gains printed on the continuous charts and reported by the mass media.” Jakob said. “If we are to compare the 2009 WTI returns based on the February contract (i.e. unrolled position) then the returns for 2009 were only the fourth best of the last 10 years, and that is only because there were 3 negative years. In other words, over the last 10 years for those years that had positive returns on WTI, 2009 was the worse year in terms of percent returns.”

Jakob said, “The largest loser of the year would have been the investor…buying commodity exchange traded funds or commodity indices under the belief that he was buying a futures-look-alike contract while he was buying a net-asset-value instrument based on futures. In a contango structure any net-asset-value instrument on commodity futures will mathematically underperform the direct purchase of a commodity futures. This being said there are many asset managers [who] are happy to pay a higher commission for an underperforming investment vehicle to cover for their lack of understanding of the markets they are investing in.”

In money markets, Jakob said, “The euro made strong gains during the year but came back under pressure during December to bring it closer to the start-of-the-year value, and large speculators have been getting overly bullish on the dollar index.” Crude prices continued increasing in December while the dollar index also rebounded. Jakob observed, “There is nothing sacred in a dollar-to-oil correlation but with crude oil prices rising in tandem with the dollar index, it means that Brent on a euro price basis is at the highest level of 2009, and that could start to hit the European demand price elasticity.

Price forecasts
Analysts in the Houston office of Raymond James & Associates Inc. claim their 2009 oil price forecast was “unusually” accurate. “For the first time in 7 years,” they said, “our forecast…did not prove overly conservative. At $60/bbl, our oil forecast was near consensus and ended almost dead-on with the full-year average of $58/bbl—despite the panicky meltdown in oil prices that reached its trough in February.”

Raymond James analysts’ 2010 forecast is for $80/bbl, “which assumes modestly higher demand and falling non-OPEC supply.” They expect bullish supply and demand trends to continue for several years and set their initial 2011 forecast at $95/bbl.

On the other hand, they admitted, “Our bearish 2009 US gas price forecast was directionally accurate but still 20% too high.” Their gas price forecast of $5/Mcf at the start of the year was well below Wall Street’s $7.31/Mcf consensus. Gas prices slid steadily through the third quarter as they expected but further than predicted, averaging $4/Mcf for the year. This year they are lowering their gas price prediction to an average $5/Mcf from $5.50/Mcf previously; their initial 2011 gas price prediction also is $5/Mcf.

Raymond James analysts expect US gas prices to hover around $5/Mcf for several years because that is the price level at which US gas supply rises, LNG imports increase, and gas-to-coal demand switching takes place.

(Online Jan. 5, 2010; author’s e-mail: samf@ogjonline.com)


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