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WSJ shows how oil analysts keeping getting it wrong

It’s amusing to see analysts at high-powered, influential financial-services companies continue to predict what oil will do, following its 55-percent plunge from June to early February.

Here’s a news flash: Nobody knows what it’s going to do: whether the price will spike again, and if so, by how much. They were wrong in the last half of 2014, and some of them are sure to be wrong even as we speak.

The Wall Street Journal’s Alexandra Scaggs looks into specifics ($$), leading with the recommendations of Raymond James & Associates analyst Pavel Molchanov. In late November, with oil already down 30 percent from June, he issued a report saying oil prices and energy stocks were “within weeks of bottoming.”

He and his colleagues maintained the equivalent of a “buy” recommendation on Houston energy producer Southwestern Energy Co., also down about 30% since June. … More than two months after Mr. Molchanov made that call, it is clear he and many other analysts were wrong. Nymex crude prices and Southwestern Energy’s stock each have fallen more than 20% since Thanksgiving.

What does Molchanov say now?

“It’s a little late in the game to downgrade stocks on oil going down, because oil’s already gone down,” said Mr. Molchanov. But “commodity prices are almost impossible to predict in the short run.”

As the story notes, often analysts have waited until very late in the game to recommend against holding energy stocks. Molchanov’s colleagues at Raymond James didn’t downgrade Southwestern Energy’s stock until Jan. 6.

Reed Choate, portfolio manager at Neville, Rodie & Shaw of New York, says: “Analysts are always optimistic.” But “this was a big miss.”

Arun Jayaram, an analyst for Credit Suisse Group AP, added: “In an ideal world, as an analyst you anticipate moves.” But “it’s difficult.”

You’d figure that such analysts, chastened by their bad moves, would be a little less enthusiastic. Nope.

Mr. Molchanov of Raymond James thinks the sector could begin a lasting recovery in the second half of this year. The firm forecasts Nymex crude will sell for an average $62 a barrel this year. “The recovery will take time,” he said. “Then, naturally, there’s going to be a bounce in most oil stocks.”

Maybe. Oil has certainly climbed back upward a bit the past week, but it could just as easily slip back as march upward.

What consumers need, instead of expensive guesses and uncertainty, is a steady cost structure they can count on when they build their household budgets. And the best way to achieve that kind of stability is by introducing choice into the transportation-fuels market.

Yellowstone River oil spill contaminates drinking water in Montana town

Residents of the town of Glendive, in eastern Montana, are being told not to drink or cook with water from the city’s supply after a weekend oil spill that send 50,000 gallons of crude into the Yellowstone River.

The river flows downstream from Yellowstone National Park, and the site of the spill is some 400 miles from the park’s entrance, along the border between Montana and Wyoming.

But Saturday’s spill — the equivalent of 1,200 barrels of oil extracted from the Bakken shale-rock formation in Montana and North Dakota — caused elevated levels of the cancer-causing compound benzene to turn up in the local water supply. Officials in the city of 6,000 are trucking in bottled water, and residents were warned not to use water out of the tap.

The Los Angeles Times quoted Glendive Mayor Jerry Jimison:

“It is an inconvenience for everyone in the community, no doubt. But we have truckloads of water being supplied, and the company has taken full responsibility, stepping up to the plate and helping bring everything back to normal.”

The pipeline is owned by Bridger Pipeline, a subsidiary of a Wyoming company called True Cos. That company said in a statement that a 12-inch section of the Poplar Pipeline had breached Saturday at 10 a.m. The company said the pipeline was shut down within an hour of the leak, and that “all relevant local, state and federal authorities” had been notified. More than 50 people were working to clean up the spill, the Times reported.

“Our primary concern is to minimize the environmental impact of the release and keep our responders safe as we clean up from this unfortunate incident,” Tad True, vice president of Bridger Pipeline, said in the statement.

Montana’s Department of Environmental Quality said the city draws its drinking water supply from an intake structure about 14 feet beneath the surface of the river, about 7 river miles downstream from the breach.

“Product sheen has been observed on the river almost to Sidney,” about 50 miles downriver from Glendive, the agency said. “No other community water supplies draw from the Yellowstone River downstream of the release in Montana.”

As National Geographic noted, this is the “second sizable oil spill” on the Yellowstone River in the last four years:

Another spill into Yellowstone River occurred 235 miles southwest of Glendive in July 2011, when an ExxonMobil pipeline broke near Laurel, Montana, and released 63,000 gallons of oil that washed up along an 85-mile stretch of riverbank.

NatGeo says that after the latest spill, “initial water tests showed no evidence of oil, but residents soon complained that their tap water had an unusual odor. The city’s water advisory was issued late Monday. The Times says benzene has a sweet odor and can be hazardous over time.

oil trains, crude oil, bakken oil,

New rules would require treating Bakken crude before transport

North Dakota’s top energy industry regulator unveiled new rules on Thursday that would require oil companies to reduce the volatility of crude  before it is shipped by rail.

The regulator, the mineral resources director Lynn D. Helms, proposed to the North Dakota Industrial Commission that all crude from the state would have to be treated to remove certain liquids and gases to “ensure it’s in a stable state” before being loaded onto rail cars. “The focus is safety first,” Mr. Helms said.

Oil trains in the United States and Canada were involved in at least 10 major accidents in the last 18 months, including an explosion in Lac-Mégantic, Quebec, that killed 47 people.

Read more at: The New York Times

Is Bakken crude more volatile than other kinds of oil?

The Wall Street Journal takes note of an issue that’s growing in importance: Whether crude from the Bakken oil-shale formation is more volatile, and explosive, than other kinds of crude oil that comes out of the ground.

The geological makeup of the oil is crucial to regulators who are in the process of deciding whether to impose additional restrictions on companies that transport Bakken crude by railways.

The WSJ story begins:

Regulators set to decide on crude-by-rail shipping rules are relying on testing methods that may understate the explosive risk of the crude, according to a growing chorus of industry and Canadian officials.

The tests’ accuracy is central to addressing the safety of growing crude-by-rail shipments across the continent: whether Bakken crude contains potentially dangerous levels of dissolved gases. Several trains carrying Bakken crude have exploded after derailing, including a fiery accident last year that killed 47 people in a small town in Quebec.

The North Dakota Industrial Commission is expected to decide Thursday whether to impose new rules on transporting oil on railroads. A study by the state’s Petroleum Council concluded that Bakken crude was no more volatile than other light crudes found in Texas and other fields. But the testing that went into that report might have allowed flammable gases, called light ends, to escape before the samples were collected and processed.

The U.S. Department of Transportation also has proposed new safety rules for oil by rail, including phasing out the aging tanker cars (called DOT 111) used to transport the oil within two years.

Of myths, oil companies and a competitive fuel market

I do not wish to join the intense dialogue concerning whether or not the government should allow exports of crude oil. Others are already doing a good job of confusing and obscuring the pros and cons of selling increased amounts of America’s growing oil resources overseas.

What I do want to do is just focus on the logic of one of the oil industry’s major arguments for extending the permitting of exports — again, not on the wisdom of exporting policy. Permit me to do so in the context of the industry’s long-standing argument concerning the pricing of gasoline to U.S. consumers. The argument is that more oil drilling in the U.S. will lower the price of gas and put America on the path to oil “independence.”

In somewhat of circuitous manner, oil companies are using the opposite of their domestic advocacy for “drill, baby, drill” policy as a way to keep prices lower at the pump. Their yin is that producing more oil in the U.S. and sending significant amounts overseas, combined with declining vehicular fuel demand, will lower gas prices. Economist Adam Smith would applaud the simplicity if he were alive and well. Their yang presents a bit more complicated set of “ifs.” That is, the industry presumes that fulfillment of the yen (excuse another pun) to export will result in more U.S. oil being drilled because of increased world demand generated by the assumed ability of the U.S. to produce oil at less costs than the world price for oil. It will also help foster infrastructure development in the U.S. to break up current log jams concerning oil transportation. Finally, it will facilitate more efficient refineries, allowing them to specialize in different types of oil. The yin and yang will result in (marginally) lower prices of gasoline — so goes the rhetoric and oil-industry-paid-for studies.

Paraphrasing Dr. Pangloss in “Candide,” the oil companies hope for the “best of all possible worlds.” But, before Americans run out and buy stock, note the price of gasoline does not directly reflect oil production volume. Indeed, gas prices, despite increased supplies, have gyrated significantly and now hover nationally over $4 a gallon. Generally, oil and gas prices relate to international prices, tension in the Middle East and investor and banker speculation — not always or directly domestic costs. Stockholders and executives of oil companies function not on patriotism but on profit and to the extent that the law permits, they will sell overseas to get the best price — in effect, the best dollar over payment for a barrel of oil. Consumers, I suspect, are rarely a significant part of their opportunity costing.

Unfortunately, lack of strong empirical evidence tempers the company’s argument that increased world demand will stimulate good things like refinery efficiency and log-jam-ending infrastructure. Maybe if the price per barrel is right (clearly, higher than it is now) and seems predictable for more than a small period of time, refinery and infrastructure developments will be positive. But, the costs to the consumer, in this context, will be higher. It will also be higher because shale oil is tight oil and more risky and costly to drill.

Oil independence is a myth suggested by oil industry and a non-analytical media. Certainly, the oil boom and less vehicular demand have generated less imports and less dependency. But we still buy nearly 300 billion dollars’ worth of oil every year to respond to need and we still produce far less than demand.

Somewhere in the dark labyrinth of each major oil company is a pumped-up (another pun), never-used, secret justification for franchise agreements impeding the sale of alternative fuels in their retail outlets. To alleviate guilt, it may go something like this: “Monopolies at the pump will allow us to make larger profits. You know we will someday soon want to give back some of the profits to consumers by lowering the price of gasoline.” If you believe this still-secret beneficence, let me sell you the Brooklyn Bridge.

There is another way to steady the gasoline market and lower consumer costs. Inexpensive conversions to allow older vehicles to use safe, cheaper and environmentally better alternative fuels (as opposed to gasoline), combined with expanded use by flex-fuel owners of alternative fuels, would add competition to the fuel market and likely reduce prices for consumers. Natural-gas-based ethanol is on the horizon and methanol, once the EPA approves, will follow, hopefully shortly thereafter. Electric cars, once costs are lower and distance on single charges is higher, will be a welcome addition to the competitive mix.