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The Great Recession has created substantial spare capacity in the oil market, for now
40 35 30 25 20 15 10
W TI
s rie to en Inv
$120 $110 $100 $90 $80 $70 $60 $50 $40 $30 5-Jun
26-Sep
19-Dec
22-May
13-Mar
21-Nov
27-Mar
16-Jan
30-Jan
10-Oct
24-Oct
10-Apr
13-Feb
27-Feb
24-Apr
5-Dec
8-May
7-Nov
2-Jan
Since February, the glut has shifted from crude to distillate, with some fearing that a distillate storage max-out this fall would weigh on crude
Distillate Stocks (mmb) 175 165 155 145 135 125 115 105 J F M A M J J A S
2008
N
2009
Moreover, distillate spreads have been lower than gasoline spreads for so long that if possible, storage operators have put heating oil in tank
cents/gallon 4 3 2 1 0 -1 -2 -3 -4 -5 -6 2-Mar 16-Mar 30-Mar 2M-3M Heating Oil Spread 2M-3M Gasoline Spread
11-May
25-May
22-Jun
8-Jun
20-Jul
6-Jul
3-Aug
17-Aug
31-Aug
13-Apr
27-Apr
14-Sep
28-Sep
However, the market has been able to find an outlet on the water for distillate, so refiners have been able to continue to produce
cents/gallon 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0
7-Jul 17-Mar 31-Mar 17-Feb 20-Jan 23-Jun 21-Jul 3-Mar 3-Feb 6-Jan 9-Jun 18-Aug 15-Sep 12-May 26-May 29-Sep 4-Aug 14-Apr 28-Apr 1-Sep
D
2009
Source: EIA
Heating Oil
Gasoline
Crude Oil
Mn B/D 55
35
40
45
50
Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Non-OECD Oil Demand
Will cyclical factors in the economy finally start to create more oil demand in the US? Some banks believe so
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But even if fiscal stimulus turns to drag and the economy does the W, will investors sell commodities?
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Fed loosens policy Monetary policy rules in time indicate tightening needed If Fed maintains looser policy, fears of inflation are stoked, pushing up nominal interest rates Inflation Loop: The more loose policy creates inflation fears, the more its needed to push down nominal yields
Why the Fed wont take the punch bowl away for a while
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All this analysis presumes that investors are buying or selling oil based on their view of some aspect of the forward fundamentals
Price
Long-short portfolio of commodities sorted by inventories and sorted by prior spot returns
Avg Annual Return
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Inventories 12-mth Spot Returns 8.8% 12.8% 13.4%
Std Dev
16.0%
(1) The Fundamentals of Commodity Futures Returns. Gorton, Hayashi, and Rouwenhorst. NBER Working Paper No. 13249. Published July 2007.
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Inventories are difficult to observe Past prices are more informative of future prices than observable inventories
Inventory problems: publication delays, revisions, and data limits in non-OECD
In addition to the momentum traders, banks are also positioned to push prices toward $60 in the short run
When banks buy calls, they have to sell in a rising market When banks sell puts, they have to sell oil in a falling market
Currently producers have bought $60 puts and sold $80 calls to banks
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On the long side are pension investors, China and retail players
China willing to buy in size at $55 for strategic stocks For retail players, peak oil and China provide a plausible enough long-term fundamental bull story without any clear price target Young/immature asset class + career risk in bucking a trend = upward pressure on oil prices by some index investors
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To forecast prices with any accuracy, the physical glut is relevant but not paramount Ultimately, either way the economy goes, commodities should outperform other risk markets Momentum traders turned bearish in September and that indeed could be the short term trend as a knee-jerk reaction to recent economic data worsening Banks may also have to sell the market down to $60 to hedge positions
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Ultimately, however, the bull case is intact, and if the economy rebounds before 2015, prices could spike
Brazilian deepwater = at least a North Sea of oil The rig market has finally responded, but first output 5 years away Alternative energy and conservation also will play a part Another price spike is likely before 2015 if the economy rebounds
# rigs 35 30 25 20 15 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: ODS-Petrodata
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RBS Sempra Commodities is a top tier global commodities trader whose primary activities
include
Physical commodities merchant (buyer from producers, seller to consumers) Commodity derivatives (financial trading) Creation of risk management products and solutions (combination of financial and physical)
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Singapor e
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Trading Capabilities
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Natural Gas
Business Overview
Worldwide natural gas RBS Sempra Commodities is an international natural gas marketer with a primary focus on the North American (ranked #1 non-producing gas marketer in North America in Q1 2009 by Platts) and European wholesale markets as well as the international Liquefied Natural Gas (LNG) market. RBS Sempra Commodities Natural Gas franchise offers physical trading, market making, and risk management solutions to its global customer network. RBS Sempra Commodities natural gas services include Customer Types
LNG trading Gas storage Derivative and Structured Products (financial and physical) Management of physical assets and options
Municipalities and
government entities
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RBS Sempra is uniquely positioned to provide extensive expertise in the physical market combined with a strong presence in the financial market.
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Crude (WTI, Brent and Dubai benchmark crudes) Heavy products (high and low sulfur fuel oil, and bunker fuel) Light products (jet, naphtha, kerosene, gasoline, distillates) Natural Gas Liquids (NGLs) Physical storage Physical and OTC products for a majority of crude oil and oil products Derivative and structured products (financial and physical)
Independent power
producers
Integrated oil companies Refiners Financial institutions Hedge funds Traders and marketers
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Power
Business Overview
Worldwide power RBS Sempra Commodities is an industry leading power marketer with a primary focus on the North American and the European wholesale markets. RBS Sempra Commodities Global Power team offers physical trading, market making and risk management solutions to its extensive customer network RBS Sempra Commodities power services include
Customer Types
companies Emerging power markets Poland, Czech Republic, Slovakia, Hungary, Croatia, Serbia, Romania, Financial institutions Bulgaria, Greece, Italy, Portugal
Await deregulation of markets in Asia, Latin America, CEEMEA Structured products (financial and physical), management of physical assets and options
Hedge funds
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Metals
Business Overview
Worldwide Metals RBS Sempra Commodities is a leading metals trading group, specialising in base metals, precious metals, steel and plastics. RBS Sempra Commodities offers market making and execution, risk management solutions, physical trading and warehousing to its extensive customer network. Worldwide metals services include
Physical trading
Provide liquidity and a reliable partnership to some of the industrys largest producers and consumers globally Base Metals, Plastics & Steel - focused on trading LME-deliverable material both on-warrant and physical and concentrates across all major world locations
Warehousing Approved by the London Metal Exchange, the London International Financial Futures and Options Exchange and the New York Board of Trade to store and issue exchange-traded warrants for commodities including aluminium, aluminium alloy, copper, zinc, lead, nickel, tin, plastics, steel, cocoa and coffee
Futures and structured products The Royal Bank of Scotland plc is a ring-dealing member of the London Metal Exchange (LME) Customer Types The Royal Bank of Scotland plc is a member of the London Bullion Market Association (LBMA), Producers a member of the London Platinum and Palladium Market (LPPM) Smelters Our range of hedging products includes: Structured swaps and options Averaging Two asset arbitrage options Cross commodity indexation
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Steam/thermal coal trading physical and financial Structured products (physical and financial), management of physical assets and options Producer financing
Core competencies: Structured transactions Hedging structures Marketing Producer optimization (continental arbitrage) Directional and relative value trading
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Agricultural Products
Business overview
Agricultural products RBS Sempra Commodities agricultural products trading group has a growing business in ethanol and biofuels primarily focused on North America. Through its Henry Bath Warehousing division, RBS Sempra Commodities provides storage for coffee and cocoa for London International Financial Futures and Options Exchange (LIFFE) and New York Board of Trade. The agricultural products trading group is committed to growing its grain and oilseeds business to include financial markets worldwide as well as physical markets. Agricultural products services include Ethanol Physical and financial Risk management solutions
Customer types
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Disclaimer
This report reflects the current views of RBS Sempra Commodities and is intended for informational purposes only. RBS Sempra Commodities may make investment, hedging and trading decisions inconsistent with the views expressed in this report and/or based on information not reflected in this report. RBS Sempra Commodities assumes no obligation to advise of any changes in its views and assumes no responsibility or liability for the accuracy or completeness of the information provided or any loss suffered. RBS Sempra Commodities does not act as a fiduciary or financial, investment or commodity trading advisor for its customers, each of which is responsible for its own investment, hedging and trading decisions. The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St. Andrew Square, Edinburgh EH2 2YB. The daisy device logo, Make it happen and RBS are trade marks of The Royal Bank of Scotland Group plc. Sempra is a trade mark of Sempra Energy. Sempra Energy Trading LLC and Sempra Energy Solutions LLC, each a subsidiary of RBS Sempra Commodities LLP, are not the same company as the utility, SDG&E or SoCalGas, and Sempra Energy Trading LLC, Sempra Energy Solutions LLC and RBS Sempra Commodities LLP are not regulated by the California Public Utilities Commission.
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