Thursday, May 27, 2010

Reuters summit-Oil contango here to stay -Mercuria


* Longer term oil prices needs to be $90-$100
* Backwardation likely to be only sporadic, contango endures

By Barbara Lewis and Christopher Johnson

Oil prices are close to the bottom, but the market will probably stay in contango as producer countries ensure a cushion of supply, trading house Mercuria told the Reuters Global Energy Summit.
Longer term, Mercuria said oil needed to trade around $90 to $100 to ensure enough supply to meet demand in emerging countries.

Some investment banks, including Goldman Sachs, have wrongly forecast a return by now to backwardation, in which oil for delivery near term is more expensive than for later delivery.

But Mercuria, which accurately predicted in June last year that the market would retain the opposite structure contango, said it expected the most prompt crude futures to stay cheaper than those for later delivery.

"We don't think we're far from the bottom because the production of oil is still in the hands of not that many countries," Mercuria co-founder Marco Dunand said. "Certain countries need a $65-$70 kind of floor."

Oil prices this month fell to a low below $65 a barrel, but have since rallied back above $70.

Longer term, Dunand was relatively bullish.

"The market needs to be in the region of $90 to $100 and that's where the market has to go if the population in developing countries wants to have cars," he said.

Still that did not mean a return to backwardation, the structure that historically has been associated with rising prices and limited supplies.


"The market is more likely to stay in contango, certainly for crude," said Dunand. "The ultimate regulator of stocks is OPEC. If you have low stocks in a high price environment, it would be extremely dangerous for the economy because you could have a massive bubble in the price."

The Organization of the Petroleum Exporting Countries, led by Saudi Arabia, intervened to boost supply when prices spiked in 2008 to a record of nearly $150 a barrel.

Since a fall in use linked to recession and demand destruction linked to higher prices, OPEC said this year its spare capacity has risen to more than 6 million barrels per day.

During the recession in 2009, oil demand fell so much that millions of barrels of surplus oil were stored in ships at sea.

At the same time, the contango in the oil market gaped wide and trading houses such as Mercuria were able to generate hefty profits through storage plays.

Dunand saw the market staying in structural contango with sporadic backwardation and said the contango would only be wide enough to justify keeping oil onshore, rather than at sea.

"I don't think the contango is going to be high enough to justify storing oil in ships," he said.

Steep short-term falls on the oil market that have coincided with nervousness across financial markets following the Greek debt crisis had little to do with oil demand.

Dunand summed it up as "so-called derisking or deleveraging", which had a marked impact at the back end of the futures curve.

"Clearly some people at the back of the market wanted to exit," he said, but saw reasons for them to return.

BP's Gulf of Mexico spill, for instance, had heightened the cost and risk of future oil supplies and raised the prospect of increased regulation for deepwater drilling.

"I'm sure the regulations will come through in the U.S. and possibly other parts of the world," said Dunand. "It's going to be expensive. It's going to be more difficult."

Mercuria co-founder Daniel Jaeggi took the same view:

"What the BP tragedy illustrates, if it needed to be illustrated, is how fragile the long-term supply side is."

"We are getting to the limits of technology. We are obviously always pushing at the limits." (Editing by Anthony Barker)

No comments:

Post a Comment