January 18, 2006
REPRICING RISK FOR 2006
It doesn't take much to set the oil market running skyward these days. A bit of anxiety here, talk of trouble there, and--wham! Crude's takes flight.
Anyone who's surprised by the trigger-finger mentality that defines oil trading of late hasn't been paying attention. It may be easier to sleep by turning a blind eye to unfolding events in far-off locales, but for those who crack a newspaper or Google the world of oil news it's deja vu all over again.
Indeed, there's little wonder why a barrel of crude has shot up to nearly $67 in early New York trading this morning--that's up by around 4.5% since Monday's close, and the highest in around three months.
THE FLY IN MR. MARKET'S OINTMENT...
Oil prices, Feb '06 contract
The current mix of supply-side catalysts include the international brouhaha over Iran's stated intention of proceeding with the development of its nuclear program, and the ongoing crisis in Opec-member Nigeria over oil worker hostages. In the latter case, there's no mystery that it's all about shutting off oil shipments from one of the world's largest exporters. "We have decided not to limit our attacks to Shell Oil as our ultimate aim is to prevent Nigeria from exporting oil," the militant group responsible for the current turmoil announced in an email statement, according to Reuters.
In both cases, worries of a spillover effect on crude exports has contributed to anxieties anew that the supply of oil is sufficiently vulnerable to warrant higher prices.
To be sure, the Iran situation so far is only talk, although the implied threat is hardly any different from the Nigerian crisis. In fact, talking can have real-world impacts too when it comes to energy. "The oil weapon is more talked about than used, but it rattles the markets" David Hobbs, managing director of Cambridge, Massachusetts-based CERA, told ISN Security Watch. "And they get more money for their oil."
Turning to the demand side, not much has changed, which is to say that the consuming nations of the world still require incrementally bigger fixes as time goes by. Underscoring the trend (again) is the latest monthly oil report from the International Energy Agency, which predicts that the U.S. and China will be front in center in pushing worldwide demand higher by 2.2% this year, up from a 1.3% advance in 2005, reports Reuters.
Jim Rogers--famed Wall Street investor turned commodities bull--spoke earlier this week at the International Oil & Gas Investor Forum in Aspen, Colorado, urging the audience to recognize the obvious. “Most Chinese don’t have electricity; they’re going to get electricity,” he said, advising that oil and gas will deliver satisfaction, via ResourceInvestor.com. “Unless someone discovers a substantial amount of oil soon, the price is going to keep going up," he continued. On that note, he observed: “Since 1988, Saudi Arabia has said it has 260 billion barrels of oil--that’s 18 years of the same number!”
No wonder, then, that of the S&P 500's ten sectors, energy remains far and away the best performer this year, rising 10.4% so far in 2006 as of yesterday's close, or nearly four times more than the S&P 500's 2.78% year-to-date climb.
Global risk, in short, is alive and well. That risk is re-emerging in oil prices and share prices of energy companies, emphasizing a trend that's ever more firmly in place as something secular rather than short-term. Whether that risk is reflected in prices elsewhere in the capital markets--such as bonds and stocks generally--promises to be a topical subject of debate in the days and weeks ahead. Rest assured, the people on the ground in Nigeria and Iran understand as much. Does Wall Street?
Posted by jp at January 18, 2006 9:30 AM
We talk about sanctioning Iran, but I don't hear a lot about how they would sanction us back. Couldn't they threaten to sell their oil in currencies beyond the dollar? What is their endgame? Iran says they won't just sit and take it-so what can they do.
Also, what about mistakes? The stakes are high. Aren't any of the actors here consciously looking to capitalize?
How do you like having our Brainiac-in-Chief making the calls for the US?
Posted by: mike w at January 18, 2006 4:40 PM