All of the PowerShares DB Crude Oil ETNs are based on a total return version of the Deutsche Bank Liquid Commodity Index-Oil (the "Index") which is designed to reflect the performance of certain crude oil futures contracts plus the returns from investing in 3 month United States Treasury bills. The Long ETN is based on the Optimum Yield™ version of the Index and the Short and Double Short ETNs are based on the standard version of the Index. The Optimum Yield™ version of the index attempts to minimize the negative effects of contango and maximize the positive effects of backwardation by applying flexible roll rules to pick a new futures contract when a contract expires. The standard version of the index, which does not attempt to minimize the negative effects of contango and maximize the positive effects of backwardation, uses static roll rules that dictate that an expiring futures contract must be replaced with a contract having a pre-defined expiration date.
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Unrest in Egypt is helping add to anxiety in the oil markets (USO +1.4%), but it is not likely to significantly lift oil prices that already have been elevated for months due to Middle East turmoil, says the head of Middle East research for IHS CERA. There is enough supply in the oil market today that any potential disruption of the Suez Canal transit route would not be significant.
Is the U.S. oil renaissance overhyped? U.S. oil production grew faster than almost all the world's major energy players last year, but some analysts think the industry can't maintain its blistering growth. AllianceBernstein sees the marginal cost of crude in the U.S. at ~$95/bbl, which makes new production vulnerable to sharp price drops. Also, declining Bakken and Eagle Ford well production rates suggest “the best is behind us."
The odds that oil prices will fall over time due to supply increases gets support from the IEA's latest oil market report, which projects the amount of oil processed by refineries to rise by 2.2M bbl/day between Q2 and Q3 to average 77M bbl/day. Non‐OPEC supply expectations are raised to 54.5M bbl/day for 2013 on rebounding output in South Sudan and strong North American oil sands and tight oil production.
On the face of it, it's a smooth meeting of OPEC ministers, who decided - as expected - to maintain the current 30M bbl/day oil production cap. But there are some elephants in the room: the impact of North America's energy glut on OPEC’s periphery, how best to accommodate rising Iraqi output, how to close the political divide that prevents the selection of a new secretary general, and even whether OPEC is now a "paper tiger."
Oil traders might have an opportunity in the recently-narrowed spread between WTI crude (USO) and Brent (BNO), says Goldman. Though expecting further narrowing in the near-term, the team recommends selling WTI Dec. 2014 contracts and buying equivalent Brent as rising Gulf Coast supplies later this year and in 2014 should pressure WTI prices.
Thanks to U.S. shale oil, demand for OPEC crude will remain largely unchanged over the next five years the IEA says in its semi-annual report. "Output growth from North America dominates the medium-term growth profile," the agency notes. By 2018, U.S. output should reach 11.9M barrels per day, 20% of the projected total of 59.3M barrels per day of non-OPEC supply.
The commodity boom (DBC) is over, writes Morgan Stanley global macro chief Ruchir Sharma, as massive overinvestment - mostly to feed China's voracious demand - comes online just at the time said demand becomes considerably less voracious. Not only are China and emerging markets in general slowing, but the countries are striving to become more efficient (USO) as well. "If historical pattern holds, we are now entering a long period of falling commodity prices, which could last two decades."
One would expect lower crude inventories to result in higher prices, but that didn't happen yesterday as WTI slid below $87. Walter Kurtz's four possible reasons to explain crude's downside moves: weaker than expected growth in China has sparked a negative sentiment in commodity markets; hedge funds unwinding positions; lower U.S. demand for gasoline; North American production continues to surprise.
It's not as bad as gold, but crude oil is taking a beating too as weaker-than-anticipated economic reports from China deepen demand worries. Goldman Sachs says it has closed its long position in Brent crude with a loss of ~15%, worried prices will come under more pressure as European refining capacity comes back online after routine maintenance. WTI -2.9% to $88.59, Brent -2.6% to $100.45.
China's GDP miss and disappointing industrial production data are sending global equity markets lower, as well as copper and oil, which is also suffering from the IEA slightly cutting its demand outlook last week. Japan -1.6%, Hong Kong -1.4%, China -1.1%, India +0.6%. EU Stoxx 50 -0.2%, London -1%, Paris -0.8%, Frankfurt -0.8%, Milan -0.2%, Madrid -0.4%. Oil -2.4%, copper -1.5%.
Crude futures give back a bit of recent gains after the IEA cuts its outlook for global oil demand growth to 795K bbl/day from a previous 820K bbl/day, reflecting weak demand from industrialized countries and especially Europe, where 2013 consumption is seen at the lowest since the 1980s. Still, political threats to supply and an imminent recovery in refinery operations mean it's "too early to call a bear market."
West Texas crude’s discount to Brent prices widened from the narrowest in almost nine months after Exxon Mobil (XOM) shut its 96K bbl/day Pegasus pipeline system due to a leak in Arkansas. Inventories already are high, and the pipeline closure will mean less crude can be transported from the U.S. Midwest, potentially exacerbating a glut of oil coming from Canada to the Midwest.