Battle of Kursk (2024) Revisited: illuminated by flames

It is well over three weeks of Ukraine's incursion into Kursk.  If they so choose, they can easily extend this into next month, maybe longer: the word in Moscow is that Putin has set his birthday (in October) as the deadline[1] for expelling them.  

His policy is consistent with the 'Stalin 1941' approach he has generally taken when hit with an unexpected blow: lie low for a bit (doubtless squaring away various issues and people behind the scenes), then tough things out - the policy equivalent of trading space for time, always Russia's default reaction.  Would be deeply unsatisfactory from the standard western point of view as regards being seen to respond with urgency, but doesn't seem to bother most Russians very much ("wait till the Tsar finds out ...").  Meanwhile his Donbas advance continues - with faint signs that manoeuvre warfare might even be breaking out there too.  Oh, the rush to get things done before the US election!

Putin's policy of not troubling too much over Kursk may be assisted by a phenomenon noted in France during WW1.  Primitive opinion-surveys determined that the population in the south of France - many hundreds of miles from Verdun - didn't care very much at all about what was happening elsewhere: northern France's peril didn't seem to move them.  The French powers-that-be took this so amiss, they instituted (inter alia) the rigid, universal school curriculum that had every French kid taught exactly the same thing - i.e. whatever the government dictated - at exactly the same time, wherever they were.  Knowing first-hand how brutally racist Russians are towards Ukrainians, it seems possible (though personally I have no evidence) that Muscovites don't view deep-south Kursk residents in a particularly sympathetic way either.  In any event, that 'word from Moscow' also has it that Russia as a whole is not much troubled by the Kursk incursion, distinctly limited in geographical scope as it will always be, however long or short. 

While we await further developments on all these fronts, Ukraine's ultra-successful drone-strike campaign is having a genuine effect on Russian oil supplies, petro-facilities being nigh impossible to defend.  The standard official Russian line is usually that "a drone was shot down over the refinery / whatever, and fragments caused a fire that subsequently spread".  Everyone knows this means the attack was successful: and as one milblogger acidly wrote, shooting down a high-explosive drone directly over its target is likely to be "a posthumous achievement" - for both the shooter and the target itself.  Incidentally, the fact that one of these fires has raged for 12 days now (and counting) tells this old oilman that the Russians have failed to fit non-return valves in their oil infrastructure (i.e. the fire is being fed by oil still arriving unpreventably into the facility from the pipelines it is connected to) - which isn't even remotely surprising: their whole set-up is truly primitive by western standards.  They'll no more be able to retrofit valves in a hurry than land a cosmonaut on the moon[2] - indeed, they probably won't even be able to buy them.

Of course, they can and will source oil from elsewhere and truck it in.  The lines of logistics, though, start to get very stretched indeed[3].  

ND  

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[1] Of course, Putin's deadlines, like his 'red lines', are eminently flimsy, as has been proven so often it's a wonder he still sets them.

[2] Amazingly (by western standards), the Russians have even attempted to bring the blaze under control by holding a prayer meeting at the oil depot in question, complete with saintly relics.  Sadly for these pious folk, an oil tank took the opportunity to explode during the ceremony.  Still: always gotta admire piety.

[3] Also, there will be a lot of folk taking a cut in such an ad hoc operation.  The beauty of fixed delivery-infrastructure is that once built, it's relatively hard for the usual embezzlement to take place along the supply chain.  But an operation based on thousands upon thousands of trucks ...

The Saudis and the 'Petrodollar Deal'

Several days ago, there were stories that a supposed US-Saudi deal had elapsed (at its 50th anniversary) with potentially earth-shattering consequences.  We said we'd take a look.

The 'deal' (as reported) was that the US would guarantee Saudi's security militarily in various ways, in return for the Kingdom only selling its oil in dollars, and reinvesting (most of?) those dollars in US government bonds.  This had the effect of propping up the dollar all these years, as nations globally were forced to buy dollars.  End the deal, end the dollar, was the implication.

Hmm.  Well, firstly I know nothing about macro-economics, so I'm always open to being corrected on some of these things.  (My state of macro ignorance has never held me back, since happily I've always found that micro competence is the way to make money.)

That said, here are a few thoughts.

• several well-informed commentators stated there never was such a deal !
• whether or not the doomsayers knew this (I thought everyone did, but maybe not), the US is about to sign a significant new defence pact with Saudi.**     We probably won't be given the full text ... but I can't imagine the US isn't getting more or less whatever it wants from this
• given that the whole world (not least, China) holds US Treasuries, who wants to crash the dollar anyway?
• the FX markets are just about the most liquid on the planet.  What difference does 'pricing in dollars' make?  (There's my macro ignorance showing - but seriously now, just tell us.  It isn't as if oil is priced in dollars at a fixed price, is it?)
• after many years as a net oil importer (indeed, net energy), since the shale revolution the US has been a net exporter.  That makes the world a rather different place to what it was 50, 30, 20 years ago, in ways that I'm sure the US Treasury is on top of
  

From time to time we hear guff about how China wants the whole world to switch to renminbi, or alternatively some devious crypto-currency of their devising.  Nothing much seems to happen.  Similarly Russia says that, Uncle Sam being a busted flush, it will now export its oil and gas in rubles, thank you very much.  The rest of the world waves them a cheery two fingers.  

The simple fact is that liquidity is liquidity.  Loads of countries announce from time to time that they are going to supplant this or that feature of the established (western-led) global order, but it rarely does them any good.  For many years the Russians have sought to develop a global market in "Urals Blend" crude oil in order to break the tyranny of Brent (i.e. UK / North Sea) pricing, but Brent it remains on the world market.  After Brexit, the EU toyed with the idea of relegating English to "just the language spoken by Malta": and the French fancied their hour had come!  Tough titty, frogs: English it remains, long after the English themselves have departed.  Liquidity is liquidity.

I have a very strong suspicion nothing much has changed between the US and Saudi this year.  At any event, the US dollar remains my hedge against a UK meltdown.  It served me very well during the financial crisis 2007-10.

Any views from those with a proper PPE degree?  

ND

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** Incidentally, within the USA itself there is a significant school of criticism of this deal, not least in military circles: "we don't need their oil, so why do we need them any more?"  Not too difficult to come up with answers to that question, though.

Evans-Pritchard on Oil & Commercial Revolution

AE-P seems to be a bit of a cult fugure for some, and here he is on the propects for "Negative Oil" (meaning negative CO2 emissions) and "negative aluminium" (ditto, mutatis mutandis) - and he doesn't seem to be behind the usual DTel paywall.  What does Negative Oil mean?  It seems that "emblematic" oil compay Occidental intends to "become net carbon negative on all its operations and the oil it sells in order to insulate itself against the enveloping climate backlash".

Before getting stuck into this very interesting subject, we do need to enter several caveats.

• the very fact it's not behind a paywall means that it's being sponsored - presumably by Oxy
• the definitions of "negative oil" that we encounter as we go along are pretty weasely - at one point it's as unimpressive as "you can have net negative reservoirs", which has been true for a very long time - in certain very specific and non-typical circumstances
• the "negative aluminium" stuff comes from "Russian owned EN+" (Deripaska), fronted on this occasion as on many others by "Lord" Greg Barker, a notorious BS merchant 

Putting that important dollop of skepticism to one side, there are a couple of significant takeaways.  The first is the very real prospect of investors turning sour on "traditional" hydrocarbon companies, the brighter ones among which are rushing towards both the buckets of greenwash and, with the longer-term picture in mind, the strategic corporate restructuring advisers (statement of personal interest here, *ahem*).  The prospects of (a) some seriously stranded assets and consequent balance-sheet impairments; and (b) increasing cost of capital, are very serious indeed for these most capital-intensive of businesses.  Public opinion is fickle, and clamour for divestment can really rattle institutions.  When it becomes a run on the bank, it's a self-fulfilling prophesy, as a lot of green activists are fervently hoping and striving for.

On the other hand.  The actual demand for oil & coal (as opposed to demand for oil shares and coal shares) isn't going to fall precipitously: it can't, while China still breathes**.  It's all a bit reminiscent of the tobacco industry a decade or so ago.

What can easily happen, though, is that even with stable-ish demand, the cost of capital rises (due to unpopularity with investors).  We're talking about western companies here, of course - there are loads of NOCs who don't care, and may be looking forward to stepping into the breach, picking up distressed assets and market share.  But they ain't necessarily very good at production technology (or indeed finance), even if they plan to hire a bunch of mercenary engineers to help them along.  (And there may not be so many of those; because the big players retreating from oil are piling into other energy tech, and will have jobs for many engineers - even if not always the same ones.)

So, while there'll be no shortage of oil, on both counts (cost of capital and engineering efficiency) production costs are going to rise. 

One question, then, is: does this wash through into the price of oil?  It's an important fact that in the short and medium term, production cost has bugger all to do with price except at the very sensitive margins.  (Plenty of people will tell you there is $2 oil available in large amounts in Iraq; but ...) 

Another question is: WTF happens to the pension funds of the western world while the IOCs are busily and expensively redefining themselves?

And I'm sure there are more such fundamental issues to ponder, when we're at such a remarkable turning-point.  Have at it in the comments, C@W-ers. 


ND
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** not intended as a pun or off-colour comment: but there is a point there

A copper-bottomed bet?

It's been a bloodbath for many years in the commodity sector. Many shirts have been lost (a few of mine even, tear-stained ones...). The price of oil is normally one of the key metrics along with gold for assessing asset inflation.


However, gold is only around $1300 an ounce, which whilst double the 2008 low is a long way off the $2000 plus highs. In fact, there has not been much movement in gold at all this year, as compared to say Bitcoin which is rapidly taking shape as the future of independent store of value.


Then we come to oil, off its $30 lows of the post-shale revolution, but still only around $50 a barrel and that is after some small, but actual, production cuts from OPEC. The supply side still looks strong though and this at a time when global non-recessionary GDP growth is de-coupling from the oil price/supply for virtually the first time in a hundred years.


Which leads one to look further afield and this for me is to copper;





Copper looks interesting, the world's biggest miners have been struggling with various geopolitical events and supplies are not increasing that rapidly. The building of China still is eating capacity but the new found desire for electric vehicles also implies a long-term demand surge for the metal that is the core of the electricity transmission industry (of course, Lead/Lithium are looking good too). So demand is growing whilst supply is relatively flat.


I wonder if long-term there may even be a good long/short bet on copper versus oil as the switch away from petrol and diesel cars takes hold over the next five year?

A world of electric cars?

Reports like the one out today are meant to be read for their shock value.


No doubt, greenies everywhere are busily sharing and approving of this report, which claims that in 10 years the petrol/diesel engine era will be over.


However, I am not so sure about these claims. Firstly, the electric cars are still too expensive and although battery technology improves, they are relatively slow. Maybe in about 10 years they will start to be competitive, but I doubt before then. And, when they do they are going to need to have a huge road tax (something needs to replace petrol taxes), so delaying the day or competitive equivalence.


Then there is this nice communist dream I see everywhere about Uber taking everything over and people not owning cars. This works just in in, say, London. Anywhere outside a major conurbation this is an idea for the birds. It has taken a century to get the world set to make people free, they are not going to give this up easily and certainly not within a decade. Who cares about saving money when you have a choice about freedom to make (er, the EU referendum vote anyone?).


Then there is the charging, people will get used to it, but an hour plus stop all the time is not an easy thing. Just to be controversial too and anti-capitalist, this is an area where international standards are needed too, so that all cars are compatible with some kind of generic charging platform.


Whilst I don't doubt electric is catching on (all the rich, cool people in my town now are rushing to buy Model X Tesla's), it will be a longer than 10 years for it to try to replace the current infrastructure - and this is in the West, let alone the rest of the world where power is not even stable or affordable!


I won't be rushing to short oil companies just yet.

Better policy needed for North Sea to stave of shutdown

The North Sea, the pot of Gold for Independent Scotland, is in the worst crisis since 2008/9. With Oil prices hovering around $50, the highest cost oil producing region in world in understandably in trouble.

Jobs are being lost and contracts are either not being renewed or cancelled. Several of the international oil majors are pulling out of the region and looking to sell their remaining fields.

Moreover, the Government Regulator is fixated on De-Commissioning costs, over and above the cost of production. Laughingly a couple of years ago Executives were wondering whether to buy older fields as they balanced the income against the decom cost to see whether there was any economic point in acquiring; it came up as a no surprisingly often.

However, this is still a significant chunk of UK industry and know-how. Yes, all those Scots can offski to Dubai and the Far East for lives of expat bliss, much as shipbuilders once did.

Is there a way though to actually keep the oil following for the next 10-15 years and make the most of what we have?

The answer must be yes, but will require more Government flexibility. One hit the Industry took was Osborne raising taxes in his first budget in 2010, when prices were still high. Now that prices are below cost, there needs to be a severe relaxation of the tax regime to encourage companies to stay in business. Gordon Brown had his much maligned fuel-price escalator....but there is a kernel of an idea there.

The world now moves much faster that it used to, business is connected and the markets are connected globally to a very highly-correlated extent. Government budgets and taxes are set on an annual basis - Companies don't like too much change because they want to plan expenditures.

For oil though, the biggest variable is the price of the product, over which the companies have no control - a bugger of a business. So why not get the Government to set moving tax thresholds set on a moveable price.  The difference to today, where the percentages are set (providing some market balance), would be that different tax thresholds would come into play over quarterly or bi-annual periods. When the price of oil was very low there would be negative taxes to ensure employment and the industry continued, made up for when prices were higher by higher bands. The next impact would be that cash flows for the North Sea companies would be more stable - but better than the huge breaks given to the fortunate few like Chevron and Maersk but not to the likes of Ithaca or Enquest.

Government needs to be more flexible in its approach, else a whole industry will be gone before we know it. Oil prices are going nowhere but down for the next few months and years maybe, so without action the North Atlantic shelf will not survive the competition from the US Shale boom - or indeed a growing potential UK shale boom.

Is the North Sea really a dead duck?

The papers are full of bandwagoning about the death of the North Sea. Do we think this is true though or just useful copy as the fall in oil price plays out.

Here are some thoughts on it:

1 - The oil price will bounce back, but in reality the days of $200 oil are a chimera. There is lots of shale oil, LNG is replacing oil demand rapidly across the world (rapid in terms of over this decade). Many countries full of oil have restricted access to market - Libya, Iran and Syria for example.

2 - So where will it hit, well the ceiling may well be governed by the Shale Oil sit around $69 in the US currently, maybe a tad more. So long-term this may well be the placeholder for oil to float around - touching a hundred in times of stress maybe, but no further. Certainly going lower at points such as we are now.

3 - Oil demand is rising more slowly than in the past as the world grows more slowly and Renewables and LNG take the strain- another long-term constraint is in play.

So, overall this is very bad news for the North Sea, where extraction costs are $60-70 per barrel - the same as Shale oil. So it won't die but it becomes a very marginal business with small fields at the end of their lives. Plus the increasing regulation around decommissioning is another negative factor.

I can't see a new North Sea rush without huge tax breaks (umm, by which I mean reduction of the huge taxes on production and distribution, not actual subsidies) which maybe what is needed. The greenies in the political parties may well put a stop to this.

Such a shame for the humour of the world that the Scots did not go independent though and then have to face this reality!

Oil price to continue falling this week; outlook weak

A long time since I put any kind of trading thoughts in a post (given how bad my position were/are, I have no right to comment!).

However, this week there is a nice gimme. Firstly, in an effort to try and keep Iran on side against ISIS the major nations have today extended their talks with them for another 6 months. No agreement could be reached on the nuclear aspirations of Iran, so instead of a reversion to previous stance, another roll of the dice has been agreed.

Next up later this week is an OPEC meeting where Iran and others are keep to try and agree a cut in supplies. Sadly for the cartelistas, but happily for everyone else except rabid Environmentalists, it seems unlikely that much will be achieved.

Firstly, desperate countries like Nigeria and Venezuela have no real room to cut exports as they need the money. Secondly, Saudi Arabia seems quite happy to be able to defeat its enemies by creating excess supply. Russia is selling what it can too and is not even in OPEC.

Rather weirdly for Saudi, but also very handily,  low prices cause:

- Problems for US Shale producers
- Problems for Russia and Iran in terms of low prices
- Problems for ISIS in terms of low prices
- Benefits for Europe, China and Japan in terms of helping low prices.

So, why on earth is Saudi going to agree to any major cut? It isn't.

Instead the fall out from today's standstill agreement with Iran and also Thursday non-agreement with OPEC is going to see the Brent and WTI lose another 10% this week in pricing as they head down to the low $60's per barrel.

Danny Alexanders desperate fuel gambit

So typical of a failing minister - th fuel gambit. Whenever a nice, populist and patently untrue statement is demanded, fuel prices are right up there.

It is the mark of the unthinking, publicity seeking MP to roll out this old chesnut as soon as they notice the price of oil going down. Extensive research today has revealed, exclusively to C@W, that no minister in history has ever come out to note that petrol prices are low and should go up to keep up with the market.

61% of the price is petrol is Duty - Petrol taxes and VAT. So given crude oil has fallen $30 over the last few months, which is about 30%, you would only rationally expect to see a fee through of 18% in terms of a real price impact.

DECC handily keeps the stats, so we can see what has actually happened. Brent oil has hovered for most of the year around $103 to $108, with one spike up to $115 when ISIS really kicked off. The is has dropped down to $82 today.

UK retail fuel prices matched this, at around staying between 128p and 130p for most of the year. The big dive in Brent pricing occurred in September and since then the petrol price has dropped 6p per litre, down to 122p average today. Of course, this equates, accounting for duty staying the same, to around a 10% drop.

Perhaps Danny Alexander is right and there is a 8% price gap here - petrol should around 2-3p cheaper. Of course, plain market mechanics explain this, crude oil is not petrol, it needs to be bought, shipped, cracked and distributed. This all takes around 2 months. We should be seeing further price drops in the next 2-3 weeks as the supply chain catches up. Perhaps another 2p before Christmas depending on whether the market stabilises.

Of course, Danny Alexander is a Lib Dem, famous for their election leaflets where they stand next to fixed potholes in the roads with their thumbs up, as if somehow this was their efforts on behalf of the electorate. The same is true of this, Mr Alexander knows full well prices will fall and no doubt before Christmas will make an announcement about how wise the petrol retailers were to obey his orders on this.

Shame he can't lose his safe seat at the election, eh?

 

The coursing damage of oil money

Norway, the only Country in the world ever not to have totally squandered its oil wealth. Virtually every other country has become exceedingly corrupt on the back of oil wealth, although how much of a contribution it makes to the overall economy has a great bearing too.

I note the US has bouts of being unduly affected by major oil and gas effects, from way back in time with Standard Oil, to the Halliburton of today. But oil is not the sole contributor to the US economy, so although effective in pushing foreign policy agendas and such like, it is rarely totally dominant.

Other countries fair less well, the states of Africa become kleptocracies for decades and only finally now are making some progress, having learned the hard way from Chinese intervention and constant civil war. But the greatest oil state in Africa, Nigeria, is still very corrupt and hosts Boko Haram - the south of the Country, Imo, is poisoned beyond recognition and resembles parts of China more than Africa's beauty.

The main threats, rapidly growing, in the world today focus around the Sunni sponsored growth of Whabbist Islam, Shia countering sponsored by Iran and Russian attempts to re-create Greater Russia.

All of these are funded, not so much directly but States (Iran being the exception), but by wealthy oligarchs. Naive Qatari and Saudi shaikhs channelled the money to build Al-Nusra in Syria which in turn spawned IS. They still do, the army of IS being paid for by these funds in the main and the mercenaries fighting for them (its never all about religion is it, remember the crusades) being paid up to $10,000 a month to fight. No wonder IS managed to amalgamate all the disparate Syrian and Iraqi forces - the side with the richest battalions wins.

Outside of the Syria-Iraq disaster, but sadly forgotten on the sidelines, is the sad case of Libya, with warlords fighting over key resources and the key oil terminal at Ras Lanuf for funding. Libya has entered firmly into failed state category. the only saving grace for the world is that the Libyan population is small - half the size of London and similar to Scotland, so the effect of a rapidly growing diaspora will be minor.

In Ukraine, Oligarchs were first responsible for raping the country, then fighting to get their placemen elected and thence now to defending or attacking Eastern Ukraine. Some of the oligarchs are Russian and some are Ukrainian. Their money and power,  mainly taken from either oil or coal mining, allows them more power than State actors. Putin himself plays the role of the Oligarch personified as a State actor, having subsumed the nascent democracy of Russia.

So much of the difficulty of ending the conflicts at the moment is to do with the funding and support for them. Much as Israel/Palestine has always had backers on both sides, wars that continue this way mean money for the those involved. They are harder to end than more conventional state wars because the financial conduits are hard to close.

Moreover, the rich men who support the wars have little stake in the post-war settlement. They care nothing of the country or people whom they fund to fight (like Gaza these past sad years). being removed, personally they are at no risk.

All of these men became able to influence through the immense power of controlling oil resources. I am no leftie nor greenie, but the world is a harder, sadder place for this and with resources running out over time the fighting over them and with their riches will surely only become tougher.

The world was a better place when they wasted their money on wine, yachts and women.

China Getting Its Act Together

A laughably arrogant heading ?  Writing here about China my refrain has generally been - the 21st century may ulimately belong to them but, right now,  how very far they are from being a confident actor on the world stage.   Constantly wrong-footed by events from Libya to MH370, barely able to restrain Fat Boy's appalling North Korean excesses, clumsy in their dealings with neighbours around the seas they share, yet in serious need of raw materials from beyond their borders: no, China hasn't cracked the Top Nation thing - yet.

But as a good empiricist I need to keep my assessment up-to-date, and here's an interesting marker, from the Peoples Daily Online (English version, natch).  They've translated the headline: Is China Wrong To benefit From Iraq?, but I stuck the original into google translate, and it came up with the rather more revealing: China on the issue of Iraq "free rider" wrong?  which neatly captures the concern - as ever, a tad defensive about how they are perceived.  Is China just letting the USA et al do the heavy lifting for them in Iraq ?   At which point, under his banner of every nation for its own self-interest, our friend Budgie will no doubt say: why not ?  But clearly the Chinese see the need to cover the statesmanlike angle.

Here are some salient gobbets. 

Taking advantage of stability in Iraq and the Middle East as a whole, China makes substantial profits from the petroleum trade*, which further promote the healthy development of relationships between China and Iraq ... Responding to Obama's announcement of airstrikes against extremists in Iraq, a spokesperson from the Ministry of Foreign Affairs said that Beijing "has an open mind towards any actions that help to ensure security and stability in Iraq" ...

China hopes that the U.S. will make a further contribution to Iraq's reconstruction and development, and deal rationally with China's contributions to Iraq in trade, investments and infrastructure. As China's political and economic interests sharply expand in the world, it is increasingly necessary for U.S. to cooperate with China when it comes to vital global issues. In view of this changing situation, even if Obama does not request China's participation, China will pay close attention to international affairs.

To my ear, the contrast between this and Putin's typical pronouncements is noticeable.  I know who's the more likely to get a constructive 'phonecall from Washington.

ND
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* an interesting statement, n'est-ce pas ?

Most of their reservoir is depleted now

So who said this and about what? Well it was  Abdalla Salem El-Badri the Head of OPEC discussing the UK's oil reserves in October of last year.

On a quick facts basis here are some rather key ones too:

- UK production is expected to drop to 800,000 barrels a day this year, down from a production peak of 2.92 million in 1999. That is, umm, a 75% drop in production in just 15 years.

- With huge investment needed into getting North Sea production back on-line, it is unlikely this will go over one million barrels per day ever again.

- The decline is North Sea production is the fastest of any large system in the World over the past decade.

- The UK became a net importer of oil again in 2007.

- Newer North Sea companies, such as Xcite Energy (tipped here many a moon ago, but struggling still) are really struggling to find finance. This is because their cost of to pump the oil is at $80 barrels plus and the oil is much heavier than Brent - so less valuable. Taking this into account is huge as it means the margin available to tax is far slimmer. Even if these companies are successful and we have more successful drilling in the likes of the Bressay field and others, the tax revenues potential is far less than was the case with the Forties field.

So basically, Salmond and Cameron can discuss all they like in Aberdeen about UK offshore oil reserves, but this is yesterday's story in many ways. The future will be Fracked gas onshore in the UK - sadly for Scotland much of this is in England.

Showdown: Food vs Fuel

The USA considers itself strategically at risk by virtue of being an oil importer: but it has a food surplus, so (under a very specific Federal mandate) it turns foodstuff wastefully and large-scale into fuel.

Saudi Arabia considers itself at risk from being an importer of food: but it has an energy surplus, so it desalinates seawater using huge amounts of energy and makes the desert fertile, turning it to food.

If only international trade were more dependable ... (eh, Budgie ?)

Anyhow, with widespread drought in the USA, thoughts are turning urgently to halting the gigantic compulsory conversion of corn into ethanol.  This is just one flashpoint among many where the trade-off is food vs fuel: the EU is having second thoughts about bio-fuels in general - and not before time.

Food vs fuel.  People riot when they can't get either.  Wonder which wins...  your views ?

ND 

Oil: Flirting With Double Figures

In October oil stooped briefly to touch $100.  But it rebounded strongly, maintaining a flat-ish $125 through March (which I misread).  The earlier assessment was the correct one: the distinct prospect of GlobalRecession2 has put a dent in commodities, even as producing nations are opening the taps;  the Baltic Dry Index, that traditional coalmine canary, is in decline once more; and oil dipped back into double figures again this week. Since GR2 isn't remotely played out, we may expect more flirtation with $99.

Stock markets have found reasons for optimism just now, but overall it looks like another crisis brewing: number 94 in a long and tiresome series. And right on cue, for whatever you think it's worth, gold and silver have broken out of their 3-month-long down-trend.  I'd assess that particular uptick as more meaningful than the stock markets' own burst of green.

ND  

Supply, Demand, Manipulation ... Gas, Oil & Gold

Starting gun for the battle royal over UK shale gas seems to have been fired. Timmy, (who first picked up on this from C@W), lost no time in firing an inflammatory salvo - no smooth-talking PR man he, but his original battle-cry was the right one: "a political battle that we must win".

Yes, the supply fundamentals for gas are looking good. But oil ? Cnut Obama is at it again, asserting that it's all the work of the wicked speculators.

The US cannot afford to let speculators artificially drive up the price of oil, the US President said on Tuesday, revealing plans to boost supervision of the market and tackle manipulation. "Rising gas [petrol] prices means a rough ride for a lot of families," President Obama said. "It's like an additional tax that comes right out of your pocket." The measures from the White House include an "at least six-fold" increase in the number of staff who scrutinise the trading of oil futures contracts at US market watchdog the Commodity Futures Trading Commission (CFTC).

Well, we can't object to scrutiny, though it may prove an expensive waste of time. But hey, while they are in the CFTC, how about looking into the manipulation of precious metals ? You don't need to be a conspiracy-loon to raise your eyebrows over this kind of thing - latest in a very long series (almost weekly, in fact) of strange, strange goings-on.

It's "an additional tax" of another kind, Mr President. Go take a look at that one, eh ?

ND


UPDATE - if anyone's interested, more on the bullion shenanigans of this week

Oil and More Rumours of Wars

Just as the Baltic Dry falls through the floor (a reliable indicator of global slowdown), our good friends Gazprom cut their prices again, and commodities soften generally, oil is once again in the spotlight. And not in a good way.

Yes, at home and abroad the prospect of trouble at t'pump looks to be on the cards. Starting with Petroplus*/ Coryton: this may provide an excuse for a price-hike in the South East, but in reality its effect will be limited. When the owners of a conversion-process asset like a refinery go under, the creditors step in smartly to ensure it keeps running, just to generate whatever basic turn is there to be had: no-one wants to see the cashflow dry up. We've seen it a dozen times with power plants (in the dire period 2002-04, for those with short memories). What tends to happen is that the asset, which should be run on a highly-optimised basis when in the hands of a proper owner, slips into a dumb but still effective mode of operation, with reduced but still positive margins.

If it turns out this isn't possible, i.e. only a hyper-optimised refinery is profitable, it will mean there is a surplus of finished products (petrol etc) anyway. So no big worries just yet.

The main story, though, is in the Middle East where Syria is in turmoil, Iraq is nudging towards civil war, the Iranian war-drums are beating, and the carrier groups are massing once again. A war-weary western public may be forgiven for groaning déjà vu and assuming it's just another galling waste of blood and treasure to satisfy the American electoral process.

But from the C@W standpoint, is there something really rather new and interesting afoot ? The possibility that oil might start being priced in gold is not hot news, but could be a serious development - and one that might make the US pause for careful thought. I have previously highlighted the forthcoming Chinese Pan-Asia Gold Exchange as a potential Chinese strategy to supplant the dollar: lots of countries are looking to a post-dollar world: the euro is hardly a candidate anymore and oil-for-gold would be a very logical step along the way.

The ramifications of this will be many. Here's one: if this catches on, a lot more countries and companies will potentially be in the market for gold hedges (just as they are for oil and dollar hedges, as a matter of day-to-day risk management). But the paper (forward) gold market is, allegedly, one of the most heavily manipulated in the world (along with silver and the Swissie and oil and ...) - hmm.

Any other suggestions as to how oil-for-gold would change the world ?

ND


* Petroplus was always a quirky operation. The cleverest thing they did in the last decade was develop an LNG import terminal in Pembrokeshire, and planned to do several more around the Atlantic basin - they are very easy to build, even for a company whose main business at the time was oil storage tanks. But they sold this nascent LNG business, '4Gas', to Carlyle in order to concentrate on becoming a 'specialist refiner' ... hah! Should have stuck to tankage.

Libya: The Great Game, Part 94

There has been occasion hereabouts to make reference to conspiracy theories quite recently, (I shall return to the silver markets another time).

And when we see deployment against Libya of armed forces from not only Italy, France and the USA Med Fleet - all fairly proximate - but the UK, Spain, Canada, and Denmark*, within hours of a widely unexpected and essentially unheralded UN vote ... you may be sure the plans were in hand for quite a while before that.

I have commented elsewhere that NATO is in fact quite good at this planning & deployment stuff, particularly of air forces; and France never left the command structure even when she absented herself from actual NATO formations for many years. But even so. What's going on ?

It isn't difficult to 'follow the money', and notice the sheer quantities of oil & gas involved. France has always conducted itself vis-à-vis Algeria so that national champion Total has been able to conduct uninterrupted operations in that country before, during and after the 1960's war. Likewise, it is a pressing feature of Spanish, French and Italian policy to exert as much control as they can to stem the tide of African immigration. Neither of these factors is new, so evidence of pre-planning is not to be marveled at.

But even so. We read a lot about how aggressive China is in its quest for control over raw materials; and how Russia has been gradually reasserting hegemony over the natural resources of the FSU. But these could be painted as rank amateurs when it comes to the decisive colonial instinct: China can barely restrain North Korea, and Russia's 2008 adventure in Georgia amounted to a demonstration of its ineffectiveness.

On the subject of Russia, early reports indicated that they had "stepped up gas supplies to Italy to 2.5 times normal levels after Italy's supplies from Libya were cut off". This may be genuine assistance to the Italian cause, but it may be no more than the Italians nominating winter-maximum supply levels during relatively mild weather, which (in March) they are contractually entitled to do at their own discretion. Nonetheless, if Moscow had given the nod for curtailment, Gazprom would have complied. It is thinking like that which leaves Germany on the sidelines: they pride themselves on being very strategic in their energy policy, but it all boils down to a lame single strand: grovel to Russia and, errr, grovel to Russia. (Oh, and keep those lignite mines open, just in case.)

So - it's not difficult to paint this operation as part of a considered plan, at very least to defend certain lines-in-the-sand as regards stability of access to oil & gas, plus damping-down of reasons for refugees to hit the boats. When push comes to shove, somehow wind-farms don't quite cut the mustard as the future of European energy supply. Actions (or non-actions) in Egypt, Bahrain etc can be seen in the same light: ditto the fact that Qatar - small in numbers, huge in gas supplies - is onside. Oh, and did we mention that little Qatar is perilously positioned as regards Iran ...

To conclude: we can follow this camel-train of thought all the way to the most lurid conspiracy-theories: see this, this & this. But at an absolute minimum we are seeing a measure of self-interested post-colonial steel that many assumed the Old Continent had completely lost. The traditional Capitalism-at-Work-by-other-means, if you like. Russia and China mere bystanders - for the time being, at least.

So: watch Turkey, watch Iran, watch gas prices. This could be a very serious indicator of the shape of politics to come.

ND


*PS - Denmark is interesting. They were deeply worried by German reunification, and vowed to demonstrate that their soldiers no longer wore hair-nets, so to speak - e.g. deploying tanks (which actually opened fire) to Yugoslavia to make the point. I'd guess today's air deployment is more of the same.

Silver & Oil: Commodities Update

A couple of days ago one of our esteemed anons asked about alternatives for trading the silver market in the current chaotic conditions. We need immediately to register a couple of important points:
(a) we give no advice here & everyone must figure things out for themselves; (b) 'chaotic' is often a good reason for steering clear of anything, n'est-ce pas ?

Anon was raising issues around the potential for physical default if what many judge to be a short squeeze on COMEX silver persists. Anon and others seem to think the situation may be containable in March but could go critical in May. I don't have an opinion on that. But the old question of how reliable is paper? is worth rehearsing again (click on the C@W 'Trading' bar & go back to Silver posts beginning January 11). And here I do have an opinion: if you are hedging against Bad News (my personal reason for being long bullion), and that includes long-heralded market breakdowns - why would you rely on a paper hedge ?

If the answer comes - because it is in backwardation (as it has been recently) - we must immediately retort: of course it is, there's a premium on the physical ! And that's because ... etc etc. Indeed, it is rumoured that some holders of futures are being paid a premium - or 'bribed', as we might say - to accept cash settlement at delivery instead of physical. Have a look at realized prices vs average 'market' prices (the amusingly-named London PM Fix !) for 4th Qtr 2010 as reported by Hecla Mining - hat-tip Anon.

In any case, the same investors were using paper when it was in contango, which is considered 'usual' for precious metals because they have a cost-of-carry but pay no dividend. I can only presume that people find it so much easier to trade & perhaps more significantly, get leverage, using forwards instead of physicals. Seems like a lousy trade-off to me.

Anon went on to say:

"My thoughts are Junior Miners for investment purposes, but worries about price discovery exist"

Which brings us to oil, and CU's post of last week. Oil goes up, and AIM-listed oil stocks go down! How can this be?? All I can say is that a couple of years ago I researched the correlation between gold mining stocks and gold itself, and it was very poor indeed.

So disconnected are the bullion markets from precious-metals mining companies, that the spread between the two is a recognised trade! One of the reasons may be that miners et al are often hedged, i.e. they are not actually exposed to the price of the underlying at all. Then again, just as Anon worries about price discovery, I worry that these bastards lie through their teeth when it comes to disclosing whether they are hedged or not. (This is certainly true of some energy companies, the sector I know best.)

To sum up: the poor correlation between commodities & commodity producers may be counter-intuitive, but when it comes to money, to hell with a priori reasoning - go with empiricism ! Sticking to facts is the capitalist way.

ND


PS if any of this is gobbledegook, give a shout in the comments & I may be able to clarify.

Trading in Jan 2009: Oil

This site does not provide financial advice and anything that you read here should in no way be construed as financial advice.

Trading in shares and commodities has seen the average investor lose 50% of their money in 2008!

Ouch. Think before you click.

That is really painful. Sadly, I lost money too, although having got some better strategies together toward the end of the year manage to come way back up from the October low.

One of the things that turned it around was Imperial Energy. A Russian oil company that was long a target for India's OGNC. The share price was up and down, even a month before the deal closed at the year end the shares were 50% below the final offer price, which had actually been agreed in the Summer. The Indians tried to get out of the deal.

So for this year, I am looking far more at some macro level political economics (my master's degree finally comes in useful) for direction. Particularly for resources, which have been shot to pieces this past year. I can't see at all where oil is going, but unless the dollar collapses it will likely bounce around in a 50% range from where it is today.

In the long-term though, we all know the price of oil is going back up. Which is why owning the stuff still in the ground makes sense. If you are China and India or other cash rich, resource poor states, now is a huge opportunity to build a strategic stake fro a fraction of what it would have cost just 6 months ago.

As well as Oil, Gas too is a big player; as ND has been showing re Russia. Owning Gas assets is about to be a big deal and some UK firms are quite well placed. Indeed for oil and Gas the FTSE and AIM markets have a huge variety of options. Many are pure gambling bets at the moment as the small companies are as likely to run out of money and go bust as get bought by Sinopec et al.

Overall though, with valuations ruined by the current deleverage oil companies are very vulnerable. In any sector that is vulnerable there is consolidation.

(Except Banks obviously, they just get nationalised and given more money by global taxpayers. Another topic on macro political economy for next week.)

XL 'Zooms' in part 2

I really tried to warn people of this, 10 days ago. Also Al Italia's talks have also collapsed again today, very predictably. Sooner or later this is just going to fall over as the huge debts are unsustainable with its business model. Also today SAS is in trouble too and a bail out is being worked upon

If you look back to April, just 5 months ago, Oil hit $100 a barrel and has since gone up and come back down to that level. Old planes on competitive roots just can't cut it; hence all the airline failures.

The lesson is be careful who you book with, personally speaking I think in the UK there are Virgin, BA, BMI, Easyjet and Ryanir (who cancel flights anyway) who would be able to survive another 6 months of this. Some of the bigger national carriers, like Air France, AA, Lufthansa are OK too. If you book with anyone else make sure it is through ATOL so that your way home is assured; Otherwise you could end up as another holiday refugee statistic.