Arjun Murti, the Goldman Sachs petroleum equity analyst who was dead-on in his call of higher prices earlier this year, is still holding to his generallly bullish outlook.
With crude prices plunging below the $90 level Monday, a far cry from the early days of $140 plus in early July -- almost $60 in three months! -- it's tough to be a bull. But Murti's primary argument continues to rest on the supply side.
In Goldman's latest comments on the market, which are part of a larger report on refining equities, what we can assume is Murti's voice says that the supply/demand balance is "not as bearish as sentiment, but (the) risk to our $120/bbl 4Q2008 base-case forecast appears to be to the downside." That's putting it mildly.
And Murti is right in saying that all of what is driving the market is lower is an expectation of diminished demand. There is absolutely no bearish news on the supply side, which is not moving higher. "Furthermore, oil inventories remain at generally low levels, in particular in the United States," the report said. "The problem, though, is that investors appear to be placing greater weight on the demand concerns rather than the supply shortfalls; it may require a clear bottoming in global growth sentiment before supply shortfalls are again recognized as a bullish factor."
The report cites several factors which are adding to downward pressure, including "destocking" by financial institutions. "While the market may be incorrectly interpreting the selling pressure as entirely indicative of weakening global oil demand growth, the distinction does not become relevant until the credit crisis moderates and global economic growth stabilizes," the report said. "Major restocking will be required whenever global growth rebounds."
The market curve is indicating a situation that at first glance is utterly confusing, but ultimately makes some sense. Two key benchmarks are in backwardation: WTI on the NYMEX and gasoil on the Intercontinental Exchange. In a market plunging as quickly as this one, this is extremely odd. That sort of rate of decline is normally a sign of a growing supply/demand imbalance that should be building inventories, creating a contango. But as Goldman notes, those stocks are not rising, and that in part is a function of the credit crisis. The cost of holding inventories is rising; the ability to even get the credit to hold those inventories in the first place is being constrained. So stocks remain tight.
Even in those markets where there's a contango, it isn't particularly steep. That, too, is a sign of the tight stocks in the market. In RBOB gasoline, the contango is not even one cent/gal. That's not much in a market where the watchword is "look out below!"
So if you look at only the price, Murti looks like his time has past. But his view of the supply fundamentals -- whether it's coming out of a well, or coming out of a storage tank -- remains accurate.
The issue that has been controlling oil prices is not the supply and demand of oil but the supply of money that is willing to chase a fixed amount of futures contracts. Right now the money is harder to get especially with the credit crisis and so many speculators having been burned on the way down.
Oil is headed for $80 before year end and may go lower. The fact that OPEC is considering supply cuts confirms therre is enough oil to go around and there was all summer as well when prices got pushed skyward.Welcome to the end of the commodities super cycle, mostly created by forecasters such as Murti and Rubin at CIBC telling people there was a super cycle that would last for years.
But maybe next time "it will be different"!