Uncertainities are hitting us everywhere, can we handle these risks?
Do we understand beta? And i'm not talking about the securities market. I dunno how many of us can relate the rising commodity prices to the pressure its putting on households. I did after staying home for a while, (no) thanks to swine flu, one of the many uncertainities plaguing our country and the world.
So many things are happening together and that too in this all important year particularly for me.
By the way today is our ex PM Late Shri Rajiv Gandhi's B'day. Some ministries conceptualized by him thanked him in the national dailies and justified their existence. Didn't sound very convinvcing to me, i.e only their explanations e.g Food Processing Ministry, gave a bunch of pfaff about how they're helping the nation without listing any major milestone they have achieved or are going to in the near future.
Coming back to the main topic. After summers my interest in crude has surprised even me and not without reason, its been behaving quite oddly too. Probably because i follow it only now that i find it so ridiculous. Commodities like currencies seems so similar in their fluctuating nature. Though trading helps in price discovery but the exposure to speculators is an age old malady faced by all markets. There's no solution to this and all of a sudden i feel so disillusioned now that i'll just shelve this post now. But before that let me ask the question that I had in mind.
WTI Nymex spot crude was trading at $66 whereas North Sea Brent was at $70 yesterday. How do you explain that? And today in the commodities report US crude inventories are down by some 8.4m barrels. Rumour is that with lesser spot price at Cushing its bound to attract lesser volume. Its confusing but i'll soon find out why such a disparity exists.
Thursday, August 20, 2009
Saturday, August 15, 2009
Crude oil pricing ain't no crude business
Analysts love to predict movement in crude and whats worse everyone wants to apply a different theory, each coming up with their own results.
The most confounding of them all is technical analysis based on historical price movements and volume fluctuations. They're supposed to factor in unexpected risks arising in the future but the question is to what extent?
Yesterday there was a prediction by Robert Prechter, who shot to fame after predicting the 1987 stock market crash. According to him Crude will fall to a range bound level of USD 4-10. Any sane person who has followed crude or the big Oils would laugh hysterically till his/her lungs can support no more, I know I did. His prediction was based on 'Elliot Wave Principle' which some analysts term as pseudoscientific and follows the crowd psychology, it says "all investors turn pessimistic after showing a bout of optimism."
Crude can't by any means go back to $10. I am an ardent believer in supply side economics when it comes to crude pricing and it makes perfect sense for a wasting asset which needs substantial capital investment to keep cost of production down.
Due to extreme cost cutting measures adopted by the Big Oils they have managed to post returns past expectations but the substantial cuts in capex are an area of concern. The average crude extraction price has been consistently rising as new areas are being explored. The old warhorses like Thunder Horse and Atlantis are no longer pumping oil as they used to half a decade back. The new focus areas are frigid Russian wells, Brazilian pre-salt and Canadian oil sands. Russia and Canada will require huge capex for achieving subsistence levels, as of now in comparison to the prevailing crude price, these fields are prohibitive.
Then there're also cases like Venezuela where the govt. is hell bent on nationalizing all natural assets, with such cases happening at regular intervals (Russia and possibly Brazil in the near future) oil companies have to tread with care.
If you ask me crude will hover within $70-$80 as in this range even the costliest oil wells are profitable, and profit is what these companies need if they want to secure a future for themselves.
The most confounding of them all is technical analysis based on historical price movements and volume fluctuations. They're supposed to factor in unexpected risks arising in the future but the question is to what extent?
Yesterday there was a prediction by Robert Prechter, who shot to fame after predicting the 1987 stock market crash. According to him Crude will fall to a range bound level of USD 4-10. Any sane person who has followed crude or the big Oils would laugh hysterically till his/her lungs can support no more, I know I did. His prediction was based on 'Elliot Wave Principle' which some analysts term as pseudoscientific and follows the crowd psychology, it says "all investors turn pessimistic after showing a bout of optimism."
Crude can't by any means go back to $10. I am an ardent believer in supply side economics when it comes to crude pricing and it makes perfect sense for a wasting asset which needs substantial capital investment to keep cost of production down.
Due to extreme cost cutting measures adopted by the Big Oils they have managed to post returns past expectations but the substantial cuts in capex are an area of concern. The average crude extraction price has been consistently rising as new areas are being explored. The old warhorses like Thunder Horse and Atlantis are no longer pumping oil as they used to half a decade back. The new focus areas are frigid Russian wells, Brazilian pre-salt and Canadian oil sands. Russia and Canada will require huge capex for achieving subsistence levels, as of now in comparison to the prevailing crude price, these fields are prohibitive.
Then there're also cases like Venezuela where the govt. is hell bent on nationalizing all natural assets, with such cases happening at regular intervals (Russia and possibly Brazil in the near future) oil companies have to tread with care.
If you ask me crude will hover within $70-$80 as in this range even the costliest oil wells are profitable, and profit is what these companies need if they want to secure a future for themselves.
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