To: GROUND ZERO™ who wrote (1718 ) 5/24/2000 1:32:00 PM From: John Pitera Read Replies (1) | Respond to
My thought on crude topping is that the Global market brought the OPEC "basket" of crude prices above the $28 level. This is the first time that the OPEC "basket" has traded above OPEC's desired $22-28 range. The organization's stated strategy is to increase or decrease production by 500,000 barrels per day (b/d) if the "basket" price is above or below, respectively, the band for 20 days. However, the mechanisms for this are unclear. Does OPEC raise production only if prices are above the band for 20 consecutive days? As an example, if the "basket" trades at $28.01 for 19 days and then drops to $27.99 for a day, would this meet the strategy's criteria or would the day-count reset? This could certainly provide the base for a substantial price advance. Does OPEC target the 20-day moving average? This approach presents a rather different problem. If the "basket" trades at $27.99 for 19 days, then jumps to $28.50 for one day, the moving average would move above $28. It is unlikely OPEC price hawks would begin pumping extra oil with only one day outside the range. However, in this case an increase in production would be required if the moving average is the determinant. Additionally, who actually gives the authorization to increase output and by how much? It must also be considered that some members might increase production early in anticipation of a triggered increase. Obviously, many questions still remain to be resolved. From what has been stated so far, OPEC members are quite satisfied with the current price and have no major inclination to immediately raise production.we expect to hear a great deal of political rhetoric from the U.S. Already, Energy Secretary Richardson has been vocal about $30 crude being too high. He has pleaded with OPEC members to "keep an open mind" regarding possible production increase after the June 21 meeting. Although denying any production increases will be discussed, David Goldwyn, U.S. Assistant Energy Secretary for International Affairs, recently departed on a trip to the Gulf region. The stated goal was to encourage "general energy cooperation" between the United States and the Gulf nations. Goldwyn is taking part in a Commerce Department trade mission to Saudi Arabia, the United Arab Emirates and Kuwait-OPEC members, all. He will also take a separate trip to Oman, not a member of the oil cartel. "In all countries, he'll discuss a broad range of energy issues," a Commerce Department spokesman said. "However, his primary purpose is to advocate U.S. business and strengthen bilateral energy ties." This condition presents a very difficult trading environment. With the market already near what could be a top, a bear calendar spread should be considered. The most recent move has increased the backwardation in the market. The July crude oil futures recently traded at over a $2.80 premium to the December contract. We consider this to be extreme. Our view is that any further advances in the near-month contracts will pull the back-month contracts higher as well. With forecasts for a fourth quarter supply deficit, we do not think any correction will affect the fourth quarter contracts as severely. Other short-term factors could, of course, cause the front-month contracts to continue higher and increase the backwardation, but we consider this unlikely. While unwilling to sell this market outright, we do look for a near-term correction. Look to sell July/buy December crude oil at a July premium of $3.25 per barrel, risking $.50. geocities.com nymex.com
