GAFM Expert Opinion

Oil to slump to $20 ?

By Michael Preiss

Wednesday, July 15, 2009 22:25:45 PM

For information only:

Oil and risky assets surged with the re-flation trade but some independent analysts urge caution.

Oil at $20 is still the odd view out, far from “consensus” view but please remember so was Citibank at $1 when it was trading $55 per share and many on Wall Street were “paid to be bullish” and loved to sell accumulators and Sub-prime related CDO’s

Key thoughts/ oil market view:

· Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand

· A crude surplus of 100 million barrels of will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100.

· Oil Supply (apparently) is outpacing demand by about 1 million barrels a day

· Oil will average $63.91 in the fourth quarter, according to the median of analyst forecasts compiled by Bloomberg.

“China is in a real desperate situation,” said Verleger, who publishes the Petroleum Economics Monthly.

“We’re in a situation where U.S. consumers aren’t consuming and Chinese manufacturers get hurt. Economists are looking for growth in all the wrong places.”



Verleger Predicts $20 Oil This Year on ‘Devastating’ Crude Glut

2009-07-16 08:30:17.777 GMT



By Grant Smith

July 16 (Bloomberg) -- Crude oil will collapse to $20 a

barrel this year as the recession takes a deeper toll on fuel

demand, according to academic and former U.S. government adviser

Philip Verleger.

A crude surplus of 100 million barrels of will accumulate

by the end of the year, straining global storage capacity and

sending prices to a seven-year low, said Verleger, who correctly

predicted in 2007 that prices were set to exceed $100. Supply is

outpacing demand by about 1 million barrels a day, he said.

“The economic situation is not getting better,” Verleger,

64, a professor at the University of Calgary and head of

consultant PKVerleger LLC, said in a telephone interview

yesterday. “Global refinery runs are going to be much lower in

the fall. If the recession continues and it’s a warm winter,

it’s going to be devastating.”

Crude oil last traded at $20 a barrel in February 2002.

Futures were at $61.18 today in New York , having recovered 89

percent from a four-year low reached last December. The

Organization of Petroleum Exporting Countries is implementing

record supply cuts announced last year in response to plunging

consumption.

“OPEC don’t realize the magnitude of the cuts they need to

make,” which would total about a further 2 million barrels a

day, Verleger added. “Storage is going to become tight. It’s

not clear if there’s going to be enough storage available.”


China , Inflation


Oil will average $63.91 in the fourth quarter, according to

the median of analyst forecasts compiled by Bloomberg. Crude for

December delivery traded at $65.46 today in New York . Prices

have rebounded on expectations of a demand recovery, led by

China and other developing economies, and concern expansionary

monetary policy would stoke inflation and weaken the dollar.

“ China is in a real desperate situation,” said Verleger,

who publishes the Petroleum Economics Monthly. “We’re in a

situation where U.S. consumers aren’t consuming and Chinese

manufacturers get hurt. Economists are looking for growth in all

the wrong places.”

Forward contracts for oil have been higher than prices for

immediate delivery this year, a situation known as contango,

creating incentives to buy crude now and store it. That may end

as growing stockpiles make storage more expensive.

“Prices would be much lower today, but for the very large

incentive to build inventories,” Verleger said. “You need

forward buyers, which we had when people were fearing inflation,

but as concerns turn toward deflation” that will no longer be

the case.

Regulators and Rating Agencies”

By Martin Davies

Tuesday, July 7, 2009 00:30:20 AM

[b]When it comes to regulators and rating agencies ...[/b]

 I fair the rating agencies have a lot to account for in this credit crisis but we only have ourselves to blame.  Imagine the following scenario sets:

[b]Scenario number 1 – The Portfolio and Asset Manager[/b]

1) You assess an asset class or specific market segment as overbought and risky but the rating agency gives it a thumbs up.  You say to your boss I don’t want to buy this, it is a bubble.  He is going to say the rating agencies back it, if you miss out on earnings it’s your job mate.  What do you do?

[b]Scenario number 2 – The Risk Manager[/b]

2) A risk system however sophisticated or streamlined at the end of the day finds its magic in statistics and the functioning of all things statistical is predicated on data.  In scrabbling to fill the gaps risk managers will turn to any credible sources of data and what a better place than working with a rating agency whose sole purpose in life is to publish default statistics on traded entities.  The problem of course is, if the source is broken the risk assessment will be as well, there was no backtest for that.

[b]Scenario number 3 – The Regulator[/b]

3) A bank makes an assessment on the riskiness of its portfolio’s how can we benchmark their assessment.  Sounds innocuous but if I said oh that object is hot, you need a basis to define hot.  Hot for a kettle is cold for blast furnace.  So these banks are making a statement about their risk weighted assets, let’s use an independent benchmark something not from the organisation to test their assumptions.  Sounds logical but where can we find such assessments, the rating agencies and the other pool of banks in a peer who are using the rating agencies.

[b]Scenario number 4 – Inside the agency[/b]

4) The rating agency needs to make assessments on assets, publish its opinion and charge the world for the assumptions that are drawn, that is how it makes money.   Of course all things that are measured require an understanding of the dimension of what is being measured.   Some of the instruments that are assessed such as collateralised debt obligations have more than two dimensions.   They are bundles of many contracts where each contract has a unique risk characteristic but together have correlation factors that leverages the risk within them.  Simply stating a specific CDO is sound because it is made up of thousands of little internal cash flows ignores the correlation factor when you aggregate these cash flows.  Oh dear, we didn’t have a measurement tool for that.

So what is broken here?  It’s our human nature, we need credible appraisals in life and unfortunately have lost the ability to question ourselves.  Perhaps we never had it.   I will put it differently, you feel a bit sick you go to the doctor.  If you need a quote for a job, you look for a credible technician.  To build up your knowledge you speak to more than one of these people. In banking, perhaps other places all these bodies and experts fundamentally draw their knowledge from a single network or pool, a historical museum of shared knowledge so the assessments are likely to be similar.

The solution is a cognitive one. Investors and borrowers alike have to learn to think for themselves. When they buy anything it has a rating and an approval but these people have to understand how that directly affects their world when mixed with the other assets they own and how that approval is derived rather than accepting it as simply superior authority.  When dealing with banks perhaps any system, become heterodox and irreverent to anything packaged and bundled for lemmings.

Gone are the days of trusting the regulator, the rating agency and perhaps even the doctor, certainly a pilot and a lawyer.  As for the banker we are just selling instruments; you, at the end of the day will own the risk in them. 

Question the lot them but learn how to do that, go on a course.