http://www.telegraph.co.uk/finance/c...l-rebound.html
Funds try to spot the great oil rebound
Oil is too cheap. At around $50 a barrel, it is trading far below the production costs of almost all new sources of crude and energy substitutes.
A sustained price above $70 is needed to cover investments in Canada's tar sands, the deep-water fields off Brazil, and Russia's "High North" above the Arctic Circle.
Much the same goes for biofuels from grains (sugar is cheaper). They matter. Bioethanol swings the global crude price. It accounted for 60pc of extra oil supply worldwide from 2007-2008.
Crude at $50 does not square with the failure of the big oil companies to replace reserves over the last five years, or with the lack of coal and nuclear plants to plug the gap. It takes 10 years or so to put a nuclear power station into service.
Nor is it compatible with the breakneck industrialisation of Asia. China expects to have 140m cars on its roads by 2020, up sevenfold in a decade.
So unless the world economy tips into acute deflation (possible: prices are already falling in the US, China, Japan, Spain, and Switzerland) and unless the G20's monetary stimulus fails to prevent a slide into protracted depression, it is a safe bet that oil prices will roar back.
Investors are already itching to buy tickets for the great rebound. ETF Securities reports a "meteoric rise" in flows into its family of oil funds, which trade like equities on global bourses. Their funds alone have jumped sixfold to $1.3bn (£880m) since October. Buying reached a crescendo early this year as OPEC production cuts began to stabilise crude after prices touched $34 – a long way down from the giddy heights of $147 last July.
But investors are discovering that it is harder to play the energy rally than it looks. The crude oil fund (CRUD) has fallen by 27pc since early January, though oil itself has risen 9pc since then. The leveraged oil fund (LOIL) has halved. This is the painful story of countless commodity funds. You make the right strategic call, but come to grief on the details.
The reason is "contango". Futures prices have been trading far above spot prices – precisely because the markets are already betting on a V-shaped oil recovery. This forces the ETF funds to keep rolling over futures contracts at a loss – known as "negative roll yield".
Contango has moderated, but December contracts are still near $60. Oil has to rise briskly for the funds to break even. Handle with care.
Michael Lewis, commodities chief at Deutsche Bank, said it is too early for investors to jump back into oil in any case. "We think these reflation trades are in danger of unravelling. Oil may fall back to $40 later this year before it finds a floor."
It usually takes a year or more for OPEC to flush excess supply out of the market. The cartel has moved fast this time – agreeing to cuts of 4.2m barrels per day (b/d), 80pc delivered so far – but is struggling to keep pace with the staggering collapse of demand. Japan's industrial output has fallen 38pc.
Deutsche Bank says China's spring rally is a false dawn. The 26pc fall in Chinese exports in February (-17pc in March) will curb plant investment six to nine months later, just as the $600bn fiscal stimulus runs out of juice.
The markets have almost certainly jumped the gun by betting on an end to the US recession by July, ignoring the gloomier – and reliable – message of US leading indicators. Deutsche expects one more shake-out on global markets this summer before the coast is clear, with economic recovery starting in earnest at the end of the year.
One thing is certain, the next cycle will not repeat the early 1980s when crude languished for years as the market digested a surfeit of supply from new fields of the North Sea, the Gulf of Mexico, and Alaska – all now in frightening depletion.
This time there is no easy oil coming on stream. Tomorrow's fields are mostly deep in the ocean, beneath salt, or in political no-go zones. Lukoil's Leonid Fedun doubts whether Russia's production will ever again reach 10m b/d. Petrobras has stretched its plans to develop Brazil's Tupi field in the Atlantic. The US rig count has halved since September.
Green energy pioneers are falling likely flies – sadly – as funding dries up. Shell, BP, and Iberdrola are cutting back on wind farms. Future energy supply is being turned off everywhere, and cannot easily be switched back on.
The International Energy Agency (IEA) expects an almighty crunch in three or four years as China's oil demand nears 10m b/d, up from 6.7m in 2005 (global demand is 83.4m). After that, it gets steadily worse. Four "Saudi Arabias" are needed to plug the gap by 2030.
Investors have countless ways to bet on Peak Oil. My favourite is solar power, as new technology brings it nearer "grid parity" with fossil fuels. The sun's radiation must ultimately be the answer, but you have to navigate with care through the wreckage of credit-squeezed solar start-ups.
Oil ETFs will have their day again, if contango is ever tamed. For those who prefer plain stocks, BP offers a dividend of 7.3pc; Total is at 7pc, and Shell at 6pc. But be mindful of their exposure to capricious regimes and the risk of galloping rig costs.
Above all, don't rush. The history of oil cycles tells us that you have a few more months to make up your mind.
Funds try to spot the great oil rebound
Oil is too cheap. At around $50 a barrel, it is trading far below the production costs of almost all new sources of crude and energy substitutes.
A sustained price above $70 is needed to cover investments in Canada's tar sands, the deep-water fields off Brazil, and Russia's "High North" above the Arctic Circle.
Much the same goes for biofuels from grains (sugar is cheaper). They matter. Bioethanol swings the global crude price. It accounted for 60pc of extra oil supply worldwide from 2007-2008.
Crude at $50 does not square with the failure of the big oil companies to replace reserves over the last five years, or with the lack of coal and nuclear plants to plug the gap. It takes 10 years or so to put a nuclear power station into service.
Nor is it compatible with the breakneck industrialisation of Asia. China expects to have 140m cars on its roads by 2020, up sevenfold in a decade.
So unless the world economy tips into acute deflation (possible: prices are already falling in the US, China, Japan, Spain, and Switzerland) and unless the G20's monetary stimulus fails to prevent a slide into protracted depression, it is a safe bet that oil prices will roar back.
Investors are already itching to buy tickets for the great rebound. ETF Securities reports a "meteoric rise" in flows into its family of oil funds, which trade like equities on global bourses. Their funds alone have jumped sixfold to $1.3bn (£880m) since October. Buying reached a crescendo early this year as OPEC production cuts began to stabilise crude after prices touched $34 – a long way down from the giddy heights of $147 last July.
But investors are discovering that it is harder to play the energy rally than it looks. The crude oil fund (CRUD) has fallen by 27pc since early January, though oil itself has risen 9pc since then. The leveraged oil fund (LOIL) has halved. This is the painful story of countless commodity funds. You make the right strategic call, but come to grief on the details.
The reason is "contango". Futures prices have been trading far above spot prices – precisely because the markets are already betting on a V-shaped oil recovery. This forces the ETF funds to keep rolling over futures contracts at a loss – known as "negative roll yield".
Contango has moderated, but December contracts are still near $60. Oil has to rise briskly for the funds to break even. Handle with care.
Michael Lewis, commodities chief at Deutsche Bank, said it is too early for investors to jump back into oil in any case. "We think these reflation trades are in danger of unravelling. Oil may fall back to $40 later this year before it finds a floor."
It usually takes a year or more for OPEC to flush excess supply out of the market. The cartel has moved fast this time – agreeing to cuts of 4.2m barrels per day (b/d), 80pc delivered so far – but is struggling to keep pace with the staggering collapse of demand. Japan's industrial output has fallen 38pc.
Deutsche Bank says China's spring rally is a false dawn. The 26pc fall in Chinese exports in February (-17pc in March) will curb plant investment six to nine months later, just as the $600bn fiscal stimulus runs out of juice.
The markets have almost certainly jumped the gun by betting on an end to the US recession by July, ignoring the gloomier – and reliable – message of US leading indicators. Deutsche expects one more shake-out on global markets this summer before the coast is clear, with economic recovery starting in earnest at the end of the year.
One thing is certain, the next cycle will not repeat the early 1980s when crude languished for years as the market digested a surfeit of supply from new fields of the North Sea, the Gulf of Mexico, and Alaska – all now in frightening depletion.
This time there is no easy oil coming on stream. Tomorrow's fields are mostly deep in the ocean, beneath salt, or in political no-go zones. Lukoil's Leonid Fedun doubts whether Russia's production will ever again reach 10m b/d. Petrobras has stretched its plans to develop Brazil's Tupi field in the Atlantic. The US rig count has halved since September.
Green energy pioneers are falling likely flies – sadly – as funding dries up. Shell, BP, and Iberdrola are cutting back on wind farms. Future energy supply is being turned off everywhere, and cannot easily be switched back on.
The International Energy Agency (IEA) expects an almighty crunch in three or four years as China's oil demand nears 10m b/d, up from 6.7m in 2005 (global demand is 83.4m). After that, it gets steadily worse. Four "Saudi Arabias" are needed to plug the gap by 2030.
Investors have countless ways to bet on Peak Oil. My favourite is solar power, as new technology brings it nearer "grid parity" with fossil fuels. The sun's radiation must ultimately be the answer, but you have to navigate with care through the wreckage of credit-squeezed solar start-ups.
Oil ETFs will have their day again, if contango is ever tamed. For those who prefer plain stocks, BP offers a dividend of 7.3pc; Total is at 7pc, and Shell at 6pc. But be mindful of their exposure to capricious regimes and the risk of galloping rig costs.
Above all, don't rush. The history of oil cycles tells us that you have a few more months to make up your mind.
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