Thursday, May 17, 2007
Thinking on my Brent Bet
In an effort to leverage my bet on lower oil prices, I increased my overdraft (which costs me only 5% p.a.) and purchased Kesem Optzia Neft Put 20 which pays the difference between 70 $ per barrel and the Brent Nov 17 futures price on the ILO exchange. Since current price has rised to 69.7 $ the market value of my options went down 10% to 22 shekel (6 $) implying a Brent November price of 63 $. This situation is consequence of virulent Ijaw legitimate revenue sharing demands (aka blackmail). I hope that an understanding will be concluded soon, the pipelines repaired and the hostages liberated. And Brent prices return to their former levels. In the long term, oil will be dirt cheap again, since it is an intrinsically cyclical commodity and Saudi Arabia is losing its market regulating power.
(1) High prices have provoked a flood of investments in oil production: Brazil, Angola, and the Caspian will escalate production around 2010.
(2) Conventional oil supply may decline but tar sands in Canada, Venezuelan heavy oils, and shale oil in the USA will make up all the decline. $6 to $8 billion a year are invested in Canadian tar. Once the investment is made, it will be worth producing the oil at $10 to $15 a barrel.
(3) Technology will reduce demand as hybrid vehicles and biofuels become common.
(4) Oil purchases by China and India will decrease because their internal demand is subsidized. Take away the subsidies and demand falls. Imports are at international prices and subsidies are unsustainable as their economies grow. Oil is also subsidised in Venezuela and the Middle East except in Israel. In Iran, gasoline is sold at 9c per litre and demand is rocketing. Demand is growing only where oil products are subsidized, in the rest of the world it is dead.
(5) The "greens" internalized the fear of God in the American and European public. The USA started to work on energy independence and it should never be forgotten that these are "can do" people, when they focus on something, they can put a man on the moon.
(6) If OPEC’s current plans for investment come to fruition, it will have more excess capacity.
(7) Iraq has the potential to become a second Saudi Arabia. Baghdad is mayhem, but oil producing areas around Basra and Mosul are quiet. Iraq produces 2 m barrels today, it soon will produce 5 m.
The world is in flux. All this activity is fast changing the oil market and lowering prices. A crisis will only accelerate the change. My problem is where all this will stand on November 2007.