Oil Prices Are Not Going to Spike Again Just Yet

The party isn't over -- at least not yet.

For the last year, relatively low oil prices have helped us all cope with the economic collapse. We've paid less for gasoline than we have for years. And businesses have paid less for running their factories, planes and product transportation.

But last week we began hearing the music die down and waiters moving guests out the door. The trigger was crude oil surging through the $80-a-barrel barrier for the first time since September 2008. Goldman Sachs, among others, said the hike is a signal of even higher prices going forward. Goldman predicts an average of $110-a-barrel oil next year.

Here's one big reason why the bulls so predict: Global oil exploration and production have dropped, and when economies rebound there will be a shortage. Hence prices are bound to rise. In the U.S., for instance, exploration is down 27.8% from a year ago, with 309 rigs actively drilling, compared with 428 at this time in 2008, according to the Baker Hughes Rig Count. Abroad, there are 8% fewer rigs drilling than there were a year ago—764, down from 831.

Of course, at some point these fellows will be correct -- global economics will gradually improve, and oil and gasoline prices will rise. But as numerous other analysts tell me, there are numerous reasons to expect oil prices to stay where they are, or even drop, for the next year or two.

When oil prices rocketed past $140 last year, the cause lay mostly with speculative dollars capitalizing on the supply-demand balance: There was virtually no spare production capacity anywhere in the world, so that any supply disruption, such as hurricanes in the Gulf of Mexico and the routine militant attacks in Nigeria, pushed prices up. Taking advantage of the tight market, a wide swath of investors including university endowments, investment funds and small investors piled in to funds holding oil futures, driving the price up.

But the situation is different now. Saudi Arabia has added a huge volume of fresh production capacity since last year. Globally, oil producers can produce 6.7 million more barrels a day than they actually sell, according to the International Energy Agency; Saudi Arabia accounts for 3.8 million barrels, or 56%, of the total.

And why aren't the Saudis and others running their oil rigs at full-capacity? Because there's a huge volume of crude already sloshing around the world. New U.S. government data shows that the U.S. stockpile of oil rose by 800,000 barrels in the latest week, and stored gasoline by 1.6 million barrels. All in all, U.S. crude inventories stand at around 340 million barrels, up 27% from a year ago, reports the U.S. Energy Information Administration. In addition, since mid-September the Strategic Petroleum Reserve has exceeded 725 million barrels, a 27-year record. Together, that's about 118 days of U.S. oil imports.

In fact, there's such a global glut that there's almost no place on land to put all the oil. An estimated 125 million barrels' worth are floating around on tankers scattered over the globe, according to the Organization for Petroleum Exporting Countries. Normally, a negligible amount of oil is being stored offshore in ships.

Much of that oil would have to be drawn down before any big price spike takes place.

The main driver of last week's price runup was the weak dollar -- since March, the dollar has fallen 15% in inflation-adjusted value compared with a basket of currencies of its major trading partners. Traders have sought to cushion the fall in the value of the dollars they are holding by buying futures in traditional safe havens. While oil prices have surged by 71% since March, gold has also soared this year by more than 20%, to more than $1,000 an ounce.

But for the last few days, the dollar has hardened up. And oil prices are back down. Today, they fell to $77.46 a barrel.

Maestro, more music please.

Marc Rich on the Art of Boycott Evasion

John Deuss lived a heady 1980s. This Dutchman of proverbial humble roots in the eastern Netherlands city of Nijmegen became worth hundreds of millions of dollars by ignoring a United Nations boycott and shipping Middle East oil to South Africa. On the strength of those dollars, Deuss bought and raced thoroughbreds, bought estates in Florida, Bermuda, Connecticut, Jackson Hole and of course Nijmegen. He sailed on a huge yacht, stayed at the Ritz in Paris, owned a high-end magazine, and of course -- as readers of O&G know -- became a thorn in Chevron's side in Kazakhstan. Today, Deuss is submerged in legal problems associated with a British investigation of a tax fraud scheme that channeled millions of dollars to accounts in the Dutchman's Caribbean bank.

What isn't discussed much is that Deuss wasn't the only one enriching himself on the South Africa oil trade. There actually were two main oil dealers to the pariah government. The other was Marc Rich, the infamous former owner of Marc Rich & Co., a commodities firm that, among other places including Iran, cornered the market for numerous categories of fabulously valuable metals in the former Soviet Union. Rich was charged with tax evasion in the U.S., and fled to Switzerland before then-President Bill Clinton pardoned him on his last day in office.

In a new book by Swiss journalist Daniel Ammann, Rich apparently spills the beans on much of his career. It's called The King of Oil: The Secret Lives of Marc Rich. The New York Times' Jad Mouawad rang up Ammann and asked why Rich opened up. Ammann replied: “There is a funny word in German for this — altersmilder — which means the kindness of old age. Marc Rich is now 74, and maybe he realized that if he didn’t talk, no one would see his side of the story.”

Perhaps Deuss -- and even James Giffen -- will do the same some day?

China, Russia and the Eastern Shift of Energy

The 800-pound gorilla in former Soviet energy is China. Since the late-mid 1990s, Beijing has steadily racked up oil and natural gas deals that draw more and more of Russia's and Central Asia's supplies to China. Cash-rich in a region struggling with the financial crisis, Beijing earlier this year agreed to a $25 billion loan to Moscow in exchange for a 20-year supply of oil. And later this year, a still hard-to-fathom 4,375-mile pipeline will supposedly begin pumping natural gas from Turkmenistan into China.

Now, Russian Prime Minister Vladimir Putin is on his way to Beijing, and a host of fresh energy deals are in the works. Chief among them is continued work on an important natural gas alliance between the countries that -- if completed -- would end up shipping a large portion of Russia's gas to China. It would come from the Kovykta gas field. The two countries have been working on the pact for three years but have yet to reach pricing agreement. But when they do, pressure will increase on Europe to figure out how it will satisfy its growing appetite natural gas. (Will the gas go off in Europe in the beginning of January in the annual flareup of tensions between Ukraine and Russia? The short answer is yes)

Listen this morning as my friend Jim Falk, president of the World Affairs Council in Dallas, interviews James Miles, the Economist's Beijing correspondent, who provides among the best coverage of the country out there. Sign up for it here, then listen in on this link to the live audio feed starting at 11 a.m. EST.

Russia: Nobel, Browder, and the Annals of the Pull to Gamble

Some nine decades ago, Emanuel Nobel, a nephew of Alfred Nobel -- founder of the prizes being awarded this week in Oslo -- fled Baku disguised as a peasant in order to escape the Bolshevik Revolution. As O&G readers know, Alfred Nobels' brothers were the biggest oil barons of all in Baku's 19th-century heyday. In the end, for the Nobels all was lost.

It wasn't a huge surprise. The story of Western investment in Russia is that of a crapshoot. Pockets laden with cash, all say they are entering with a realistic grasp of the country's perils. All say they are therefore taking precautions. Yet the outcome is always the same -- on the way out, some are wealthier than anyone could dream; others, no longer cash-laden, are wearing no shirt. The trick has been to avoid being the latter.

So the narrative continues. Hermitage kingpin Bill Browder had been on a soapbox about Russian investment even before Moscow kicked him out of the country three years ago. Now, he is out with a glossy new, 10-minute video detailing his fall as Russia's biggest foreign investor, to his current status as victim of Russia's unpredictable winds.



The release of the video coincides with a story in yesterday's Kommersant that the Russians intend to issue an international arrest warrant against him. Over at the Reuters blog, my former Business Week colleague Jason Bush notes that Kommersant claimed the very same thing last year, only for the Moscow police to repudiate the report. Still, the public brinksmanship well illustrates the stakes at play in the country.

Update: Jason Bush has just emailed me an MVD report -- Browder is indeed on Russia's international warrant list for arrest.

This is a big news week for foreign investors in Russia. On Monday, Norway's Telenor aped the throw-up-your-arms strategy of BP, and caved in to Alfa Group's Mikhail Fridman. After a prolonged court battle in which Telenor initially seemed ultra-confident that it would prevail, it has changed its mind and will embrace the original peace agreement offered by Alfa, its business partner, which will now run the show. As regards BP, the following day, Reuters' Dmitry Zhdannikov reported that the British oil company is resigned to letting Alfa run their partnership as well -- the oil company TNP-BP. Over at aptly named Seeking Alpha, Craig Pirrong calls this a "marriage made in hell," but corporate honeymoons are usually quite short in Russia.

One thing is for sure -- Moscow is certain that foreign investors will keep returning. On Sunday, Prime Minister Vladimir Putin signaled that Russia would embark on yet another bout of privatization next year. Get out the champagne.

The indicators are that Putin's confidence is well-placed. In Business Week, Carol Matlack writes that western companies continue to flock to Russia despite the perils. Their rationale is similar to what drives gamblers to Vegas: the excitement (never underestimate the appetite of brio-seeking westerners to seek street cred by working in Russia; as a corollary, do not underestimate the Russians' capacity to notice) , and the long-shot prospect of big, big wealth.

Take a look at Business Week's "How to Play It" feature in the same issue as the Matlack story. I hadn't noticed this myself, but after last year's breathtaking nosedive, Russian markets are -- at least of now -- doing extremely well in 2009.

Craps anyone?


Credit: BusinessWeek

Turkish and Armenian Rapprochement: A Region Grows Up

Given the players and the history, a deal is still a long shot. But that traditional antagonists Armenia and Turkey have continued their talks this far -- at least by appearances, they are within three days of an accord re-establishing diplomatic relations and opening their borders -- is already a sign of an until-now missing maturity in the deeply suspicious region.

The main flashpoint between the two countries has been Turkey's 1915 massacre of hundreds of thousands of Armenians. Turkey refuses to acknowledge responsibility for the carnage, and permits pseudo-scholarly denials of the well-established history itself. A second issue is the two-decade-long dispute between Armenia and Azerbaijan over the status of the enclave of Nagorno-Karabakh. Turkey, which supports Azerbaijan in the dispute, has insisted that the issue be settled as part of the rapprochement with Armenia.

Yet, if the pact proceeds and the countries' parliaments go on to ratify it -- not a certainty by any means -- one is led to wonder what else is possible in the region. Could Georgia and Abkhazia lower their voices? Could Georgia and Russia lower theirs? For that matter, could Russia concede that Georgia are Ukraine are independent countries?

All right, I've gone a bit too far. But you get the thrust -- the political courage displayed by Armenian President Serge Sarkisian is notable; I myself witnessed the 1998 coup that brought down then-Armenian President Levon Ter-Petrossian when he was close to a peace deal with Azerbaijan over Nagorno-Karabakh.

Ter-Petrossian's enemies at that time -- the ultra-nationalist Dashnak party -- are leading the domestic Armenian protests against Sarkisian now. Abroad, too, Eurasianet.org reports, Sarkisian faced 3,000 demonstrators outside his hotel in Los Angeles, where he visited Sunday as part of a tour to sell his plan to emigre Armenians. A similar demonstration in Paris turned violent last Friday when emigre Armenians accused Sarkisian of treason and clashed with riot police, Eurasianet.org wrote. In Beirut yesterday, Sarkisian faced an unhappy crowd of Armenians insisting that Turkey first agree to use the term genocide to describe the World War I-era massacre, according to the BBC's Jim Muir.

So the deal isn't quite in the bag. And even if it is, the political fallout is unpredictable.

Which makes the progress all the more remarkable. In the Wall Street Journal today, Marc Champion and Nicholas Birchin report that Turkey has dropped a key condition and will sign Saturday even without settlement of Nagorno-Karabakh.