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London Sees Oil Prices on the Rise

by | published September 24th, 2012

My latest trip to London may have centered on the briefings I gave on Iranian oil sanctions, but I also did a number of media appearances.

As I have mentioned before, questions from European interviewers are generally more knowledgeable and to the point than in the states. This may be because places like London are closer to the events directly affecting the price of oil.

Or it may simply be a result of recent history.

Each of the major events that have determined oil price fluctuations in the past two years (Egyptian unrest, Libyan civil war, bank credit squeeze, euro valuation, Iranian oil embargo) have either been of European origin or have affected Brent prices set in London almost immediately.

The better questions asked here may simply be a function of having less time to deal with matters in the abstract. Events have direct consequences here, and the market has less leverage to overlook them.

So it was hardly unexpected that I would be asked explicit questions requiring focused answers.

However, there was a surprising element. Nobody - be he/she a commentator, journalist, analyst, or expert – expected a fall in oil prices. The entire market environment in Europe is looking in the other direction.

The “high point” in an American interview is usually when somebody asks me where I think the price of oil or gasoline is going. In London, the matter also came up. However, my predictions of $130 a barrel for Brent and $115 for WTI (West Texas Intermediate, the benchmark crude traded on the NYMEX) by the end of 2012 were considered on the low side.

My further suggestion of $150 for Brent and $130 for WTI by the end of 2013 have caused some disagreement in the states, but are par for the course averages for what people are saying over here.

The overwhelming consensus in Europe is that oil will rise, absent exogenous economic or financial problems. In other words, the price can go down, but such a move would be a result of another bout with credit crises, intra bank problems, or currency weakening. In such situations, the lowering of oil prices has nothing to do with oil, or its supply/demand balance, or its trade. Rather, economic constriction results in concerns over short and medium-term demand and those translate into a lower price.

Left on its own, the consensus over here is simple. Oil goes up.

Concerns Grow in Europe

Now, unlike in the U.S., the conversation does not then immediately move to prices at the pump. Gasoline is less of an issue for the simple reason that a combination of heavy taxation, lowered usage and a far better mass transit system has made driving more of a luxury than in the U.S.

Paying the equivalent of $7 a gallon tends to have that effect.

Rather here, the question is the price result for other oil products, especially diesel. In Europe more diesel is consumed daily than in the U.S., and it costs less than gasoline (the opposite of what happens in the American market). The impact of diesel prices has a more pronounced effect on industrial usage. And that means pressure on jobs.

There is also the concern over what the higher oil prices means for heating oil as winter approaches. Diesel is once again a good surrogate, since diesel and low sulfur content heating oil are produced from the same refinery cut.

That makes their pricing similar.

The U.K. is now in yet another unemployment cycle. You can see it everywhere as a combination of bottom-line concerns in both the private and public sectors are prompting cutbacks and “redundancies.”

There are fewer employees in shops and restaurants. But there are also fewer employed in public services. For example, it is not unusual to have closed ticket windows at tube (subway) stations with signs indicating the reason is reduced employee availability.

That the threats of strikes are once again making their presence felt is yet another indication that the belt-tightening of the current Conservative-led coalition government is beginning to trigger a pushback.

Rising oil prices over here, therefore, are not perceived as a threat to the family SUV, but an attack on the breadwinner’s ability to work. The country has for some time experienced a division between a more prosperous southeast (London and environs) and a depressed Midlands and north.

In March, I wrote from Scotland and talked about the 60% plus pockets of unemployment there. Well, the situation is deteriorating in the north as I write this. But now the problems are moving into the more developed areas of the island.

Rising oil prices will hardly help.

There is nothing of consequence that Whitehall (the London street snaking between Trafalgar Square and Westminster that lends its name to the collective U.K. political administration) can do about this.

The same can largely be said for the White House and Capitol Hill.

Lessons For U.S. Oil Production

For years, the oil coming from the North Sea had been an advantage for the U.K., providing the prospect of a large domestic source to buttress against the volatility of an international oil market. That volume is ending as North Sea crude extractions decline and new offshore fields become smaller and more expensive to develop.

That means the British economy is less insulated from what is happening elsewhere and more vulnerable to each geopolitical ripple and its effect on oil. And despite not being a member of the Eurozone, English banks are now feeling the European credit crisis. The overwhelming view expects a downgrade in the U.K. credit rating soon.

There are a number of economic differences contrasting one side of the big pond from the other. The U.S. market is far stronger and more resilient. It also has the prospect of its own domestic oil source – rising unconventional production (from shale, tight and heavy oil, bitumen, along with synthetic crude from Canadian oil sands). That has led to a renewed (and misguided) complacency that what is happening over here in London is not going to be occurring at home.

But when it comes to the impact of rising oil prices on the broader market, the U.S. is advised to watch closely what is playing out in the U.K. This remains an integrated global oil market, despite the emergence of domestic sources.

As one knowledgeable colleague over here put it last evening – “The North Sea could not insulate us Brits; oil from shale will not completely integrate you Yanks either.”

He then – in traditional English fashion – took the colonial (me) to the cleaners at snooker.

Still can’t figure out where they hid the pockets.

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  1. Tib Csabai
    September 24th, 2012 at 12:43 | #1

    The comment that “there is nothing of consequence Whitehall can do about rising oil prices,” is total rubbish.

    Try dropping the unilateral and illegal Iran sanctions, and watch the price of oildrop, along with a resurgence in the Midlands manufacturing that had supplied Iran earlier.

  2. james simon
    September 24th, 2012 at 13:00 | #2

    Kent I understand your view point that global demand trumps US demand but demand destruction will cap or put a ceiling on crude prices.Demographics also play a role here in the US as our population ages, we drive less in fact Americans are currently driving less not due to price but a change in lifestyle.I feel the Chinese economy is too dependent on Europe and the US not to feel the effect of a slow down triggered by $130 a barrel oil. In fact assumptions or studies based on Chinnese supplied numbers are highly questionable to think internal or domestic demand will continue in the face of a world wide slow down is what the communist running that economy want us and most importantly their citizens to believe.Look at the dry bulk rates to get a feel for how healthy trade between nations is going. Im willing to bet you a nice dinner that prices will not breach 125 mark for brent absent a war in the mideast by years end.

  3. Bob
    September 24th, 2012 at 13:55 | #3

    @Tib Csabai
    It’s interesting to note that oil prices dropped last week and continued down at the start of this week. Some knowledgeable commentators attributed the drop to a rumored meeting of Lady Ashbrook with representatives of Iran that may have led to a breakthrough over Iran’s nuclear program.

    How credible do you think these rumors are?

  4. eric taylor
    September 24th, 2012 at 14:14 | #4

    Should the global economy stabilize, many finance analyst don’t
    think so, how will Russia’s indexing gas to oil play out in the
    expensive regulated natural gas market? Gazprom is not sitting
    on their hands, but building out twice as fast their enormous
    pipelines, and moving into natural gas powered cars in Europe,
    among other advantages of being the most profitable company
    in the energy sector.

  5. September 24th, 2012 at 22:43 | #5

    James, your too kind…

    The fact is that any increase in oil / gas prices will put inflation pressure on other core essential goods and services and will cause corresponding increase in price of non-essential goods and services.

    This inflation in price when not followed by wage increases will lead to decreased consumption of non-essential goods and services to a greater degree than it will essential goods and services. That part of the consumer economy suffers when the oil gods seem to think they need a raise for whatever reason puffs through their heads at the moment.

    However, as consumer demand slows because of prices, the hammer falls and prices either drop or demand dries up. This leads to a stagnant economy at best, and less demand for oil which will cause the price of oil to drop as well.

    I have long been an advocate of governments nationalizing their fossil fuel supplies in order to protect their societies from the never satisfied greed of private enterprise. And I hope it comes sooner rather than later.

    Baring that, I would just fall out of my chair laughing if something came out of the blue that made the nasty stuff virtually worthless and their are a couple technologies that are being worked on that could do just that when combined with advanced solar, wind, geothermal, and water power.

    Converting Co2 into fuel is gonna be a bitch for oil producers if it can be made completely sustainable by alternative energy because then there will be no reason for all governments to ban the drilling of new oil wells as well as forcing owners to cap the ones that have already been drilled due to environmental concerns.

    Of course we as a species need to move away from fossil fuels anyway because of the long term health problems they create so I am not that fond of the Co2 technologies either. Still I would LOL at all you oil hawks if it came to pass.

    The whole oil market is questionable because of its ability to be manipulated by speculators in order to take rapid profits through fast cycle trading schemes and for the life of me I don’t know why our governments don’t put a stop to this as it gives big investors and those who are closer to the exchanges the ability to unfairly manipulate the market at the expense of other smaller, less connected traders. But that is a whole nother story in and of itself so I’ll leave that for another time.

    I leave you with my standard warning. If you are investing on this yahoo’s advice you are part of the world’s problem, not its solution. Don’t encourage the price of oil to go up. You really are hurting people in ways you can’t understand.

    Just as an example, my friend’s business lost a full 20% of its gross revenues this past month and that loss can be directly attributed to the increase in gas prices. We seen this same drop back in Feb-Mar of 2012 as well.

    Higher oil prices don’t just put money in your pocket if you are an investor, the contribute to the economic pain of many people who have nothing to do with the oil industry. This is all part of that uncertainty that business owners are talking about. Nothing to do with national debts like the talking heads want you to believe….no one really believes that they will get back to economic prosperity with the oil vultures gobbling up every extra cent of economic growth we manage to elk out of a stagnant economy.

  6. Tom Hegarty
    September 25th, 2012 at 15:12 | #6

    Well said Al.
    It’s probably just dawning on the hotshot financiers on the LSE and Wall Street also the politicians. NONE of ‘em have any real understanding of what happens next. The reason being, the complexity of our interdependance, reliant on far away places that don’t even register on the radar. Unfortunately, so interlinked have we become that the “butterfly effect” could bring the whole edifice down round our ears! For example; a small bank in Madeira say, collapses. Because of Credit Default Swaps and Derivitives, noone knows what toxic debt other banks are using as collateral. Being Portuguese it’s just enough to tip Portugal over the edge, Spain follows next and then the BIG one, Italy! Pull out one small brick and…..
    The other thing is the popular awareness is increasing in leaps and bounds and can see it’s always the same ones that lose out and it isn’t the rich on Wall Street and the LSE.
    Politicians have outlived there usefulness and need re-educating in how to behave honourably and be trust worthy. Lol!
    There are sea changes taking place not seen before in our collective histories. Most of it is happening just beneath the surface a seething unhappiness with those supposed to represent their best interests. Some joke eh?

  7. Terry Hamm-Morris
    September 27th, 2012 at 00:16 | #7

    It is interesting that you and Porter Stansberry are giving opposing advice on what will happen to the oil markets. I have listened to you and done well but am wondering if you are both working in the same time frame. I am 65 and may not be able to wait for prices to rise again if what Porter Stansberry says is correct. On the other hand, I have followed you for quite some time so have left my money in oil and will buy more when it dips more. Hope I am putting my faith in the right person but it would be nice if you were on the same page…….

  8. September 27th, 2012 at 10:07 | #8

    @Terry Hamm-Morris
    Hello Terry,

    Thanks for bringing this up.

    We believe that we’re correct on this issue. We understand that a number of folks are calling for oil to go lower. If you go back through Kent’s last four or five articles, you’ll see we’ve been addressing this issue.

    Now, no one knows for certain what will happen in any market. But we do believe that saying “there’s a lot of oil out there” has nothing to do with the price of that oil.

    We’ve been focusing on something called the “marginal cost” of oil. In a nutshell, yes, there’s a lot more out there. But the cost to get each barrel out of the ground has increased an incredible amount. That’s because all this is pretty much “alternative” oil. Oil from places like the Bakken region and the Canadian tar sands is much more difficult and expensive to extract.

    Now, no oil producer can sell oil for less than it costs to get out of the ground.

    Also, the latest and most profound research from the renowned Bernstein Research Group calls for the marginal cost of Brent crude to be a whopping $92.

    We believe we’ll some dips, no doubt. And, like Kent has said, if we hit a major recession, then yes, oil could fall dramatically. And if that happens, we’ll see production shut down. But barring that, the thing to remember is this:

    The amount of oil in reserves has little to do with the cost of that oil. Our view is that it may stabilize, it may go down somewhat, but in the next two years, you’ll see significant increases in the price of oil.

    Now, if you believe the price of oil has only to do with how much reserves are in the ground… then you’ll bet more on a decreasing prices.

    The difficult thing is that you’ll see prices go up and down, and you’ll still wonder who is right. So again, in the longer run, we’re seeing incredible increases in “marginal cost” – the cost to get each barrel produced. That sets the price of oil.

    In the end, of course, it’s up to you to decide for yourself.

    Sincerely,

    Mike Ward
    Publisher, Money Map Press

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