Wednesday, June 27, 2007

The Road Ahead of Us

Oil prices moved impressively higher today, in a $1.20 jump, landing north of $69 per barrel. This resulted from news that, even though oil inventories were okay, our stock of gasoline and other refined products were considerably lower. What's more, OPEC's ambivalence to this problem has not helped much. Instead, traders have every reason to believe that supplies will will remain tight and, hence, prices elevated.



The short-term problem, according to many oil watchers, is downstream, at the refining level. They might be partially right. According to the WSJ, the country has been short by 11 million barrels of gasoline on hand, compared to one year ago, and these woes are attributable to untimely scheduled maintenance work, power and equipment failures, and safety concerns in our refineries.



That's why there is oil sitting in tankers, but little stockpiles of finished goods for our daily use. And, yes, that's has meant big profits for the refiners.



But before you decide to boycott Valero. You should know that the current refining dilemma is only part of our problem. In the near term, we face a much more confounding set of circumstances: how do we adapt to a world on which robust demand surges to as much as 88 million barrels per day? That's right. Thanks largely in part to global prosperity, the need for oil is estimated to be up by nearly 2 million barrels per day, compared with the demand levels in December 2006.



Furthermore, the issue of dwindling or mismanaged supplies will complicate the dilemma. Stories abound of losses in capacity. In Venezuela, production is down by nearly one million barrels per day. A similar ordeal of technical ineptitude is unfolding for Pemex in Mexico. And there are major questions about Saudi Arabia's capacity, while production in Nigeria is always at risk from civil strife.



Indeed, we may be inclined to fix out refinery problem, but that is only a short-term solution to the more daunting one just around the bend. In order to address that one, we will seriously need to open the discussion on viable alternative energy sources. And even with those discussions, it will take years before realistic and affordable solutions are available to consumers. That means, if the months ahead are the turning point, there is really no way to avoid greater energy prices, except to develop investment strategies that seek to take advantage of them for yourself and your business. That means learn how to hedge...now.



Here are the closing prices for oil futures contracts, on the NYMEX, for the next twelve months, as of the close of markets on Wednesday, 27 June 2007.



July 2007 --

August 2007 $68.97

September 2007 $69.28

October 2007 $69.53

November 2007 $69.65

December 2007 $70.00

January 2008 $70.27

February 2008 $70.49

March 2008 $70.70

April 2008 $70.89

May 2008 $71.04

June 2008 $71.18

July 2008 $71.27

3 comments:

Digger said...

so are you saying that the price is not at its peak? you think there's more room to go?

Anonymous said...

Good piece, Gary.

L. Morrison said...

We constantly feel the pain of rising oil prices. To gas up our fleet, we are paying thousands of dollars more this year, and coupled with higher insurance rates, it is almost impossible to keep out business going. Nevertheless, I like what you have said here about hedging. It would be a good move to begin to invest in these commodities or some derivatives to offset the costs we do pay. The only problem is, a complex investment strategy is a tough sale to bosses who are not terribly market literate. Sad fact is, some small businesses are not quite ready for that. Ours isn't, trust me.

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