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Oil Curve Steeper Than ’99 Shows Possible Gain in ’09 (Update1)
By Stuart Wallace and Tim Coulter
Jan. 5, 2008 (Bloomberg) — The steepest plunge in crude prices
on record may be setting up oil investors for a rally this year,
if history is any guide.
The so-called forward curve of futures contracts traded on
the New York Mercantile Exchange suggests oil will rise 28
percent to $60.10 a barrel by December. The curve looks almost
the same as 10 years ago, after Russias default and the
collapse of the Long-Term Capital Management LP hedge fund
raised concerns that a global economic slowdown would reduce
energy demand. Crude prices fell 25 percent in the final quarter
of 1998, the steepest drop in seven years.
Bets on a recovery paid off then as the Organization of
Petroleum Exporting Countries cut production 6.9 percent,
causing prices to more than double in 1999. Now, OPEC is
pledging to reduce supply 9 percent, companies from Royal Dutch
Shell Plc to Valero Corp. are postponing new energy projects and
central banks are cutting interest rates to end the worst
financial crisis since World War II.
The world economy will get into a more stable environment
most probably in the second half of next year, said Christoph
Eibl, who helps manage more than $1 billion at Tiberius Asset
Management AG in Zug, Switzerland. Commodities are thus due
for a rebound. Crude oil has the best potential.
Eibls Absolute Return Commodity Fund gained 7.5 percent
last year in part by betting on agricultural commodities and
industrial metals. He beat the Standard & Poors GSCI Index of
24 commodities, which dropped 43 percent, and oil, which fell 54
percent. A 30 percent gain this year would be the most since the
57 percent jump in 2007.Forward Market
Traders are already taking advantage of prices in the
forward market exceeding those for immediate delivery, a so-
called contango. About 26 million barrels of oil may be stored
in tankers until later in the year. The crude, valued at $1.2
billion at todays prices, will be worth $1.57 billion based on
December contracts, potentially locking in a profit for
investors after expenses for financing, storing and insuring the
oil.
Crude for February delivery traded at $46.89 a barrel at
9:50 a.m. in London today, compared with $60.10 for the December
2009 contract. At the end of December 1998, oil for February
1999 was at $12.05, compared with $13.78 for December of that
year, a difference of 14 percent.
Twenty-eight of 30 analysts tracked by Bloomberg forecast
higher prices by the end of 2009, with a median fourth-quarter
estimate of $70.Most Bearish
Adam Sieminski, the chief energy economist at Deutsche Bank
AG in Washington, is the most bearish. He said in December that
oil will trade at $40 in the fourth quarter, almost 14 percent
lower than the Jan. 2 close, data compiled by Bloomberg show.
Slowing economies may cut demand by about 700,000 barrels a day
this year, he said.
While commodity prices have fallen sharply from their
July 2008 peaks, I see a further 15 to 20 percent downside risk
for commodities into 2009 and maybe a recovery of those prices
only toward the end of the year if there are signals of a global
economic recovery, said New York University Professor Nouriel
Roubini, who predicted the global financial crisis.
The duration of the slowdown remains the biggest risk to a
rebound in raw materials. Japan, the worlds second-biggest
economy, may not return to growth until the fourth quarter,
while the euro-area will shrink through this year, according to
Bloomberg surveys of economists.
Oil rallied in 1999 as OPEC reduced output by 1.71 million
barrels a day, equal to what is pumped today by Libya, the
largest producer in North Africa.Reduced Supplies
The group reduced supplies after Russias default in August
1998 sparked concerns about a meltdown in financial markets and
Long-Term Capital Managements $4 billion loss in leveraged
trading strategies forced the New York Fed to organize a rescue
of the fund by 14 banks and securities firms.
Last year was even worse. Commodities prices fell the most
in five decades as crude dropped more than $100 from the peak of
$147.27 in July. Losses and writedowns at financial firms rose
to hundreds of billions of dollars and simultaneous recessions
hit the U.S., Europe and Japan for the first time since World
War II. The Standard & Poors 500 Index tumbled 38 percent and
about $29 trillion of global equity market value evaporated.
The combination of central banks pumping trillions of
dollars into the global financial system and OPECs resolve to
stop the plunge in crude is making investors more bullish.Bring Stability
OPEC is determined to bring stability to the oil
market, Saudi Oil Minister Ali al-Naimi said Dec. 21 in
London, and Saudi Arabias King Abdullah said in November that
$75 was a fair price. That month his nation cut output by 3.2
percent, the most since April 2006, data compiled by Bloomberg
show.
OPEC will reduce daily crude shipments by 1 percent in the
four weeks to Jan. 17 as the group enacts the supply cuts it
agreed in Algeria last month, according to industry consultant
Oil Movements.
The Federal Reserve cut its benchmark interest rate to as
low as zero for the first time and the incoming administration
of President-elect Barack Obama will seek as much as $850
billion in new spending and programs, congressional officials
have said. China unveiled a 4 trillion-yuan ($585 billion)
economic stimulus plan in November and European Union leaders
are drawing up packages worth about a combined 200 billion euros
($278 billion).U.S Shrinks
The U.S. economy will shrink 2.4 percent this quarter,
following a contraction of 4.35 percent in the three months that
just ended, according to economists surveyed by Bloomberg. The
worlds biggest oil consumer will contract 0.5 percent in the
second quarter before expanding 1.3 percent and 1.8 percent in
the next two quarters, the forecasts show.
Once these economies kick in again with the money supply
pouring into these economies, everybody is going to be caught
short with no inventory of these commodities and then commodity
prices will move up again, said Mark Mobius, executive
chairman of Templeton Asset Management Ltd. in Singapore, who
oversees about $26 billion in emerging-market stocks.
Oil tumbled almost $115 a barrel from its July record. Pump
prices for gasoline in the U.S. that peaked at an average $4.165
a gallon are down to $1.67 nationwide, according to the Energy
Department.
Low prices in themselves do not normally create demand
for commodities but for oil they do, said Tim Mercer, chief
investment manager at Hong Kong-based hedge fund Musahi Capital
Ltd. Should the economy recover this year, $80 to $100 oil is
quite possible, he said.World Consumption
World oil consumption will increase by 400,000 barrels a
day, or 0.5 percent, to 86.3 million a day this year, according
to the Paris-based International Energy Agency. Oil demand in
2008 fell for the first time since 1983, the IEA estimated.
A rebound would reward everyone from Irving, Texas-based
Exxon Mobil Corp., the worlds largest publicly traded company,
to Saudi Arabia, the biggest producing nation. The Persian Gulf
states budget drops into a deficit at prices below $50 a
barrel, according to Fitch Ratings.
Until prices improve, oil companies are delaying
investments and shutting plants, threatening to reduce supply
further.
Shell, based in The Hague, postponed a decision to expand
its Athabasca oil-sands project in Canada. Valero Energy, the
largest U.S. refiner, said in October it will defer projects to
cut spending by about $500 million, or 17 percent.Refinery Halt
ConocoPhillips agreed to halt bidding for a planned 400,000
barrel-a-day export refinery in Saudi Arabia because of falling
prices.
The recovery in oil will pace at least a 20 percent return
from commodities in 2009, Tiberiuss Eibl said. Futures
contracts signal at least a 10 percent appreciation in corn and
wheat on the Chicago Board of Trade and a 12 percent gain in
cotton. Copper on the London Metal Exchange will lag behind,
while gold is likely to end 2009 little changed, futures show.
The dollar is going down, said Jim ONeill, chief
economist at Goldman Sachs Group Inc. in London. If thats
right, gold is definitely going to continue its recent recovery
and I think that might give some support to oil prices as well,
despite the weak fundamentals.
The U.S. Dollar Index traded on ICE futures in New York,
which tracks the currency against six others, advanced 6 percent
last year, the best performance since 2005.
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