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To: jim_p who wrote (67762)	6/6/2000 9:29:00 PM
From: Tomas	Respond to of 95453

Oil Market Volatility - What Can Or Should Be Done - Financial Times, June 6 Enormous price swings over the past three years have focused attention on the issue of volatile oil prices. There have been strident calls from both producers and consumers for more stability. The most recent effort is a gentleman's agreement among nine Opec members to establish a 'price band', with trigger points to raise or lower production targets when prices move out of the range. Other suggestions include the outlawing of futures trading, expanding and contracting taxes on oil products to compensate for crude oil price changes and setting up a 'World Energy Organisation' to fix prices and volumes and manage buffer stocks. All of these ideas miss a major point: that oil markets are unstable by nature and that the instability derives both from internal and external factors, such as weather, economic events unrelated to the oil market and non-oil geopolitics. Producers and consumers need to recognise this fundamental volatility and work to encourage a flexible and efficient response, rather than impose rigid rules that have limited chances of success. Petroleum is a highly concentrated, exhaustible, chemically-heterogeneous resource, which dominates the economies of the major resource holders. Most demand centres are located geographically far away from the production areas, and the supply cannot be instantaneously increased or diminished. Moreover, crude oil cannot be used in most applications until it is converted into oil products like gasoline, heating oil, jet fuel, diesel or petrochemical feedstock. Because of the higher cost of transporting refined oil products compared with transporting crude, refining tends to take place close to the point of use. Refiners must also match the heterogeneous mix of crude qualities with a variable slate of oil products needed in a particular region at a particular time. One of the reasons the mix of products changes is weather, since in many areas heating and air conditioning uses still account for a significant portion of oil demand. This not only creates seasonal cycles in product demand, but also introduces volatility when the weather is milder or more severe than usual. Oil remains the largest single internationally-traded good in terms of volume and value, and oil market events have a very high profile. Global diplomacy clearly affects oil supply security: there is a marked vulnerability to external political or economic events. The Arab oil embargo in the early 1970s, the Iranian Revolution and the Iran-Iraq War in the late 1970s and early 1980s, the Gulf War in 1990-1991 and the Asian financial crisis of 1997-1998 are all examples of external factors which can swing oil prices up and down. Although there were obvious oil market components to the first four of these events, non-oil factors were certainly at work as well. The Asian financial crisis of two years ago did not stem from the oil market. It serves as a prime example of those external factors, like weather, that can cause oil price volatility. Oil prices fell from over $25 per barrel in early October 1997 to under $10 per barrel in February 1999, with the Asian financial crisis and two very mild winters in the Northern Hemisphere as primary causes. Internal market factors were also at work; prices had risen artificially high in late 1997 due to uncertainties surrounding Iraqi exports and the rebuilding of low inventories. The Asian economic situation, mild weather and higher output in Middle East producers were sufficient to break the 'backwardation vortex' that had been shaping forward price curves in 1996 and 1997. In this effect, downward-sloping forward price curves continue to shift up and to the right as low stocks inflate spot prices and increasingly negative forward differentials further depress stockholding. This counter-intuitive feedback recurred in 1999. The opposite effect, the 'contango vortex' dominated in 1998 and added significantly to the price decline. The upward cycle in prices that began in February 1999 also responded to a mix of internal and external components. The recovery in the Asian economies has played a major role, but the dominant feature has been the production restraints achieved by Opec and a few non-Opec countries in March 1999 following the 'Hague Agreement' in February. The re-appearance of backwardation in forward crude oil and product markets has also been important. Now prices have reached levels that are uncomfortably high for consumers and are also seen by many oil producers as threatening longer-term markets. Could any mechanism have been put in place in 1997 to avoid the huge swing in oil prices? My answer is no. The decision made by Opec countries in Jakarta in November 1997 suggests why this is case. The producers' collective action at that point was based on information about the state of the market through the first half of the year and preliminary data about the third quarter. Those data did not adequately reflect the impact of the Asian situation. Opec also did not take seriously the large El Nino weather effect at work in the Pacific Ocean since the summer and its implications for a mild winter. Quota increases approved in Jakarta were also intended to increase credibility by legitimising 'cheating' by some of the members, who were involved in a market share battle in the US Gulf Coast market. Late and incomplete data, changing weather and the inherent conflict between maintaining both market share and price are chronic features of the oil market. We can certainly work to improve market data. Producers could conceivably strike a balance between market share and price objectives, but the other factors would remain to buffet oil markets. So what is wrong with the current Opec price band proposal? First, the range is too high. A $22-$28 per barrel basket price is above the range of the last 15 years. If it remained in force, backwardation would tend to become a systemic feature of the market. With backwardation come low crude inventories, while backwardation in product markets is a disincentive for refiners to process more crude, since they are penalised for hedging forward. This in turn produces considerable additional vulnerability to technical problems on production platforms, in refineries or in pipelines. Second, there are widely varying opinions about what the band should be and there is no formal mechanism at hand for altering it. The Saudi Oil Minister has expressed a 'personal preference' for a $20-$25 per barrel band for Brent crude, while some others in Opec - Iran, Libya, Indonesia and Algeria - want a band $5 higher. Even the Opec basket price is not transparent. Although it is a simple arithmetic average, several of the seven component crudes in the basket do not trade in open spot markets; others sell for different prices to different regions. The text of the 'gentleman's agreement' has never been formally released. So it is unclear whether the trigger for adjusting targets is 20 days of the daily average price or a 20-day average (or even 20 days of the 20-day average). The daily average came close to $22 in April and exceeded $28 in late May, as yet without prompting any action. Whatever the trigger may be, doubt has been expressed about whether all parties would or could go along with a production increase. Some simply have no unused production capacity. This asymmetry in the ability to institute pro-rata production changes could be a major stumbling block for Opec in implementing the price band. So if price bands are not the answer to volatility, what is? The first response is that some degree of price volatility is inevitable and must be accepted. Some external factors simply cannot be controlled. But better stock provision and the availability of alternative energy supplies can soften the impacts of price spikes. Better data contribute to quicker responses to evolving market conditions, on an individual rather than a collective basis - the best way to provide for a timely response to unforeseen and unforeseeable circumstances.

To: jim_p who wrote (67762)	6/6/2000 9:33:00 PM
From: BigBull	Read Replies (7) \| Respond to of 95453

Jim, no thanks. Guess were VALUE Bull's going next? You will laugh your a$$ off but what the hell, here goes - HOTELS!!!!!!!!!!!!!!!!!!!!!!!!!!!! I'll be taking some initial positions tmw. My love affair with the patch is coming to an end. In the words of the immortal Sally Bolls: "Bye bye my liebe Herr It was a fine affair... but now it's ooooooooooooover" OSX will probably rally up to 140 and I'll be selling into it all the way and rotating into VALUE. Into a sector where insiders are falling all over themselves to BUY not SELL. I'll own the Hotel you guys stay in for the rig party! He He He Ha Ha Ha.