The Command Post - Op-Ed - Good News All Around!

August 30, 2003

Good News All Around!

Note that this is a cross-post.

-----------------

Paying a bit more for gas lately, hmmm? Well, you should love this commentary from AME in the United Arab Emirates:

This week the Saudi Oil Minister Ali Al Naimi lands in Moscow to sign a historic energy pact and to forge a new relationship with the kingdom�s main rival as top oil producer.

It has to be said that Mr. Al Naimi is gaining considerable weight in many circles. Independent observers credit him with keeping the oil price at least $1 per barrel higher in recent years than it would have been without him.

High oil prices of the past three years leave Mr. Al Naimi with a personal prestige perhaps unrivalled since Sheikh Yamani in the 1970s. Now the winning of new friends and influence in Russia is on the agenda.

This is a typically clever move by Mr. Al Naimi. In order to keep Opec oil prices towards the top of their $22-28 per barrel range then more than a little cooperation from Russia will be required.

Pragmatic Russia may heed this call from Saudi Arabia. Russia pays around $7 per barrel in oil production costs, compared with Saudi� $1-2 a barrel, and would be financially crippled if oil prices fell to $10 per barrel as they did in 1998.

But no sign of that today, as mounting resistance to US rule in Iraq is keeping world oil supplies tight. Indeed, if the tentative US economic recovery blossoms this autumn, oil prices could head much higher.

History never quite repeats itself, but the situation in today�s financial and commodity markets does bare more than a passing resemblance to the mid-1970s.

Of course, we're all hoping for a return to the petroeconomic conditions of the mid-1970s. But wait ... the outlook gets even better:

For readers of this column who have business interests in the Middle East, and that is the AME Info target audience, this is very good news. The late 1970s were a golden age in the Middle East and we are seeing a repetition of this scenario.

Conversely for Western markets this means inflation, a property crash, possibly another stock market crash and anemic growth.

Now it is possible that the many manifest geopolitical problems of the Middle East serve to undermine such a golden scenario. But there is nothing that says economic expansion can not happen under unstable conditions.

So are the happy hopes of AME and its Editor-in-Chief, Peter J. Cooper.

Interested in Mr. Cooper? Here's his AME bio:

Peter J. Cooper was the launch editor of Gulf Business magazine in 1996, and is an award-winning British financial journalist with 15 years' experience. He returned briefly to the UK last year to complete his first book, Building Relationships, The History of Bovis 1885-2000. An Oxford graduate, Cooper studied politics and economics with William Hague, now leader of HM Opposition. He was also a trainee in the European Commission in Brussels as a specialist in the economics of developing countries, and speaks French and some German.

Posted By Alan at August 30, 2003 10:51 AM | TrackBack

Comments

Great, the oil cartel spreads into Russia.

How ironic that Iraq is the country that broke from the Arab oil embargo this article calls the "golden age."

Posted by: rrgg@hotmail.com at August 30, 2003 10:57 AM

I'm no expert in the oil industry BUT:

We (the US) continue to shoot ourselves in the foot by erecting barriers to cheaper fuels. The WSJ has done a reasonably good job of explaining "September Shorts". Essentially, futures contracts for September deliveries get sold, and the sellers assumed a larger supply than actually exists. As September approaches, they MUST deliver the fuel, so they pay almost any price, and lose their shorts (so to speak).

Also, limited substitutability of fuel blends due to a Balkanized air quality regulatory regime means that certain specialty blends wind up in short supply.

Add to that limited refinery capacity, poor estimates of supply and demand, overall tight supply, and you get what we have -- low inventory and high prices.

OR, one can just claim the oil companies are gouging consumers.

As for the overall oil situation -- high prices accelerate the drive for affordable substitutes. I don't mean to be Pollyanish, but the era of "Golden Eras" in the OPEC countries is coming to a close.

MG

Posted by: MG at August 30, 2003 01:32 PM

MG

My husband trades futures on occasion, and I've learned a little about them from him.
There are two types of traders, speculators and hedgers. The hedger is someone(or a firm) that either uses a given commodity in manufacturing or sells that commodity. He trades futures to offset the price he will pay when he takes delivery. The speculator is someone who makes (or loses) money by "betting" on whether a commodity's prices will go up or down(long or short position). Both are required to maintain a per contract margin, generally around ten percent of full contract value(a contract is a given quantity of the commodity, ie 5000 bushels of wheat, 100 troy ounces of gold, etc, and that is a constant with each respective commodity). When the price moves in your direction, you can withdraw the profits you have generated, everything above your margin requirements. When the market moves against you, you get a "variation call", which requires you to deposit enough money to bring your margin back up to its required amount.
The September delivery date is called a "spot month", and each commodity has several. When you go into spot month, speculators, since they don't have any intention of delivering or taking delivery, are required by their brokers to deposit "full contract value", that is the entire price of the contract(if gold, say, is trading at $300.00, they have to come up with $30,000.00) in case they wait too long to liquidate their contracts and someone has to take delivery, it's them rather than their brokers, who also have no use for the physical commodity, nor the means to produce it for delivery.
Those holding short positions are encouraged to sell them before or at the outset of spot month, obviously.
Even a hedger, realizing he cannot make good on a contract, has the option of going back to the exchange(through his broker) and offering up his short position to a buyer, before delivery date. There is usually someone out there willing and able to assume the risk. If supplies are limited, prices will go up, and in the case of temporary overpricing, there are a lot of arbitragers out there, always ready to pounce.
Futures contracts aren't binding in the sense that most people see contracts, they are more agreements that can be transferred in seconds in the trading pits.
It sounds like the people who you say are in trouble because they can't locate supplies to deliver are people who have waited too long, out of optimism, negligence or greed, to divest themselves of their positions.
However, delivery date isn't the first of the month, I forget exactly which day(end of the first week, second week?) it is, and they still have time.

Posted by: carmen at August 30, 2003 03:56 PM

The Saudis problem is that their population keeps growing and their debt keeps increasing. To maintain living standards without a Western economic collapse they can't let oil prices go too high or demand declines lowering prices and income.

OTOH as population goes up and debt service increases they must eventually pump more oil or they get higher interests costs and an unhappy population.

The long term trends are not in their favor.

Posted by: M. Simon at August 31, 2003 05:16 PM

Dear Sir,

I am the confidant of the ex-president of the philipines (Mr.
Estrada) who was removed from power as you may know.
He has secretly in formed me to contact you and to liase with
you to invest the sum of $30M (Thirty million dollars)
which he deposited in a bank during his tenure.
Now the proceedures are that you will be given the contact of
the bank so that you will contact them to open an account
online where the money will be transfered into from his
account since he can not come out in the open to use this
money. After you open this account, I will order the bank in
a written form to transfer the money into your own account
afetr which you can then transfer it to some other account
in your place for sharing.
Upon request by you I can send to you the certificate of
deposit of this amount for your assurance.
We are willing to conceed up to 25% of the total sum to you
for all the anticipated help from you hoping that it will
cover all your expenditures before and after the transaction.
However, we will desire that you will help us invest our
share till we will be free to meet you up in your country for
futher talks,Please if this proposal is Ok by you, please
write me back via this address so
that i
can give all informations.

Regards

Posted by: okey kalu at September 25, 2003 08:22 PM

Posted by: okey kalu at September 25, 2003 08:23 PM