Diplomatic and government policy responses appear to be coming to a head in a climate of accusations over high energy prices, said industry analysts.
“Some diplomatic, regulatory, or policy watershed is drawing near, or at least some venting of pent-up pressures is likely to manifest itself,” said Paul Horsnell at Barclays Capital Inc., London. “At this moment, what is happening in Washington and elsewhere in terms of policy debates is as much a part of what [energy] traders need to be aware of as is supply and demand.”
Horsnell noted “the provocative rhetoric” as UK Prime Minister Gordon Brown recently described the Organization of Petroleum Exporting Countries as a “scandal,” while Australian Prime Minister Kevin Rudd spoke of applying “the blowtorch to the OPEC organization.” Horsnell said, “It is fair to assume that so overt a stance does not facilitate constructive dialogue.” Oil and gas producers have been “more discrete” in their language, but “it seems clear that they are beginning to lose some patience with the spread in the climate of rolling accusations,” he said.
Meanwhile, analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR), Arlington, Va., reported strong odds that the US Congress would pass a NOPEC bill (No Oil Producing and Exporting Cartels) for antitrust prosecution of OPEC members.
Horsnell cited “the continuing head of steam in Washington behind various potential market intervention measures. In particular, institutional investors seem ever closer to being placed in the regulatory crosshairs.” However, he said, “We see institutional investment as a stabilizing and improving factor for commodities markets, and we believe that holding commodities has a valuable role to play within a balanced asset portfolio.”
In addition, banning institutional holdings of commodities could lead to “some serious market distortions and volatility.” Horsnell said, “A clumsy implementation could potentially create forced trading and generate chaotic conditions and very artificial prices in the short term. Such a development would in turn discourage what is already far too slow a rate of investment and delay demand reactions. Indeed, it is likely to lay the basis for another surge in prices once market conditions normalized, while leaving long-term investment lower than it would have been.”
There is growing momentum in Congress to increase the authority of the Commodity Futures Trading Commission to allow interagency coordination, including working with the UK Financial Services Authority, said FBR analysts. There is growing support for requiring higher margins for crude oil trades and imposing position limits on noncommercial trades through swaps dealers. Strict limits or prohibitions on oil futures investment by sovereign wealth funds and their institutional investor partners are unlikely, FBR analysts said, but an investigation of potential conflicts of interest between research analysts who assess oil market conditions and institutional investors who buy oil futures is likely. There also is some support for barring further investment in oil by institutional investors, said FBR analysts.
Corn factor
In mid-June, Olivier Jakob at Petromatrix, Zug, Switzerland, discerned a possible “corn theme” in crude markets. “The US Midwest is currently suffering from historical flooding, and the corn crops are under threat. The prospect of lower corn supplies is pushing corn prices to record high levels, and expectations are growing for ethanol supplies to come under threat of falling margins (shares of ethanol producers are coming off the cliff),” he reported June 13.
Even before the mid-summer floods and the resulting run-up in corn prices, Jakob said, “Some states such as Texas were asking for a waiver on the ethanol mandate to alleviate the price pressure on corn. Following the floods, the pressure for an ethanol waiver could accelerate, and this could then be supportive for petroleum gasoline as the share of ethanol blending would be reduced.”
Furthermore, Jakob said, “Crop damage and delays could be negative for diesel demand.” As a result, the gasoline crack “was not only gaining vs. crude oil but was increasing while the heating oil crack was decreasing,” he said. “The risk [of] buying gasoline on the flood trade is that an ethanol waiver would not be the only solution to attenuate any production shortage from the Midwest (94% of US ethanol production) as import of sugar-cane ethanol could also be substantially increased” via a waiver of the US import tariff on ethanol supplies from Brazil.
“The floods are also creating a potential risk on the safe operation of petroleum pipelines and refineries in the region, while barge traffic is being disrupted with portions of the Mississippi being closed,” Jakob said.
(Online June 16, 2008; author’s e-mail: [email protected])
