Oil may hit $100 on China, QE and France: JP Morgan

Discussion in 'Wall St. News' started by S2007S, Oct 22, 2010.

  1. S2007S


    I would really like that to happen, talk about a drop in consumer sentiment. $80 is high enough, $100 oil would hurt retail and consumers alike putting a huge negative against spending in the overall economy, there is no way this economy could support $100 oil. $100 oil is possible but the likely hood of it staying at that level and higher is not going to happen as the economy is still very, very, very weak.

    Oil may hit $100 on China, QE and France: JP Morgan

    LONDON | Fri Oct 22, 2010 6:35am EDT

    LONDON (Reuters) - Oil may reach $100 a barrel sooner rather than later on Chinese demand, a dollar weakening due to anticipated U.S. quantitative easing and expected restocking of French inventories when strikes end, JP Morgan said.

    The bank also raised its forecast for U.S. crude futures to an average $81 a barrel for the current fourth quarter from previous $75 a barrel. The 2010 and 2011 forecasts were raised by roughly $2 to $78.50 and $82.50, respectively.

    "The key risk is that we are being too cautious and that the threat of $100 per barrel oil that is implicit in our fourth quarter 2011 oil forecast arrives much sooner than we expect -- driven by not only a weak dollar, but also by rampant Chinese and emerging market demand, the rebuilding of French strategic stocks," Lawrence Eagles of JP Morgan said in a research note. JP Morgan estimated supply disruptions caused by the strike at France's largest oil port Fos-Lavera since September 27 and industrial action at refineries reducing middle distillate inventories there by 8 million barrels in October.

    France will have to rebuild fuel stocks as soon as the strikes end.

    "In conclusion we can see the need for additional imports of diesel," the bank said.

    "But should the strike fade over the coming weekend then the overall impact to French inventory levels will seem substantial but not catastrophic and should provide an opportunity for additional European imports of ultra-low sulphur diesel in the short term."
  2. Larson

    Larson Guest

    The price of oil is currently distorted. There is ample supply and no reason for it to trade above 65/bbl. even with China.
  3. Without disagreeing with JP Morgan :) it would seem logical that in order for the situation in France to be significant going forward, it would have to have been a significant negative to pricing already.

    Currency adjusted pricing (not $ pricing) is the biggest factor in the S/D picture. Oil producing economies will likely feel their own distresses if oil breaks below $70. It seems fairly clear that $100 oil in the US will likely result bring another wave of demand destruction.

    It is absolutely unclear if the $ has another 20% down side. It appears the FED is talking up more QE as a threat to obtain support for re-balancing proposals (trade deficit cap's as a % of GDP - with exemptions for commodity exporters) that are being floated in preparation for the November G-20 Leaders Conference. Without another crisis on the horizon it will likely be every man for himself (ie no commitment to trade caps).

    The Fed's bluff will get called. Or perhaps the Fed is in the process of creating the next global crisis?
  4. Looks like the Fed is not going to carry the day - Bluff Called - Will the Fed carry on unilaterally and precipitate a trade war and another global financial crisis? Is the only alternative a second recession or worse in the US? These are tough and scary times.

    Quote from Reuters
  5. The value of the dollar controls the price of oil, and by extension gasoline. Since many of our energy products come from other countries, the price of oil and gasoline becomes more expensive when the dollar cheapens.

    Part of this is foreign oil producers being unwilling to be paid in less-valuable dollars, so they demand higher prices as compensation.

    The other part is that Wall Street speculators already know what I just explained to you, so they jack up oil and other commodities in trading in reaction to American currency weakness and expectations of inflation.

    You might have noticed summer is already over. So in normal times the price of oil and gasoline was supposed to decline as we bade farewell to what is known as the "peak driving season."

    But because of the dollar's weakness, the supposed-to's turned into didn't-happen's. Oil prices are up nearly 13 percent in the past few weeks; gasoline is 10 cents a gallon higher in just the last 14 days.

    Read more: http://www.nypost.com/p/news/busine...pay_more_5BeRRAdqhJLD0CRNgTQHWO#ixzz13BWDgxWE
  6. For anyone wanting to build a better picture of oil markets, the United States Energy Information Agency has great set of articles located at the following link: Oil Market Basics

    If you want a glimpse of how even global markets can be manipulated, check out this U.S. Senate Permanent Subcommittee on Investigations Report from 2006. This looks like the script that gave us $145 crude oil in early summer of 2008. At the time oil broke $140 the investment houses were predicting $175 / bbl oil before summers end. The "Enron" loophole got closed on June 18th, 2008. By that time oil had been peddled as a "long term" inflation hedge by the pro's to the chumps. Crude oil pricing collapsed from $145 to $106 during "peak driving season". The Role of Market Speculation in Rising Oil and Gas Prices

    The '08 oil spike gave the US $4+ / gallon gasoline. This probably helped start the wave of mortgage defaults which lead to a popping of the US housing market bubble, and the financial meltdown that followed.

    Everyone forgets the role that pricing has on "demand destruction". In the late 70's everyone was predicting $100 /bbl oil. Instead the US auto industry lost significant (and probably permanent) market share to fuel efficient imported cars.

    Continued US$ devaluation will suppress US consumer demand because it will feed forward into commodity pricing placing more pressure on financially strapped consumers.
  7. For anyone wanting to build a better picture of oil markets, the United States Energy Information Agency has great set of articles located at the following link:

    Oil Market Basics

    The Role of Market Speculation in Rising Oil and Gas Prices


    Question, I only took a cursory glance but do either of these reports discuss margin requirements? Any mention the role of cheap money on specualtion during this time period.?
  8. piezoe


    There is one action that would have a dramatic effect in both bringing down the price of crude imported into the US, in spite of the lower dollar, and would go a very long way toward correcting the U.S. trade imbalance. All we have to do is act.

    If the U.S. congress would finally pass a comprehensive energy plan that included Mr. Pickens recommendation that we convert all 18-wheelers and the entire Federal Fleet to natural gas, the price of crude will be held in check, and gasoline prices will come down.

    Ultimately natural gas fueled cars should be phased in as well.

    The U.S. has huge reserves of natural gas, according to Pickens.

    Internal combustion engines are more or less easily converted to run on natural gas. There are already nationwide natural gas pipelines for easy distribution throughout the country.

    Natural gas burns more cleanly than gasoline and engines burning natural gas stay cleaner.

    Switching to natural gas would not do anything for the CO2 emission problem, but neither will rechargeable electric cars unless the electricity is generated by nuclear fission.

    Pickens has not suggested natural gas as the ultimate transportation fuel, but instead as an interim fuel superior to gasoline for cars and trucks.

    Pickens is correct. His proposals will be fought tooth and nail by the Big Oil Lobby, and supported by the nat. gas lobby, of course.

    The biggest beneficiary would be the U.S. population who in spite of somewhat higher nat. gas prices would benefit enormously in the long run from the trade balance being corrected, and for other reasons as well.

    Because this is such an obvious and doable proposal with great benefits, I am quite certain congress will fail to act and instead will spend their time endlessly debating whether a fertilized egg is a human being.
  9. Who says so?
    Goldman sachs yet again?

    Google pump-and-dump
  10. The CFTC has been in the business of monitoring the level of speculation in regulated commodity markets for years. Position limits are created to constrain pure speculation to a level that provides for price discovery without becoming excessive to a point where it can drive pricing beyond commercial supply / demand factors.

    The "Enron" loophole provided a mechanism to allow significantly higher speculative positions beyond the oversight of the CFTC in look alike instruments traded in non-US electronic exchanges. This was not an issue of margin requirements (%) or cheap money. It reflects the idea that excessive speculative inflow can distort price discovery mechanisms. At this point most of what was recommended has found it's way into practice. It amazes me that the Senate report was published in June 2006. This corresponded closely to the begining of the rapid price acceleration in CL which peaked in 08. If supplies were so tight to give $140 / bbl in June 08, it's hard to envision that pricing could collapse as rapidly as it did. (Unless of course you accept that excessive speculation was at work here).


    Key findings from the Senate report are shown below:

    Based upon its investigation into the role of market speculation in rising oil and gas prices,
    the Subcommittee staff makes the following findings and recommendations.
    A. Findings
    1. Rise in Speculation. Over the past few years speculators have expended tens of
    billions of dollars in U.S. energy commodity markets.
    2. Speculation Has Increased Prices. Speculation has contributed to rising U.S.
    energy prices, but gaps in available market data currently impede analysis of the
    specific amount of speculation, the commodity trades involved, the markets affected,
    and the extent of price impacts.
    3. Price-Inventory Relationship Altered. With respect to crude oil, the influx of
    speculative dollars appears to have altered the historical relationship between price and
    inventory, leading the current oil market to be characterized by both large inventories
    and high prices.
    4. Large Trader Reports Essential. CFTC access to daily reports of large trades of
    energy commodities is essential to its ability to detect and deter price manipulation.
    The CFTC’s ability to detect and deter energy price manipulation is suffering from
    critical information gaps, because traders on OTC electronic exchanges and the London
    ICE Futures are currently exempt from CFTC reporting requirements. Large trader
    reporting is also essential to analyze the effect of speculation on energy prices.
    5. ICE Impact on Energy Prices. ICE’s filings with the Securities and Exchange
    Commission and other evidence indicate that its over-the-counter electronic exchange
    performs a price discovery function – and thereby affects U.S. energy prices – in the
    cash market for the energy commodities traded on that exchange.
    B. Recommendations
    1. Eliminate Enron Loophole. Congress should eliminate the Enron loophole that
    currently limits CFTC oversight of key U.S. energy commodity markets and put the
    CFTC back on the beat policing these markets.
    2. Require Large Trader Reports. Congress should enact legislation to provide that
    persons trading energy futures “look-alike” contracts on over-the-counter electronic
    exchanges are subject to the CFTC’s large trader reporting requirements.
    3. Monitor U.S. Energy Trades on Foreign Exchanges. Congress should enact
    legislation to ensure that U.S. persons trading U.S. energy commodities on foreign
    exchanges are subject to the CFTC’s large trader reporting requirements.
    4. Increase U.S.-U.K. Cooperation. The CFTC should work with the United
    Kingdom Financial Services Authority to ensure it has information about all large
    trades in U.S. energy commodities on the ICE Futures exchange in London.
    5. Make ICE Determination. The CFTC should immediately conduct the hearing
    required by its regulations to examine the price discovery function of the ICE OTC
    electronic exchange and the need for ICE to publish daily trading data as required by the Commodity Exchange Act.
    #10     Oct 24, 2010