Myth: Oil and natural gas prices always
increase before and
during a hurricane. The key word in this
myth is
always.
As predicted, 2008 has been a very active
hurricane season and it's still far from
over. Six hurricanes have already approached
the U.S. and most have traversed the Gulf of
Mexico and made land. Dolly, Gustav, Hanna
and now Ike have caused billions of dollars
of damage, but the oil and gas infrastructure
seems to be fairing well. After hurricanes
Katrina and Rita the oil and gas industry
developed new tethering standards
for offshore rigs. It looks like the those
steps have helped, but the pipelines that run
along the Gulf floor are still vulnerable and
can disrupt flow to the mainland. With
the tremendous increase in electronic trading
and the recent expansion of trading hours, it
appears
traders are waiting for damage reports before
bidding up prices. In years past, traders
had over 60 hours to wait for markets to
reopen on weekends and most prepared for the
worst. The circumstances that caused prices to
rise in advance of major storms may no longer
exist. Hurricanes remain a huge threat to oil
and gas production, but with the explosion of
after-hours
trading and markets reopening on Sunday
evening it looks as though people want proof
of damage before bidding up prices. People
could also be worn out by the 24-hour weather
industry that cries wolf far too often. Myth - Busted.
Myth: Natural Gas prices are $20/Mcf in
Europe and since this is a global commodity
that's where the U.S. markets are headed.
If imported Liquefied Natural Gas (LNG)
had been needed in the U.S., we could have
easily seen prices approaching those in Europe. In 2007 LNG met ~3% of
U.S. demand and as
the "marginal fuel" it helped set market
rates. In 2008 LNG imports have been
non-existent, because cargo ships have headed
to Spain and Japan where the need was greater
and prices are much higher. This summer U.S.
temperatures have
been moderate and the demand for natural gas
from electric power plants has been down. That fact, coupled with new
"shale gas" finds
have helped rebuild storage inventories to
above the 5-year average. We have had a
string of
fortunate events that limited our need for
LNG. In future years the demand for natural
gas will continue to increase due to
environmental
regulations. Also, imports from our friends in
Canada and Mexico are on the decline. As
natural gas becomes more of a global fuel, we
suspect it will be influenced by same
geopolitical forces that keep crude oil well
above its production cost. Myth -
Plausible.
Myth: Crude oil will top $100/barrel,
approach $150
by July 4th and then may go to $200/barrel.
It appeared that self-fulfilling
prophecies were coming to pass on weekly
basis. Price run ups that had no bearing on
market fundamentals were predicted and met
with alarming precision. The skyrocketing
prices led to Congressional hearings and
talks of changing the Nymex rules for
non-commercial (speculators) traders. Crude
oil prices topped out at $147.27/barrel in
early July. Myth - Confirmed
Myth: This is a rare occurrence of a
commodities bubble and it will burst at some
point.
Independent Energy Consultants had been
telling all its clients that we were
witnessing a rare commodities bubble that was
affecting all categories (grains, metals,
energy, etc.). No one knew how high prices
would go or when the bubble would burst, but
we knew it was not sustainable. The
bubble that began with the 4th quarter
of 2007 for many commodities (Q1 2008 for
natural gas) was popped on July 4th. Natural
gas prices that had almost doubled in 6
months began a rapid decline and have now
given back almost all of its gain. Crude
oil began to fall at the same time and has
just now dropped below $100/barrel. All of the
arguments for why prices had gone so high did
not magically change on July 4th, but prices
certainly
began to drop. This further makes the case
that speculators had caused the run up. Myth - Confirmed.
Myth: Crude oil's doubling in price in less
than a year was based on increased demand in
China and India.
Any student of economics knows that
business cycles are gradual processes that
tend to take 2-5 years to complete. The
government subsidies on energy and rapid
economic growth in China and India didn't
come to a screeching halt on July 4th. The
rapid decline in energy prices is not because of
demand erosion oversees. As China, India,
Mexico and other
economies continue to grow, so will their
needs for coal, oil and natural gas. That
means the U.S. will remain vulnerable to
higher energy costs until we correct our
reliance on foreign sources. Myth -
Busted.
Myth: Drilling in the U.S. won't help because
it will take years for that to come online.
Even serious talk about the
possibility of increased drilling in Alaska
and offshore is enough to sway market
sentiment. For years we have seen how
successful OPEC has been in controlling oil
supply to
keep prices high. Then when public outcry
reaches a peak, they increase supply just
enough to lower prices and silence the
critics. On the domestic front we may be
seeing that already with the "Pickens Plan". T.
Boone Pickens, an influential leader in the
oil industry, has been touting his alternative
energy plan as a means to wean ourselves from
foreign oil sources. He has many supporters
in Congress and has been received on
Capital Hill like a pop star. The discussion
surrounding wind power and other renewable
resources may be contributing to the decline
in oil
prices we are currently witnessing. Accepting the logic behind this
myth would
also lead
one to forgo any long-term initiative such as
building the much needed new nuclear power
plants and refineries. Myth -
Busted.
Myth: Changes in the U.S. dollar value are
causing the
changes in crude oil prices.
Throughout the entire wacky year,
the one constant appears to have been the
inverse correlation between the value of the
U.S. dollar and crude oil prices. Since the
Nymex crude oil contract trades in U.S.
dollars, it makes sense that a falling
dollar would cause higher prices and vice
versa. Myth -
Confirmed.
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