countering peak oil erm-02

8/9/2019 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
http://economictimes.indiatimes.com/articleshow/5857847.cmshttp://economictimes.indiatimes.com/articleshow/5857847.cms


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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
http://bit.ly/7XwAGhttp://bit.ly/ecothrusthttp://bit.ly/9meIGThttp://technorati.com/people/Ecothrust/index.xmlhttp://technorati.com/people/Ecothrust/index.xmlhttp://technorati.com/people/Ecothrust/index.xmlhttp://bit.ly/9meIGThttp://bit.ly/ecothrusthttp://bit.ly/7XwAG


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Risk Manage your life

Individual and Group Coaching

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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countering peak oil erm-02

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