Not if, but when, on $80 oil!

It would be a lot easier if the discussion on whether or not we will see $80 a barrrel oil this year, and $3.50 a gallon gas, depended only on the availability of the refined product. Unfortunately it does not. As Alaron points out this is the earliest that we have had a "D" letter storm coming into the Gulf, and that does not presage an easy time for the platforms out there this summer.
"An article in the Orlando Sentinel points out that since records were kept in 1851, there have only been 12 years when two or more tropical storms formed in June, the official first month of the hurricane season. Weather experts have already been warning of a more active hurricane season and it looks like they are on target this year. For traders, this fact, along with yesterday's market action, is a stark reminder just how storms in the Gulf of Mexico can determine their fortunes. They are even more sensitive to the weather this year because they realize that the oil complex has never quite recovered from last years relentless storms. One of the reasons the supplies of heating oil, jet fuel and diesel are in short supply is due in part to the loss of production from storms like Charlie and don't we all remember Ivan the Terrible?"
UPDATED to note that Bloomberg is also reporting on the impact.

There are also some continued concerns about the increasing attitudes of domestic governments in producing countries toward the steady flow of resources out of the country without there being adequate payment. In other words they are not getting enough of the additional profit. And there is also the usual risk of having the odd refinery have some level of problem that will reduce output. These are the sorts of events that may well drive oil up above $80 this year. And these considerations are short-term, rather than having the long term impact of the decline in UK production, Mexican production, Venezuelan production (I see they dropped 100,000 bd again, depending on the numbers you want to believe) etc.

In the slightly longer term Econbrowser is still looking at the odds on $80 oil being the price this time next year (not this year please note). And that is a slightly different kettle of fish, in that between now and the end of the year demand will continue to rise, taking prices with it. At the end of the year demand will then fall, at least in normal circumstance, until the start of next years driving season. And at this time of the year now, as in previous years, we have still got most of the reserves that have been put aside to help with the demand later in the season.

However, the level at which demand stabilizes after the end of this year will dictate how much can be diverted into reserve stocks next year. And at the higher levels of demand against stable production, this may not be very much. At the same time, however, there are some additional projects that will come on line next year, that could bump world production, although this anticipated increase must be set against more significant declines than had been anticipated.

The decline in North Sea production, noted elsewhere, still remains uncomfortably high and the drop of over 14% has been at this level most of this year, so that when added to other national declines they combine to make the balance even more tenuous.

Speaking of reserves I am struck by a thought. The United States plans on completing the filling of the Strategic Petroleum Reserve by this August. It is at that time that the Chinese have announced that they will start filling theirs. I wonder whether this is coordinated to ensure that there is no untoward overlapping demand on the world supply. It would seem logical.

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Wow! I comment about the weather's likely impact, and you're posting a new thread at the same time. Too much. Here's a link everyone should have in their favorites, What would happen if a hurricane spawned tornado hit a refinery or two as opposed to just knocking some oil platforms offline? Will the NYSE finally fall below 10000 as Dennis approaches?

You must have been watching the Oil Storm movie. There are three concerns, The LOOP where the Gulf oil comes ashore, the platforms out in the Gulf, and the refineries.

This could be a long summer.

As far as Econbrowser's analysis of oil prices, it's true that he was looking at June 06 not December 05. But the prices aren't all that different. December 05 is at 63.47 while June 06 is at 63.05, less than a 1% difference in price. So your concept of a spike in prices in the winter followed by a drop in the spring/summer is contradicted by the market opinion.

I hate to be a curmudgeon, but nobody, as in NO FRICKIN' BODY knows where prices are headed. I'm convinced down the DNA level that we're very close to the peak, but that doesn't mean I'm sure that prices will only go up, or that I think the people who are playing Russian roulette with the futures market know where it's going.

There are WAY too many wild cards. We could see favorable weather, some new production coming online (e.g. from the Caspioan Sea), plus some demand restraint all combining to make oil $45 a year from now. I'm not predicting that, just pointing out that in the short run, say, under 18 months, the market could very well behave quite differently than it will over the ensuing 5 years. We could see prices dip slightly or hold steady and then run up fast.

Personally, I hope oil doesn't dip. If it does, it would have a very unfortunate effect on market psychology--there would be many articles about how it was just another "price spike", etc., and people would happily go back to shopping for a Belchfire 9000 SUV.

But the bottom line is: Don't obssess over prices. I see a lot of that online--every time oil dips, the Pollyannas consider it proof they're right, and every run-up convinces the Cassandras that they're right. Putting that much faith in short-term price fluctuations is only marginally better than reading tea leaves. I know, it's very important stuff, and we all want to know where things are headed as soon as possible, but short term price data holds no answers.

Well, you are clearly right about that Lou. The futures market is as much about psychology as it is about the real state of the petroleum supply. And as the reality of the petroleum supply comes into focus, the psychology is beginning to edge into the sort of territory that is generally associated with some form of pharmacological relief.

Hurricanes in the Gulf causing $80/a barrel this year is kind of a stretch. Now really, c'mon. It's more likely some human factors affecting the current no slack, tight supply/demand situation will do the trick....

SW said: "The futures market is as much about psychology as it is about the real state of the petroleum supply"

and Lou said: "I hate to be a curmudgeon, but nobody, as in NO FRICKIN' BODY knows where prices are headed."

Just want to say, I think you've both got that right. Who knows? I will say the preconditions (tight market, geopolitical instability) for a steep hike in prices seem to exist and so the situation is precarious. Maybe we'll skate through this this year but if we do, come next spring, after the late fall/early winter spike, it'll start up again.

Dave: My gut instinct is that you have the timing tight--next spring is when things will really get interesting.

It's a shame we can't convince all the people flocking to car dealerships to snap up pickups and SUV at fire sale prices of just how short sighted they're being. A lot of those people will wind up "buried alive, face down", a car industry term meaning the resale price of their vehicle will plummet, leaving them owing more on the loan than the vehicle is worth.

No one know where the market is going in the short term. That is true BUT the market is going to saw tooth its way up. $60 will look cheap. OPEC has complete control of the down side $40 would be their minimum and there for you can asses your down side risk 60 to 40 =$20 dollars the upside risk is well over $100 Political (nigeria, Venuzeula, Iran, Saudi etc) anyone of these countrys could explode. Enviromental, (storms, earth quacks etc) any event in any oil producing reagion is going to spike the price. We currently produce 84mbpd and consume about the same come winter we will need 87mbpd nothing is going to save the day execpt demand distruction. And the price has to go high enough to cause this. $50 dident cut it its anyones guess how high it has to go.

I have to wonder if any car is worth buying right now. Do I want to be paying for a hybrid for five or six years when I may be unemployed anyway? One car is paid for and the other is two payments away. I've got my new bike for fun, my old bike for commuting. Unless they legalize the Twike for US roads, I don't see any vehicles worth buying.

Growth in demand continues across all products and total product demand appears to be trending higher starting from a higher base.