Crude Oil Prices - Goldman Revises Down

By: Andrew_McKillop

Ice sheets retreating due to global warming often suddenly stabilise for “decades to centuries” no matter that the warming is still going on, scientists of the British Antarctic Survey and partner research institutions have found. It would seem that current predictions of sea level rises to be expected on a given timescale with a given amount of global warming will need to be revised - downwards. System stability is much higher than previously thought - or hoped by global warming hysterics.

In fact more closely related to this news than it might at first seem, Goldman Sachs analyst David Greely in a recent mea culpa from GS allowed punters to know that Goldman has been exaggerating with its oft-repeated claims that "the right price of oil" in 2012 is $125 for WTI and $130 for Brent. In his October review of oil market fundamentals published by Goldman Sachs, Greely said in brief coded language that oil markets are "cyclically tight but structurally stable".

He went on to say that GS now sees long-dated Brent crude oil stabilizing around $90/bbl, a price level which is a whopping $40 lower than previous GS forecasts. The new forecast could or might save face for GS, and just as important a large number of customer plays on rising oil prices going forward.

The famous Brent premium feeding huge volumes of arbitrage trades at an unreal mark-up from WTI to Brent - hitting highs up to $25 a barrel - has disappeared from the Goldman oil price Muppet show. Greely said that he sees a return to the oil pricing regime that characterized the crude oil market in the 1990s when long-dated Brent crude oil prices were anchored at $20/bbl, and although he made a point of not mentioning it, a year average oil price of $11.90 in 1998, or in 2012 dollars about $16.80 per barrel that same year. At the time, in those halcyon years, the Brent-WTI mark up counted for toast, the premium-and-discount was nearly zero.

HELLO TO OPEC, GOODBYE TO ARBITRAGE TRADES
In a very interesting exhibit of oil trader schizophrenia and double talk from high paid oil analysts, Goldman Sachs now tells us that rising OPEC spare capacity is no longer a mortal threat to global security, the triumph of Al Qaeda and a guarantee of high oil prices - but the exact opposite. In Greely's words OPEC spare capacity anchored longdated prices in the 1990s, which were low, and future oil prices will be anchored not only by growing OPEC capacity but also by "substantial growth in crude oil supplies from US shale, Canadian oil sands, and global deepwater provinces".

Making a point of keeping his chitchat off the subject of world oil demand - which is very close to straight line and can decline, not only in Europe but also in Asia - Greely has to talk his way around the fact that US WTI grade crude is a low-price snip relative to Brent, "but nobody seems to have noticed".  The Goldman Sachs flight plan for oil prices soaring to $130 a barrel for Brent and just a little less for WTI - - now backtracked very officiallly by GS to a $110 forecast for Brent crude in Q4 2012 - - still needs to tell us all why, at present, Brent grade crude should cost $25 more, each barrel, than WTI.

We get an amusing series of 100% US-based inner sanctum rationales from the GS oilspin doctors. In breif these say that WTI prices have traded at an increasing discount to Brent because barrels delivered to the Cushing, Oklahoma Nymex oil pricing base point and terminal for physical deliveries (of the few percent of all paper contracts taken to delivery) cannot be onward transported south to the US Gulf Coast for refining. The pipeline and rail transport capacity, even truck transport and maybe a few barrels given a ride in the back of a pick-up vehicle, are just not up to the task. What is needed is the Big Thing of the Seaway pipeline expansion, ramping up from its current capacity of 150 000 barrels/day to its new capacity of 400 000 b/d in early 2013. Conversely and in the meantime, the addition of substantial new rail loading and unloading capacity in 2012 has created excess capacity to move Bakken crude, from the north, to the Gulf Coast and especially to the Pacific coast.

Bakken crude, which is very low or zero sulphur, even lighter and easier to refine than WTI, commands a premium against WTI and depresses its price as Bakken's mostly shale-based crude output increases. Goldman has no option but to believe that less Bakken crude will flow south into Cushing, preventing Cushing inventories from building too much as the major nearest refining point for crude, BP’s Whiting refinery undergoes further conversion to handle heavier crudes. Basically and logically, WTI demand should rise because more of it can be refined, with a certain and massive downward hit on the unreal Brent-WTI premium that Greely now forecasts as making LLS (light low sulphur) crudes, in the US, trade at a $2 per barrel discount against Brent by the second half of 2013.

The current WTI-Brent spread (18 October 2012) is minus $20.50 per barrel.

This coming crash of the premium and its related, nice-for-traders arbitrage plays, makes it necessary also for Goldman Sachs to back off regarding the premium/discount which will operate the rest of 2012. Greely says "We expect the WTI-Brent spread to remain volatile in 2012, but to narrow to minus $4/bbl in early 2013".  The only hope for arbitragists will come, Greely thinks, if Bakken crude is increasingly shipped to the US east coast, by rail because the pipeline capacity does not presently exist. Only under that fragile assumption can the arbitrage trade be saved, but even then it will be downsized to a Brent premium against WTI of no more than $6 per barrel "by the end of 2013".

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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