2011 was a relatively stable year for oil prices. Brent crude oil traded in a narrow band all year between $100 and $120 a barrel. But 2012 may be a very different year with traders bracing themselves for a much rougher ride.
The base case scenario is for oil to remain at about $100 a barrel in 2012. This is founded on relatively healthy oil demand growth of about 1 million to 1.2 million barrels a day in 2012. This outlook also is based on OPEC maintaining its output at the current 3-year high of around 30 million barrels a day and the end of supply disruptions that troubled the oil market in places like Libya.
And indeed, at its recent meeting, OPEC did set a target for output at 30 million barrels a day.
However, despite the apparent calmness in the oil market, there is currently an extreme difference of opinions between the bulls and the bears on oil prices in 2012.
There are traders on opposite sides of the market who are buying large amounts of out-of-the-money oil futures option contracts that would profit from both a collapse in oil prices and a super-spike. These traders are betting on low probability events – either a rise to $150 a barrel for oil caused by Middle East unrest or a drop to $50 a barrel brought about by a eurozone collapse.
The key benchmark Brent crude oil contract is now trading for approximately $108 a barrel.
Although there are bets occurring on both sides, recent options buying on the New York Mercantile Exchange has been skewed toward an upward spike for oil based on risks coming from a possible European Union embargo on Iranian oil.
Since October, many trading firms have noticed persistent interest in call options for prices ranging from $120 to $180 a barrel. The number of options contracts purchased betting on a move for oil to $130-$155 a barrel by the end of 2012 has risen more than 25% over the past six months to more than 93,500 contracts.
These buyers perceive greater geopolitical risk than just the situation with Iran and its nuclear program. There is also the threat of regional war if Syria were to collapse or even a turn for the worse politically in Egypt or Libya.
Finally, there is even the risk that political turmoil in Russia surrounding the presidential election in March may disrupt output from the world's second-biggest oil producer.
But the bears have their reasons too. They say a eurozone collapse will trigger a worldwide recession that cuts oil demand sharply. The global financial crisis of 2008-09 did see two consecutive years of falling consumption for the first time since the 1980s. This did drive oil prices briefly below $40 a barrel, forcing OPEC to cut production.
Bears also point to a hoped for increase in Iraqi oil production of at least 500,000 barrels by the middle of 2012 as well increased U.S. shale oil production from North Dakota and Texas.
Both bulls and bears could be right depending on if one of these 'low probability' events comes to pass. Either way, 2012 looks to be a far more interesting year for the oil market than 2011 was.
Individual investors can join in with professionals on trading the perceived upcoming volatility in oil prices through the use of exchange traded funds.
Some of ETFs available for purchase include: United States Oil Fund (NYSE: USO), United States Brent Oil Fund (NYSE: BNO) and United States Short Oil Fund (NYSE: DNO).
Article originally written for the Motley Fool Blog Network. Check out my articles there at: http://blogs.fool.com/tralmoe/
Showing posts with label bno. Show all posts
Showing posts with label bno. Show all posts
Monday, January 9, 2012
Friday, December 9, 2011
Arab Spring Drives Up Oil Prices
The United Arab Emirates' oil minister, Mohammed Al Hamli. recently defined a “reasonable” price for as oil as between $80 and $100 a barrel. This is quite a jump up from just five years ago when OPEC oil ministers said that a “reasonable” price for oil was about $50 a barrel.
But a look at the price that Middle East countries need to survive economically today explains why oil ministers are now targeting such higher prices.
Not long ago the International Monetary Fund provided a timely update on the so-called 'breakeven price' for oil needed by Middle East producers to balance their fiscal budgets.
In the IMF's latest semi-annual “Regional Economic Outlook: Middle East and Central Asia” report, it estimates that the breakeven oil price for the UAE has now risen about $80 a barrel, up from $60 a barrel in 2008.
For Saudi Arabia, the IMF estimates that $80 a barrel is the breakeven price, up nearly $30 a barrel in just three years.
Part of this increase in the breakeven price can be explained by the sharp increase in spending earlier this year in response to the 'Arab Spring'.
But even before 'Arab Spring', budgets in Middle East countries were ballooning nearly out of control as governments try to deal with little non-oil revenues, rapid population growth and a very generous welfare system where governments pay almost everything for their citizens. These include payments for utilities, fuel, education, housing and health.
The rapid rise in breakeven oil prices means that key members of OPEC now have a strong incentive to defend much higher prices.
It also means that Middle East countries are unlikely to spend any large amounts of money in building spare oil production capacity. This is simply no money in their budgets for such undertakings.
The bottom line for investors and consumers is that oil prices would be extremely unlikely to below $80 a barrel for more than a brief period of time.
This is obviously bullish for oil. Investors can participate easily through the use of an exchange traded fund. The ETF which best reflects global oil prices the United States Brent Oil Fund (NYSE: BNO).
But a look at the price that Middle East countries need to survive economically today explains why oil ministers are now targeting such higher prices.
Not long ago the International Monetary Fund provided a timely update on the so-called 'breakeven price' for oil needed by Middle East producers to balance their fiscal budgets.
In the IMF's latest semi-annual “Regional Economic Outlook: Middle East and Central Asia” report, it estimates that the breakeven oil price for the UAE has now risen about $80 a barrel, up from $60 a barrel in 2008.
For Saudi Arabia, the IMF estimates that $80 a barrel is the breakeven price, up nearly $30 a barrel in just three years.
Part of this increase in the breakeven price can be explained by the sharp increase in spending earlier this year in response to the 'Arab Spring'.
But even before 'Arab Spring', budgets in Middle East countries were ballooning nearly out of control as governments try to deal with little non-oil revenues, rapid population growth and a very generous welfare system where governments pay almost everything for their citizens. These include payments for utilities, fuel, education, housing and health.
The rapid rise in breakeven oil prices means that key members of OPEC now have a strong incentive to defend much higher prices.
It also means that Middle East countries are unlikely to spend any large amounts of money in building spare oil production capacity. This is simply no money in their budgets for such undertakings.
The bottom line for investors and consumers is that oil prices would be extremely unlikely to below $80 a barrel for more than a brief period of time.
This is obviously bullish for oil. Investors can participate easily through the use of an exchange traded fund. The ETF which best reflects global oil prices the United States Brent Oil Fund (NYSE: BNO).
Monday, November 14, 2011
Iran Pushing Oil Prices Higher
It's been deja vu lately for the oil market as fear factors regarding Iran have returned.
Iran is very important to global oil markets as it is the world's third biggest exporter of black gold after Saudi Arabia and Russia. Last year, the country sold an average of 2.6 million barrels of oil a day, mainly to the Asian countries of Japan, China and India.
The price of Brent crude oil, the global benchmark, has rallied to almost $115 a barrel as tensions rise in the nuclear triangle between Iran, Israel and the United States.
Of course, there are factors at play here besides Iran which is pushing prices higher. These other factors include continued supply disruptions from Libya, Yemen and Syria along with sharply lower oil inventories in Europe (the lowest level in almost 9 years).
This combination of tight fundamentals and rising geopolitical tension has driven up oil prices more than 16 percent from the eight-month low set in early October at $99.70 for Brent crude oil.
The geopolitical tension comes from the fact that Iran controls the Strait of Hormuz, the gateway for Middle East oil where 15.5 million barrels a day passes through. That is equivalent to a third of all seaborne traded oil.
The Strait has added significance because all the world's spare production capacity is in Saudi Arabia, the United Arab Emirates and Kuwait. All of these countries ship their oil through the Strait.
If the Strait of Hormuz is shut down, even briefly, oil prices would skyrocket. Independent energy consultant Philip Verleger says “It is the $200-a-barrel scenario.”
Investors can protect themselves several ways against such a scenario such as buying companies with large exposure to oil from other regions of the globe. Statoil ADR (NYSE: STO) and Petrobras ADR (NYSE: PBR) come to mind.
Another way to play it is through an exchange traded fund (ETF) based on the Brent oil futures contract. It is the United States Brent Oil Fund (NYSE: BNO) and is up 25% year-to-date.
Iran is very important to global oil markets as it is the world's third biggest exporter of black gold after Saudi Arabia and Russia. Last year, the country sold an average of 2.6 million barrels of oil a day, mainly to the Asian countries of Japan, China and India.
The price of Brent crude oil, the global benchmark, has rallied to almost $115 a barrel as tensions rise in the nuclear triangle between Iran, Israel and the United States.
Of course, there are factors at play here besides Iran which is pushing prices higher. These other factors include continued supply disruptions from Libya, Yemen and Syria along with sharply lower oil inventories in Europe (the lowest level in almost 9 years).
This combination of tight fundamentals and rising geopolitical tension has driven up oil prices more than 16 percent from the eight-month low set in early October at $99.70 for Brent crude oil.
The geopolitical tension comes from the fact that Iran controls the Strait of Hormuz, the gateway for Middle East oil where 15.5 million barrels a day passes through. That is equivalent to a third of all seaborne traded oil.
The Strait has added significance because all the world's spare production capacity is in Saudi Arabia, the United Arab Emirates and Kuwait. All of these countries ship their oil through the Strait.
If the Strait of Hormuz is shut down, even briefly, oil prices would skyrocket. Independent energy consultant Philip Verleger says “It is the $200-a-barrel scenario.”
Investors can protect themselves several ways against such a scenario such as buying companies with large exposure to oil from other regions of the globe. Statoil ADR (NYSE: STO) and Petrobras ADR (NYSE: PBR) come to mind.
Another way to play it is through an exchange traded fund (ETF) based on the Brent oil futures contract. It is the United States Brent Oil Fund (NYSE: BNO) and is up 25% year-to-date.
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