PARIS (ResourceInvestor.com) -- When oil was hitting heights in August we here at Resource Investor mansions predicted that crude would be back at $61 at Christmas. Of course the markets do not open on Christmas Day but when they did on Boxing Day – December 26th - both the Nymex and Brent closed on exactly the same price, $61.10. You can stop applauding, thank you.
Of course we were always certain this would be the case. Oh okay, we were nothing of the sort. Whilst we were making this bold prediction the markets were already in a mood to short, by a record amount of lots. We had anticipated that the shorting, and resulting price fall, would occur far closer to end of the year than actually happened.
So in September and October when the backside fell out of the crude price, sending it tumbling as low as $54.70 intraday, our prediction looked well wide of the mark. Crude could have gone anywhere at that point. OPEC summoned up some courage, and rank hypocrisy, to make some cuts to output in order to protect a price of $60.
We say hypocrisy because this is the same organisation that just two years back was still saying its price band of $22-$28 was achievable. It later said $40 was too high and then we end up with it protecting $60. Best of all no one believed that the output cuts it said it would make were actually real in any meaningful way. OPEC has already admitted its quotas are breakable and that if a buyer is there for oil, the members of OPEC will sell.
But 2006 was a year in which predictions failed to come true. Firstly refining margins stayed far higher than expected, a result of the long delays in restoring capacity in the U.S. Gulf after hurricanes Katrina and Rita. Economic consumption did not falter; many people have long been predicting a recession or economic slowdown in the OECD countries. So far there are few signs of that actually happening. Consumers carried on consuming, wages have risen, the stock markets are booming and even interest rate rises and a housing price fall in the U.S. have failed to dampen the price of energy to any major extent.
The major prediction that failed to come on board was the arrival of new hurricanes in the U.S. Gulf. The season was predicted to be heavy and stormy by various experts. In fact in the U.S. Gulf it was nothing of the sort. As we pointed out the markets had almost subconsciously been pricing in new hurricanes. This would have had a very poor impact on the industry, having just spent billions repairing the damage it would have to do the same again. Financially and for moral, any Katrina mark 2 would have been devastating.
This takes us on to a look at what we might expect next year, 2007. Predictions at this time of the year are fraught with danger, replete as we are with wine, turkey overdoses and assorted Christmas fayre of old.
Firstly the Republican administration has had its wings severely clipped. This has put a dampener on the geo-political situation affecting the oil price. An attack on Iran seems less likely, the people who could make that attack happen are really the regime in Iran. If they were bellicose enough to force the Europeans to support an attack then it could still happen. For America, Britain and Israel to go it alone and simply bomb them would seem to create more problems than even the Bush administration would like to see.
Iraq has generally been a success in the eyes of the administration. It has propelled profits to the “haves and the have mores” as George W. Bush likes to call his closest confidents. It has shown the Middle East what America is prepared to do, fabricate a war in order to smash a country to pieces without any plan, or desire, to restore it. All in order to play the long game over energy resources. Eventually it will do the same with Iran.
But Iraq, Nigeria and the Iranian nuclear question will stay with us. However the market has now discounted all three. New production is starting to come online, though some projects, like BP’s Thunder Horse, have been delayed. LNG in Nigeria, Dalia in Angola and Dolphin in Qatar are all online or coming online in 2007. The market has even lived with Venezuela, Bolivia and Ecuador painting the Latin American map a new shade of red. As Venezuela points out, oil companies still pay more tax in the United Kingdom than they do there.
So where are the real pressure points? Refining capacity is still stretched - complex refineries that create nice gasoline out of nasty sour crude are still at a premium on a global scale. We have elections in Nigeria that could make the situation in the Delta even worse, in this columnists view within 20 years no oil companies will be left in the region.
Russia is prepared to flex its muscles openly. From the point of view of Moscow the country was raped by foreign powers and companies after the fall of the Soviet system. Now it is payback time. A gas crisis in Europe? It could happen, though Russia is not really interested in screwing its major customers. TNK-BP could come under threat.
OPEC could also become more aggressive, angry that it has born the brunt of so much politicking from the western demagogues, war criminals and charlatans we call politicians.
But what price a reverse of 2006. The year when everyone thought a hurricane would smash the U.S. Gulf to pieces again, it did not happen. Now everyone expects another quiet hurricane season, could we end up seeing the exact opposite?
There is also the possibility that a group of religious radicals from the Middle East will ferment a major attack in an OECD country. However even the Madrid and London bombings were ignored by the crude market, it is hard to see any attack being large enough to really dent the global economy.
Instead we are more likely to see a market believing its own hype, that the economy is buoyant, consumption high and capacity still tight. This is likely to drive prices in the first half of the year, perhaps up to $70 on the back of any disruptions - certainly a fall below $55 seems highly unlikely anytime in 2007.
Companies to watch? Total [NYSE:TOT] is looking to put on a lot of new production after recent disappointments. The merger between Statoil [NYSE:STO] and Hydro of Norway [Oslo:NYH] looks promising as both companies are lean and efficient. Shell [NYSE:RDS-B, RDS-A] and Repsol [NYSE:REP] still look weak. BP [NYSE:BP] is still mopping up the damage from its safety disasters.
But then, always expect the unexpected. When Osama Bin Laden turns up for tea on the White House lawn with Elvis, then all bets are off. Happy New Year!
