Vikram Saxena

Is Valero a Better Buy than Exxon Mobil?

The US still imports refined products so there is no overcapacity in this area. The refiners are trading at below replacement value and are a great long term buy. Right now they are suffering because of being at the wrong end of the stick (weak economy/high oil). Worldwide the demand for refined products is increasing so the long-term fundamentals are great for this industry.

The Era of Cheap Crude Is Ending

A lot of people are writing about the Tata Nano and oil demand. What they miss is that the Nano is a replacement vehicle which gives better mileage than the two-wheelers it will replace. Plus it can carry 2x the load of the two-wheeler. The person buying the Nano will be replacing one or two two-wheelers and is likely to consume less gas.

Another aspect to keep in mind is that folks in emerging economies spend a significant chunk on food and energy. They are very conscious when it comes to spending on energy and even a 5-10% difference in mileage will sway their choice regaring the vehicle they use. The emerging economies have a lot of demand elasticity built in to the system; consumers there will adapt to higher prices quickly.

In developed economies the percentage spent on food and energy is much less than that spent in emerging economies and hence the demand elasticity is limited. Further the lifestyle changes needed to reduce consumption are much tougher in the developed world compared to the emerging markets where attitudes and trends are still evolving and can adapt easily.

Crude Oil: Congress Acts, Iran Hoards, RTX Soars

JREwing:

Goldman and Morgan Stanley indeed have oil tank farms. That is why they can act as commercial hedgers. It seems last week even JPMorgan decided to get in the physical commodity business (Bear Sterns had a strong commodity trading group).

JPMorgan's action seems to be designed to pre-empt any effort to have a dual margin structure (hedgers vs speculators).

The large investment banks have a their finger on the pulse of almost everything in the capital markets; it is not wise to bet against them. Goldman will drive the super spike, which will eventually result in a dramatic shift in oil consumption patterns.

The New Peak Oil: Peak Demand

Here is an interesting piece on how the investments in commodity indices are allowing speculators to bypass position limits created by CFTC.

www.bloomberg.com/apps...

"Asset Diversification'

With the popularity of long-only commodity index funds and the prevalence of total-return index swaps, the definition and quantification of speculation has changed, according to Jim Bianco, president of Bianco Research in Chicago.

Let's say a pension fund, like the California Public Employees Retirement System, wants to increase its exposure to commodities. Calpers, a speculator according to the CFTC, does a total-return swap with Goldman Sachs Group Inc., a hedger. Goldman promises to pay Calpers the total return on the Goldman Sachs Commodity Index and hedges the swap by buying futures contracts. Calpers's speculative bet on commodities gets recorded as Goldman's hedging in the COT report. In so doing, investors circumvent the position limits on non-commercials, says Aronstein, who estimates that passive commodity index exposure in commodities amounts to some $250 billion.

With everyone on board the express train, pension funds can market these bets as ``asset diversification.'' And who will argue otherwise in the middle of a boom? "

The New Peak Oil: Peak Demand

freewilly: During a bull run, all news is bullish.

The seasonal maintenance, by definition, is seasonal and predicted; the refiners of the crude would have communicated that to the sellers. But even then the glut continues to the point that Iran has to think of cutting production.

Saudi Arabia is offering a $7 discount on its not so light crude since there are a few buyers.

The Russians have come out to say that their productions will go up this year 'wait till the end of the year'; the drop in the Russian production was one of the thesis of peak oil scaremongers.

Bloomberg has interesting article out there saying that more than $256B invested in commodity indices linked notes is showing up as money invested as hedgers in the COT reports when it is speculative. The notes are sold by banks (like GS) who then hedge by participating in the futures market. However this serves as a mechanism to bypass the CFTC position limits on speculative positions.

This is a bubble driven by speculation where a physical commodity is being treaded like other paper assets. However it has deep political and economic ramifications which will lead to a radical change in the energy complex as we know it. The super-surge will help accelerate the process.

The New Peak Oil: Peak Demand

JR:
Read carefully. The uncultivated arable land is not in the Amazon region. In fact Sugar cane does not grow in the Amazon region (too wet/hot).

Further there are national security concerns which will ensure that countries will continue to look for new oil. In most of the world, oil is a nationalized resource and it is not oil companies which their vested interests who determine where new development will happen.

Many governments will be willing to pay $90 for local oil when OPEC sells at $70 since they know without their oil they will be paying OPEC $125.

Traditional oil industry analysts thinking has been stratified by decades of inaction; they can not think beyond what they have been used to thinking. They ignore the progress in technology or the dramatic change in the developing world's attitudes (they no longer need capital from Western oil companies to develop their fields).

From GPS, remote sensing, remote controlled robots/machines, deep-sea exploration and drilling we have come a long way in the past 2-3 decades. The Petrobras experience with the Tupi fields is an indication of things to come. The naysayers are still asking questions while Petrobras is hiring workers and rigs, and bringing the field online much sooner than the scaremongers ever thought they would.

The New Peak Oil: Peak Demand

JR/Crossing:

The move to sugar based ethanol can be dramatic and quick. Brazil has huge tracts of arable uncultivated lands which can be brought online much quickly. Sugar plants and sugar fermentation plants can be bought online, especially when done on a small to medium scale.

Unlike some who believe that there was divine intervention which led to oil being concentrated in the Gulf, I believe that it was just the low oil prices of the past few decades which prevented newer areas being explored. We will discover new oil and oil will stabilize between $60-$90.

NYMEX: Speculators Aren't Driving Oil Market

Moe Gamble:
1. The British study you posted has a graph on page 37, which shows massive swings in speculative long positions as the oil prices go up and down, with almost 1 to 1 correlation with oil price movement (Figure 4: IMF graph).

2. The amount of speculative money has increased substantially over the past year as long only commodity ETFs have poured cash into the commodity futures market. The price is determined by the marginal buyer and the speculators can drive the marignal price very high.

ronrhokal:

You can just roll over your future contracts to the next month. Plus there are also cash settled contracts where you do not take delivery of physical commodity but get settled based on what the physical contract is trading.

Futures speculation can contribute to immense volatility in essential commodities; that is why the Indian government has actually halted trading in food futures. Speculators can take food prices through the roof and cause massive disruptions.

Record High Crude: Free Markets Meet the Cartel

CrossingTheT:

I think we have already reached the point where we will no longer ignore oil and energy costs. So expect more initiatives to drill for more oil in the US, electric cars, higher fuel effeciency standards, solar energy etc. Silicon Valley VCs are heavily into alternative energy; solar stocks are on fire. A 10-20% downward movement in oil is not going to change that. In fact even if crude oil falls, it will not show up at the pump since gasoline spreads will widen a bit from the historic lows they currently are.

In the interest of the democractic world, just get speculation out of the oil market. Let commercial hedegers determine the price; not hedge funds and ETFs. Increase margin requirements, sell some futures and get oil to stabilize in the $80-$100 range.

Record High Crude: Free Markets Meet the Cartel

CrosingtheT:

All the GOTUS has to say that they will use the SPR to affect pricing. There are 702 million barrels of oil there (97% of capacity); that is 702,000 future contracts they can sell without going short. Even if they use 5% of that amount at critical points, they will make a difference in the speculative excess. Increase the margin requirements by 5x and you reduce speculation significantly.

You keep on talking about supply/demand. What has changed in the supply demand situation in the past one month for a move to $125 from $108?

And government intervention: Have you heard about The New Great Game? Oil and energy is the driver of the biggest geo-political games in this world. To believe that there is no political component to oil supply and pricing is not just being naive but completely disingenuous. We are losing the economic war every time we ship our dollars abroad in exchange for $125 oil.

Record High Crude: Free Markets Meet the Cartel

maximax:

As I have reiterated, the goal is to get speculators out. I agree with you that in the medium to long term, commodity prices are driven by fundamentals. However in the short term, they are driven by momentum and technicals. Oil prices have oscillated between $108-$124 over the past month; clearly a 15% range is not due to dramatic moves in fundamentals.

OPEC chief today declared that there is no supply shortage and there is 4 million barrels of spare capacity; however the market still rallied into the close. This is nothing but speculators taking over the market.

Though it is true that diesel stocks were down, you can not view that without regards to consumption. As the report indicates, the days of supply of distillates was at the highest level over the past five weeks!

Economic War: There is absolutely nothing which prevents oil producing countries to supply support in the futures market at key technical points. Iran's President today declared $200 oil as realistic. They will try their best to create situations where oil rises (whether it is gun boats approaching US ships or terrorist attacks); they can also participate in the futures market.

That is why some intervention in the futures market which can get excess speculation out of the market is in US interests.

BTW, the way CrossingTheT is questioning 'who are you to intervene...' seems to suggest that he too believes that government intervention might reduce the excess.

Increase margin requirements for speculators, sell some futures at key technicals, and oil will find its real price.

Record High Crude: Free Markets Meet the Cartel

Also short selling of stocks (the other argument you proposed against government intervention) does not result in a net transfer of wealth to countries amicable to our interest.

Speculative excess in the oil market transfers wealth away from the US. That is why it is in the national interest of the US to intervene in the market and reduce the speculation.

There are some observers who say that by increasing the margin requirements we will be driving speculators to other exchanges. That is where a concerted effort at the international level can make a difference. Increase the margin requirements across as many world exchanges as possible, and the role of speculators will decrease.

Record High Crude: Free Markets Meet the Cartel

It is fashionable to take a dig at CNBC. Over the past few days they have been beating the drums on the GS report and reporting the huge option volume. And typically they have both bearish and bullish commentators.

And you must be living in a different world if you believe that oil markets are 'free'. Oil and energy is the driver of the biggest political games in the world. It is anything but free.

Record High Crude: Free Markets Meet the Cartel

The focus of my article is to reduce the role speculators in the price discovery process. If commercial users feel that $120 oil is supported by supply/demand well and good.

CNBC is reporting what they are hearing on the floor; they are not inventing anything. If commercials are keeping out they feel that the market is not driven by fundamentals.

Speculators, by definition follow the trend. They are sensitive to technicals. Break the trendlines by well-timed selling, and the speculators will go and find another market to play with. Right now speculators do not see any headwinds towards the march to $150. Show them some red flags and alter the sentiment and they will move elsewhere.

And there is nothing which says that the SPR has to be filled up to the current level. BOJ interferes in the currency markets are they are quite successful in doing that. Similarly, the US Gov can use the SPR to sell futures at critical points in the market to signal the speculators to go play elsewhere.

Similarly decreasing the leverage by an increase in margin of 5x will decrease the role of speculators.

And even at $100, oil companies will have enough incentive to explore.

Record High Crude: Free Markets Meet the Cartel

CrossingtheT:


CNBC just noted that commercial hedgers are now sitting on the sidelines since they find this market totally crazy and detached from fundamentals. Speculators are ruling the roost. As the GS article noted speculators have and will significantly accelerated the process of the price-rise. What we need to do is to end or significantly reduce the role of speculators in the price discovery process.

I pointed about the days of supply of distillates to show that the report had little bullish about distillates but oil still rallied. We can talk about global demand and what not, but that demand did not emerge overnight to drive oil up, after a relatively bearish report.

The capacity of US airlines is falling as airlines go belly-up.

I am a US citizen and have a US centric view. As you wrote in another post, the US subsidizing the security of trade routes, while protecting Europe during the Cold-War. Right now we have huge oil reserves in the SPR and we are fighting an economic war. The least we can do is drive away the speculators and let supply-demand find the price equilibrium; not speculators who cause huge spikes.

Spikes in energy costs have a huge disruptive impact on developed economies and it is in our national interest to prevent it.

I am all for our government intervening to prevent powers who will be happy to see our destruction become more powerful.