Countering Peak Oil ERM-02
Transcript of Countering Peak Oil ERM-02
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Countering Peak Oil
Energy Risk
Management SeriesERM02
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What is Peak Oil ?
Peak Oil means
Reaching peak extraction limitsOften during peak demand
Causing peak demand supply gap
Resulting in peaking of prices
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When do oil prices peak
When demand supply gap jumps
If supply becomes a constraintIf demand increases greatly
If prices are manipulated
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Oil was a stable commodity for 20 yrs
The producers cartel OPEC was under pressure from
the OECD Governments to stabilize oil prices
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untill the ICE Trading cartel
took shape
The ICE Trading cartel was formed in the year
2000 by Europes Oil majors and global banksnamely BP, Shell, Total, Morgan Stanley, Goldman
Sachs, Deutsche Bank & Society General.
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They controlled Europes oil trade .
They controlled Europes supply chain, as well as the virtual
trading and swapping of oil contracts at ICE & NYMEXelectronic trading exchanges. Unlike OPEC, they are not a
limited membership official cartel and have several other
traders and hedge funds as associates.
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At the ICE future markets, oil prices became volatile.
It broke the OPEC price band of $22 to $ 28 in 2000 - 2005 and has
controlled oil price through its index indicator Brent Oil ever since.
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Formed on the concept of Enrons deregulated energy
trading model, ICE added physical stocking to virtual trading.
The future markets at ICE Exchange thus had a unique effect on demand
supply trends, as stockpiling among OECD nations rose despite drop in
consumption.
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ICE created a modern electronic trading platform for oil
futures and chose Brent Oil (North Sea) as its lead index .
Brent Oil had incidentally reached peak oil conditions. The
strategic manipulation of supplies of Brent Oil , (North Sea) whichis less than 10 % worlds oil volume, but the lifeline of Europe,
was done by the ICE cartel both at the supply chain level, as well
as at the ICE exchange.
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The peaking of Brent Oil
After peaking between the year 2000- 2005 North Sea oil went into a
steady decline in production, due to higher exploration costs and lower
investment in new oil fields. As per a Financial Times report new oil
finds at North Sea accounted for 140 mbd in 2009 as against 600 mbd
in previous years
http://www.ft.com/cms/s/0/e0db0b90-0099-11df-ae8d-00144feabdc0.htmlhttp://www.ft.com/cms/s/0/e0db0b90-0099-11df-ae8d-00144feabdc0.html -
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Since Brent had peaked, it was easy to control it by
supply chain investment
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However there was no such scare in other major sources of Oil chiefly
crude from OPEC , which scaled up production to meet demand .
OPEC crude accounted for 55% and Brent Oil less than 10% of the
market. Still it was the online trading of Brent Oil that set the prices.
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The strategic control of the Brent oil supply chain and
betting on futures market pushed up the Brent prices.
Long term investors like pension funds were sold the concept
that reserves of Brent oil were depleting. The future contracts
of Brent Oil were both lucrative and safe from the investors pointof view, due to the falling reserves and the growing energy
needs of the world, and the rise of the index was the proof.
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The success in pushing up oil prices
each year brought new investors.
Investment in commodity index funds by
institutional investors rose from $13
Billion in 2003 to $317 Billion in 2008
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Stock piling in super tankers
Besides the cartel leased out numerous oil tankers
on short time basis for additional storage, resultingin a record 80 million barrels of oil being stockpiled
in oil tankers in ready to deliver condition at high seas.
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The contango trades
This also helped the cartel to soak up surplus stocks
and profit additionally from contango tradesbuying spot and selling long, as the spot rates were
weak and the supertanker storage cost was nominal.
http://www.bloomberg.com/apps/news?pid=20601130&refer=environment&sid=aIbVHft2R3SEhttp://www.bloomberg.com/apps/news?pid=20601130&refer=environment&sid=aIbVHft2R3SE -
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Tanker prices crash due to oil volatility
Oil tanker lease rates crashed to an unprecedented $ 1 per barrel
per month, due to demand volatility making it easy for contango
trades to profit on netlongs. In January the margin was as wide as
$8 per barrel on March futures and $ 21 on Sept futures , making itextremely profitable to buy spot and hold oil in super-tankers.
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How oil contracts move
Oil contracts move through the shadow of middlemen mostly
based in Switzerland or other tax havens the biggest of thembeing the Zug based commodity traders Glencore, Trafigura
Taurus Oil Transocean ( Gulf of Mexico disaster) , Masefield AG,
Xstrata etc. Some of them are suspects of the Iraq and West
African food for oil and embargo violation scams.
They buy crude from producers, sell it to refiners, buy back the
refined oil and charter tankers to ship it.
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Swapping at the London loophole
The Title to oil contracts , then may change hands 20 to 30 times
before the ship reaches port without physical transfer of goods. The
traders, the oil majors, Banks, hedge funds and the cartel membersswap the commodity in high speed round trip trading at the ICE
London commodity exchange, amongst themselves, driving the prices
up before it reaches the retail trade. Several Bills has been
spearheaded by Senator Levin ( currently heading the Goldmaninvestigation ) in the US Senate to limit speculation but with limited
effect .
http://levin.senate.gov/newsroom/release.cfm?id=297513http://levin.senate.gov/newsroom/release.cfm?id=297513 -
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Shorting to create volatility
At times the prices are pushed down to ensure volatility, and the
cartel benefits on shorting as the commodity prices crash, against
market expectations. In all such cases the cartels production curve
drops instantly , in tandem with market demand, as if fore-warned
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Volatility lesser in OPEC production
In comparison the OPEC Oil Production, takes as lot of time to
adjust, as producers not having the inside information of how
markets will behave, react much late and more moderately.
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The London exchange has few curbs.
Being outside the US , there is little bar on speculative trading at the
ICE exchange in London. The regulator FSA is comfortably lax and has
been known to let off the cartel members like Morgan Stanley for
gross violations of speculation, punishing the trader broker instead.
Besides Mr. Sprecher who runs the exchange is an influential CFTC
member and Mr. Hatfield, a Director is a member of the current
Economic Policy Advisory Committee.
http://www.guardian.co.uk/business/2009/may/20/fsa-ban-morgan-stanley-oiled-traderhttp://www.guardian.co.uk/business/2009/may/20/fsa-ban-morgan-stanley-oiled-trader -
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Building the panic at Davos
The build up to panic started this year at Davos with BP Chief Tony
Hayward stating that a supply challenge of 100mbd oil demand was
around the corner, that would lead to a new oil peak. He was backed
by both Shell and Total Chiefs and Europes Press gave it the widest
coverage , blanking out the dissent of the largest producers of oil the
Saudi Aramco who shared the dais .
http://www.telegraph.co.uk/finance/financetopics/davos/7093442/Davos-2010-a-new-peak-in-oil-production-is-needed-energy-leaders-argue.htmlhttp://www.telegraph.co.uk/finance/financetopics/davos/7093442/Davos-2010-a-new-peak-in-oil-production-is-needed-energy-leaders-argue.html -
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The Saudis refute peak oil theory
Saudi Aramco Chief Khalid Al Falih had promptly refuted Group
Europes claim, stating that the industry had adequate capacity
to meet any demand surge, and a third of his capacity was idle,ready to add 4 mbd on demand . We don't believe in peak oil,
he said, criticizing the speculation on oil scarcity, and said that it
made investors shy away from investing in production .
h f h k
http://www.dailybahrain.com/news/newsfull.php?newid=328112http://www.dailybahrain.com/news/newsfull.php?newid=328112 -
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The stage was set for the spike
The unexpected face off at Davos, was followed by a series of
studies quickly taken up in the OECD by expert groups backing Group
Europes theory of demand shortage. The IEC soon followed with its
revised consumption projections of 86.6 mbd up by 1.7% from its
previous estimates. The stage was thus set for the cartel members
to hoard and punt.
l h
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But two can play the game
Risk Managing commodity prices is a real time game.
It can be done by predictive analytics by matching counter moves.
Since the market players and supply logistics are both known and
unknown, tracking of both is needed, along with other metrics.
The most crucial is your development of your counterstrategy
that must be both dynamic and forceful.
hi k h fi
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China makes the first move
With the the highestnet - long positions in the futures market
being scaled since the early eighties, China quickly reacted to the
possibility of a price spike , taking advantage of being the first
mover in the market place.
Chinese imports of oil jumped by an unprecedented 28% to 33% in
January , February and March as it stockpiled hugely to avert a
possible supply shortage.,
It was both dynamic and forceful throwing estimates and forecasts
of Wall street analysts out of the window.
Chi b ld
http://www.bloomberg.com/apps/quote?ticker=.CLLRG:INDhttp://www.bloomberg.com/apps/quote?ticker=.CLLRG:INDhttp://www.bloomberg.com/apps/quote?ticker=.CLLRG:INDhttp://www.bloomberg.com/apps/quote?ticker=.CLLRG:INDhttp://www.bloomberg.com/apps/quote?ticker=.CLLRG:IND -
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Chinas bold energy strategy.
This was in line with Chinas well known policy of investing
aggressively in oil. Last few years China has even invested in several
smaller oil fields globally to ensure its energy security. It was also
reported that China struck a separate deal with the Saudis, who
assured increase in production to meet stable supply conditions in
Asia, ensuring Chinas high growth without impediment.
US j i h k il
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US joins the stockpile game
In Cushing Oklahoma, where WTI is delivered into America's
pipeline system, there was a perceptible stock build up in March.
This was due to US Energy Departments decision to raise stock by
an additional 2 million tons creating record stockpiles of 356.2 MT,
a 7% rise in US inventory over the five year average stocks
Th d f k ili
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The advantage of stockpiling
By aggressive stockpiling , China was able to
achieve the duel objective of buying before
price peaks, and setting a higher demandprojection in IEAs annual forecast, according to
which producers all over the world would plan
both their extraction as well as refinerycapacities.
H B t il d
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How Brent oil moved
C ti i i i
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Creating price inversions
One of the proven way to reduce volatility used by large
consumers is to stockpile before peak season. This helps it ease its
demand and buy spot during price troughs further releasingpressure on demands. In an inverted market, current prices are
higher than future prices and thus the price of storage is negative.
This creates losses for the investors and speculators alike, butbrings back control to the real consumers and producers.
The effect of Chinese and US stockpiling caused price inversions
and caught the Big Bank analysts at Wall Street wrong footed.
Ri k i il f t
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Risk managing oil futures
M i Ri k th h ti ti
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Managing Risk through negotiations
Chinas positive cash flow and large demand pattern has
helped it buy spot to create price inversions in the market.If China ties up with other buyers and the large OPEC
producers it can stabilize the price of oil at below $70. This
will still generate profits of $15 to $20 billion for large
producers like Saudi Arabia but will hurt the speculators andbring stability back to oil.
Chi i d i k
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Chinas growing energy needs is key
Apart from Chinas positive cash flow and large demand
pattern , its growing energy needs is the key to the currentcrisis. While speculators want to cash in on the demand surge,
it is aggressively tying up new sources, and the OPEC cartel will
want to enlist it as a stable and growth oriented customer.
M i Ri k th h j i t t
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Managing Risk through joint ventures
China signed a $ 20 billion oil for cash deal with Venezuelas
state owned oil producer to form a joint venture to extractcrude oil from the Orinoco Beltblock. This was an extension of
the ongoing $8 billion cash for oil program devised by it
M i Ri k th h fi i
http://www.businessweek.com/news/2010-04-18/china-lends-venezuela-20-billion-for-oil-venture-chavez-sahttp://www.businessweek.com/news/2010-04-18/china-lends-venezuela-20-billion-for-oil-venture-chavez-sa -
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Managing Risk through financing
Last year China Development Bank signed a $ 15 billion financing
deal with Russian state oil firm Rosneft, and $10bn to pipeline firmTransneft to develop a Siberian oil field and transport oil through
pipes to North China.
M i Ri k th h t i
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Managing Risk through partnering
Last year China Development Bank and the state owned oil
company Sinopec tied up with Brazils Petrobras in a unique$ 10 billion deal that will cover developing Brazilian oil
deposits, trade, engineering equipment and materials, that
demonstrated the flexibility that China devices for meeting
its energy needs.
Stabilizing oil price
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Stabilizing oil price
Chinas positive cash flow and large demand pattern has helped it
buy spot to create price inversions in the market.
If China ties up with other buyers and strikes a deal with large
OPEC producers it can stabilize the price of oil at below $70. This
will still generate profits of $15 to $20 billion for large producers
like Saudi Arabia but will hurt the speculators and reduce volatility
of the markets . The Supply chain challenges and moves to overcomespeculative pressures independently shall be discussed subsequently.
References and Sources
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References and Sources
Ecology to EconomicsAmazon Kindle Blog : Ecothrust
http://bit.ly/7XwAG or http://bit.ly/ecothrust
Article in Economic Times of 26th AprilOil: A tale of 2 cartels http://bit.ly/9meIGT
Technorati (RSS Feed)http://technorati.com/people/Ecothrust/index.xml
Sources : Bloomberg, Business Week, The Economic times, OPEC,
The Oildrum , Telegraph U.K., Wikipedia, The Guardian, Financial
Times, Daily Bahrain and U.S. Senate Proceedings.
FOR ANY QUERIES MAIL TO [email protected]
Risk Manage your life
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Risk Manage your life
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For Risk Management
and strategy planning
with complete client confidentiality
3 month course (12 sessions) starting June 2010
For 10 Students and 3 GroupsOn First Come first serve basisRush MAIL TO [email protected] for details
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