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Oil (CLZ07) settles above $93...and in the next month...?
Posted by Prof. Goose on October 29, 2007 - 11:45pm
Here's an new open thread and a poll for you to discuss the fact that oil went through $93/bbl today. (and if you haven't seen Drudge this evening, he has the now ubiquitous grasshopper in the sunset picture up...)
(By the way, the 45ish% of you in the old poll who said 93 before 79, you were correct.)
The five options in the new poll are, "in the next month, CLZ07/CLF08 will..."
1. hit 100 before it hits 86
2. hit 86 before it hits 100
3. stay in a trading range between 86 and 100
4. it's still all geopolitics, what does a price signal mean anyway?
5. haven't you heard? it's all about the declining dollar. it has nothing to do with growing demand and a current lack of supply.
Enjoy. :) A link to the actual poll can be found here. The discussion/comment thread for oil price and the poll choices is below.
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http://business.reddit.com/info/5zdnw/comments/
thanks for your support.
Still too many variables in play to safely pick a threshold. We could see Iran attacked, which would shoot the price well over $100, as Venezuela has said they would stop exporting to the US under such a scenario.
Increases could also come from Turkey invading Iraq, Russian muscle-flexing with its neighbors, Nigerian unrest, an attack on a ME exporter, continued dollar devaluation, etc.
The market can also feed upon its own fears (or realization of the seriousness of PO), with speculation based upon speculation-fueled increases becoming more evident as the price gets higher.
The big question: where should the price of light sweet crude be at this time, and what 'fundamentals' should be used as the basis for such an estimate?
Hmmm... how about the demand for a commodity with a finite supply finally exceeding available supply?
I'm glad that the sun is finally shining on reality. $100 and beyond is almost here.
Got burned last time. I voted it would stay in the trading range. This time I voted it would hit $100 first.
I vote it will touch 86 before jumping up through 100. Gotta have that volatility to make the traders money. However I do think 100 before the year end is still a distinct possibility.
I vote for volatility. If it hits $100, it could easily crash back down to $70, since big round numbers have at least as much impact on markets as real data. After that, fundamentals will push the price back up within a few weeks or months.
I am with you on both counts.
I pick 1 again.
4 and 5 are like the salt and pepper on the steak.
#1, well hit $100 pretty fast if:
a. Mexico continues to shut in production this week
b. The Fed lower rates this week
c. This Week In Petroleum shows another large draw down this week.
Oh, and that's $100 this week or early next week with all three happening...
Just a guess.
Yes...my vote is for $100 this week.
I would have voted for another wording as well.
3 (Triple) YERGIN ($114) before 2 (double) YERGIN($76).
We'll be watching on Wednesday
http://www.youtube.com/watch?v=3u2qRXb4xCU
Great video
I picked 2, I think the recent price run up is not sustainable. Everything depends on the implementation of the production increase promised by OPEC and the stock level situation.
For oil trader types, the following is probably a short term sell signal, although we have never tested the "Yergin Indicator" as an indicator of lower oil prices, so we are in unexplored territory here. One could, in the alternative, argue that we may be looking at $200 oil with "one or two events." As I said--unexplored territory.
In any event, Yergin's comment is about as useful as saying "The oil market may be only six or seven dollars away from $100-plus oil."
LMAO westexas, I love your "Yergin Indicator". That guy certainly deserves to be ridiculed and marginalized (in a tasteful manner of course), especially if he continues the fantasy that we don't need to worry about our oil usage.
I picked the trading range for the next month, hoping for the price to build support before it shoots higher.
Clint
Guys,
Haven't you heard, the "invisible hand" is in our pant's pocket!!!
Bob Ebersole
Come on you guys, Bernanke votes #5. Watch the Fed news come wednesday.
Oil and gold are moving together. That tells you that it's the dollar.
Is it as much a "run up" in oil price as a "run down" in the value of the dollar? Gold is also "running up".
It looks to me like over a one year (or more) period it has been largely a dollar story, although i think oil is still up in a trade weighted basket of currencies.
Over a four year period, it is certainly an oil story. The price is way up in every currency.
That has been generally true. However, as of two weeks ago, even against the €, the price of oil has moved into new territory.
Even more interesting is what is happening on the spot market. When the market contract expires there is a bit of a difference between the spot market and the new front month contract (and it seems the contract price drives the spot price), but in the past week contract prices have been lagging behind spot prices.
I also vote for te declining dollar.
I'm not saying that there aren't supply (or demand?) problems, but that most of current changes are due to currency adjustments.
I pick 3. Tight supplies insure at least the 86-100 range.
ok real head above parapet question
what's the lowest price(range) oil will ever drop back too?
if we really are on the peak/plateau there is a fairly decent argument that depletion may outrun demand destruction or at least impact its effect.
for instance what circumstances could produce $50 oil?
Boris
London
Re: for instance what circumstances could produce $50 oil?
An economic recession.
Not in USD as the dollar would be falling like a rock (it's only falling like a feather now...).
$70 would be my guess on a price floor in USD.
If that feather is attached to a dead pigeon, then your statement is correct.
Think of demand destruction this way: for oil prices to fall back to $50, then we have to have the same spare capacity as we did three years ago, before Katrina. That means taking away 5 to 8% of worldwide demand, or about 4 to 7 mmbbl/day. The US alone cannot contribute that-- we would have to drop from 22mmbbl to 18mmbbl or below, which would mean a crushing contraction in the economy.
China is almost to the point where she can use internal demand to keep her factories running, if exports to the US dip. Chinese kids needs toys and laptops as well, though halloween costumes might be a tougher sell.
The oil producers can cut back production for a while, without feeling any cash pinch--OPEC can contract production, keep the price north of $70/bbl, and still take in more cash than before. The crunch to open the taps only comes when the nation needs additional revenue from its NOC.
Unlike past recessions, we do not have Alaska or the North Sea to compete with NOC production.
And in a recession, Bernanke is going to have to open the taps all the way to save the banks, given their leverage situation. That means inflation, in dollar terms, no matter what.
I just can't talk myself into a severe price decline in a recessionary environment right now.
That's because things are way more inflationary then recessionary. Housing Sales are at 1991 levels. The banks are laying off people. And yet Oil is still pushing new highs. Why? Emerging Markets demand and a weak dollar.
When mortgage debt is defaulted on, does it really take money out of the system? With fractional banking system used to create the debt at a 10-1 ratio, it should only destroy 10% too, right? How much does the average US citizen lose when he defaults on a zero down interest only loan?
And then there are the untold trillions in government liabilities with Bernanke at the Fed. The only option is inflation. If you look at the reconstructed M3 numbers at shadowstats.org it's glaringly obvious what the fed is doing. They're inflating! After all, this is why they did away with the M3 reporting in the first place.
The scarcity in liquid hydrocarbons via Peak Oil will only add to the inflationary bias.
JMO.
Garth
shadowstats.org doesn't link up ---
http://www.shadowstats.com/cgi-bin/sgs?
Sorry about that - I didn't double check the link...
Garth
Yeah, I'm in on the "what's a price signal anyway" option. Work requires energy. Shifting the types of work we do will require rebuilding infrastructure - more work than we can produce. Can't happen. It's the Law of Receeding Horizons applied to everything.
Toxic planet, resource depletion, climate change, overpopulation, economic inequality: prosperity is just around the corner - the one we passed.
shiva in Gray, ME
A major U.S. recession or of course a global recession could produce $50 oil.
Except that its likely to be associated with such rampant inflation/currency revaluation that a resolutely dollar based assessment will not be able to drive down that far.
If it were a basket of currencies maybe, but dollar based I don't think will reach below $65 ever again.
That dollar might be equivalent to 50c Canadian though...
I believe it would have to be global... even in a considerable US recession, we would not shed 4Mbbl/day consumption.
China, India, or someone else would gobble up the excess capacity anyways...
It would have to be a global recession / depression
Not so sure. If the U.S. went into recession, China would follow quickly - they depend on us to buy the cheap plastic crap that they crank out by the ton.
Speaking of plastic, I expect that the price of anything made of plastic ought to be influenced by the price of oil.
Been to China a couple times this year for work. They are not as nearly dependant on the US as everyone likes to think, nor are they making only plastic crap anymore.
China also has a middle class that is growing in leaps and bounds and wants all the stuff they see on TV shows; the cars, clothes, houses, dishwashers, etc.
Think about where China is now, and where the United States was in the 40's-50's timeframe from the standpoint of urbanization, manufacturing, and growing middle class.
They don't need us nearly as bad as we need them to keep taking dollars as payment.
On the plus side, they should be a service oriented economy in about 50-60 years.
What conditions? A sufficiently large recession resulting in enough demand destruction to put that much excess oil on the market. How much is that? I'm not sure anyone has a reliable way to calculate that number.
Last year and early this year I asked a question that no one has been able to answer clearly - how much demand destruction does a $1 increase in oil's price cause? We don't know. But very clearly in the rest of the world it has caused serious demand destruction (and riots and other effects). People in the US who say that these prices are not high are smoking dope. These prices are sky high for the rest of the world. It's only because the US has (or had) the richest economy on the planet that we've been able to somewhat ignore these increases. But Indonesia hasn't. Iran hasn't. Taiwan hasn't. Nicaragua hasn't. All of those nations and many more have been hit by various effects due to inability to buy enough oil. The effects have ranged from outright riots in Indonesia to rationing in Iran to changing business patterns in Taiwan to loss of electrical power in parts of Nicaragua. And now even in the US we are seeing a slow flattening of demand so these prices are starting to hammer home even here.
But back to your question - what conditions? I don't think we have a way to accurately calculate that value.
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone
odd though.. these flattening out effects have some sort of lag.
I have a gut feeling it ain't coming back down recession or not.
I think the arguments in favour of geopolitical/psychological premiums (turkey etc.) have some validity.. and one would expect the price to fall if these tensions eased... but the realisation the whole shooting match is underwritten by the black stuff is starting to sink in.
I think the market may start exhibiting strange split personality behaviour.
hoarding may be a new "end use"
Boris
London
These prices are causing demand destruction/recession somewhere in the world ... you can be sure of that, but that's about all you can be sure of!
Don't believe anybody who thinks they know what the future will be in any detail, especially several years ahead.
On the other hand, we do know one thing the future won't be ... BAU!
Xeroid.
My thoughts too.
You have to factor in the human condition.
World governments are not stupid.
The price I feel, is going up because everyone is scrambling for their share "before it's all gone or not enough".
Demand destruction won't make one iota of difference any more. The game has changed forever.
Just like we did with whales and fish stocks, just like the North American Bison and Passenger Pigeon.
The realization that oil is disappearing will drive governments into a frenzy as they try to secure their share.
No government will stand by and watch another country secure all they want while they make do, they will all try to buy as much as they can, when they can.
Just like we'll do when supply is short at the bowser.
Basically we are screwed.
It is best to dig the well before you are thirsty.
It is more complex than just a simple $1 increase. An increase from $40 to $41 has no impact. While an increase from $200 to $201 will probably have a measurable impact. We need to reach the threshold where it starts to be more expensive to drive to work than your wages. Let's take someone making minimum wage that has a long commute (60 miles each way). With an average car (22 mpg) they are burning (60x2x20)/22=109 gallons per month which cost $327. Earning $1120 - rent (500) - food (300) - taxes (200) leaves $120 per month. Once we cross into negative territory, you will see people reacting. The next question will be to figure out the commute distance of low wage workers. That will determine how many people will move to save on gas money. According to my calculations, that would be $4.10 per gallon (Crude $140). With a 40 mile commute it increases to $6.20 per gallon (Crude $230).
Hang on everyone, we are in for a very wild ride.
Can someone point me to a correlation of crude and gasoline? my numbers are based on $1 crude = 2c gasoline and probably don't hold up when we pass $150.
These are interesting numbers. I am really curious about gas and diesel at spring planting time.
My guess is that shock is more lethal than price. What is the jump at planting that will prevent farmers from getting loans to plant? My unfounded wild guess is 12% of price.
My unfounded wild guess for harvest is 8% of price. Harvest is a better bet than planting.
You do not die because you have a bad heart. You die because you have a heart attack. There is a distinct difference between stress and shock.
Does anyone know how to measure that difference?
Gasoline prices are currently severely decoupled from oil prices even as low as gasoline stocks happen to be. After a long period of coupled prices, they decoupled (initially) in 2004, closed back to more nominal relationships (especially earlier this year) and then decoupled again. The price curves for 2004 and 2007 look very similar (though more expensive in 2007), but what is evident from the most recent data for 2007 is "resistance" to the $3/gallon (gasoline) as the curve spreads out of a nonsensical pattern (gasoline prices go down as oil prices go up)
A historical equation from 1992 has been:
Gasoline (cents/gallon)= 82.547 * e^(.0181 * $/barrel)
(R-squared of .9284)
where the $/barrel is the weekly average of WTI spot-market FOB price before the Monday release of average weighted gasoline prices (all area areas, all-grades) by the EIA. Note this is not the value of "regular gasoline" that is shown on the gasoline price "entry page."
For the period from 2002 to today, the curve is defined by a similar equation (with similar decoupling as noted above):
Gasoline (cents/gallon) = 98.128 * e^(0.0151 * $/barrel)
(R-squared of 0.9229)
For the period of 2004 to present (which includes 6-months of the tradional coupled prices in 2004 and the decoupling that occurred in July in 2004 and the "new" relationship to gas /oil prices), the equation is:
Gasoline (cents/gallon) = 109.78 * e^(0.0133 * $/barrel)
(r-squared of 0.8284)
If you plug-in last week's average FOB spot market price for WTI of $89.89 into the 2004-present equation you would find that gasoline prices "should be" $3.629/gallon. They were not ($2.921/gallon, weighted all-grades all regions). The long-term historical equation (stretching back to 1992) tells you that gasoline should be selling at $4.20 gallon (and if you use a straight multiplication ratio between the cost at some base period that was pretty stable, like 1992, you get a value close to $5/gallon) and the intermediate term equation (2002-present) suggests $3.813/gallon.
But the simple fact that the FOB spot price of WTI has matched and exceeded the the wholesale price of gasoline (in $/gallon) should indicate that something is very much amiss. Gasoline has been treated more like a waste by-product throughout the autumn by the current pricing structure that seeks to "dispose of" gasoline through the market. Again, this is not supported by the low-stock levels, so the pricing structure must be one of (intentional) avoidance of high gasoline costs and the psychology associated with gasoline prices well-above $3/gallon.
Consider it evidence of the "Iron Triangle" at work.
Thanks for the formula. Have you tried adding a delay between crude and gasoline price to see if there is a better fit? One would assume that an increase in oil today takes at least a week or more to impact the gasoline price. How long does it take to move a drop of oil from the tanker to the refinery and on to the gas pump?
Yes, that was one of the first things I tried (autocorrelation and offset).
What showed prior to 2004, is rapid rise of gasoline prices with oil prices and then gradual decline of gasoline prices when the oil prices declined sharply (kinda like looking at half-dome in Yosemite).
I started plotting this a while back for a project I was working on (the spreadsheet has gotten quite large and encompasses alot of data (some that I've split out into their own spreadsheets).
I've been tempted to drop this into SAS and see if I can tease out some other relationships but I've been pretty busy on global warming issues (that spin out of this topic).
I've seen estimates (sorry, I don't have citations on hand) that the short-term gasoline demand elasticity in the US is in the range of 0.05 to 0.1. So a 20% increase in price would lead to 1% or 2% less use than otherwise. Longer term it's much more elastic -- if (when) prices stay high for several years, people will buy more efficient vehicles and choose a home/job closer to their job/home. Short-term elasticity is probably linked to the fraction of income spent on fuel, which is why it can be so low in rich countries but not in poorer ones, and hence why we can "outbid" them when supply doesn't keep up with demand.
For the poll, I voted 2. Partly just to be contrarion. But I also expect the Fed to keep rates steady (vs a cut) to preserve their credibility for a bit longer. That'll give the dollar a bit of a (temporary) bump, just in time for weak holiday sales to bring economic expectations down again. Note that I'm calling for a downward fluctuation, not a downward trend. The trend is upwards from here on out (until we invent that fantastic substitute for transportation fuel, wish us luck).
peace,
lilnev
http://www-cta.ornl.gov/cta/Publications/Reports/ORNL_TM2005_45.pdf
Here is a link for you. See especially the info starting on p. 23 ("Oil Supply and Demand Elasticities"). For the oil price elasticity of GDP, start on p. 21. Asebius, you would be interested in the GDP section, if you haven't already seen it.
Adequate rationing could bring in down below $20. This would be short term unless other nations joined in rationing. I notice that Mike Lowell was given 2 hybrids last night by Chevy.
Chris
I picked #1 last time but will pick #3 this time, assuming no geopolitical events trigger anything. I don't think that the current decline we've seen from 2005 to 2006 and into 2007 is fast enough to warrant much more increase yet. One non-political factor that could push prices much higher though is an extremely cold winter in Europe or North America or both. If you forced me to pick something other than #3, I'd select #1 instead. I don't see prices retreating too much just yet, short of an economic bomb going off.
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone
How about a long term poll? Make intelligent guesses instead of speculating on short term volatility (read: gambling).
Will the Dec 2009 price hit $150 before $70? Better yet, buy oil futures and put your money where your vote is.
2012 futures are cheap at $80. Does anyone on this blog think oil will be below $80 in 2012?
there won't be a futures market in 2012.
sometimes I wonder if there will even be a United States of Clinterica.
I fully expect something to happen between now and then to make it all not so worth it. Remember you still have to eat until 2012.
If society collapses to the point that they must close the futures market, 2007 money will be worthless. If that is the case, there is no reason not to buy futures now. If by some miracle, the market is still functioning, then it will be worth quite a bit.
If you are that pessimistic, you could buy 2009 futures.
There will be an election on Tuesday 6 November 2012, and Hillary or someone else will seek re-election, and the futures market will be making regular profits for smart people, just as it is today. It is tempting but rather self-centred to believe that TEOTWAWKI will happen in one's own conscious time-span. I think it's wiser to bet the world will still be here, more similar than different, more or less in recession or more or less inflationary, and for one to proceed accordingly ...
Even with the worst-case scenarios transpiring, in peak oil, global warming, peak water, peak grain, and so on, these things take time. We have obligations right now to future generations however to mitigate the very worst - of that there is no doubt.
It is tempting but rather self centered...
Grandpa and Grandma made it out of the Austro-Hungarian empire just before the First World War. Budapest and a little village in what is now Slovakia. You know how many flags have flown over both of those locations?
Their parents world ended in fire and chaos. Teotwawki to them.
I'm sorry about your grandparents, but neither Austro-Hungary nor Europe are equal to the world. And, unless they were Jews, (impossible to tell from your name), how much did a Central European peasant's life really change in the ensuing decades?
I decided to experiment with a few options since I couldn't afford futures.
Got one DEC07 80 call for $1300 in April. Made the mistake of listening to the broker and sold it for $5300 a week or so ago. Today it would have been worth about $13000, so my wife is annoyed - that'd be a lot of $ for us. She may be a lot more annoyed in the coming couple weeks...
No problem, right, just buy more options? Well, I've been trying to lock in a few 2011 100 call options, and the broker says he can't get 'em. Says that large blocks are trading with institutional investors, but that nobody's selling anything that long-dated to individuals just now. Oops.
08-10 still available, though at twice the price or more of earlier this year. Still a bargain for those who have digested the data from this site.
It's also time for me to put my money where my mouth is - provided I can find a cheap options site (futures look too expensive for me too). Any ideas/suggestions as to the best place to join? Cheers.
I trade futures so I can't help with options, but my broker Russ Carlson may know. I've used him for the last three years.
tora'
take a look at US based royalty trusts-Sabine Royalty, Permian Basin Royalty Trusts are both heavy i oil production, pay excellent returns (over 11%)and sice theyare actual ownership in the oil are commodity based and inflation protected. I'm not a financial adviser though, do your homework yourself. Bob Ebersole
If you're not experienced at trading futures and options, you might want to check out a CD that's available at Wells Fargo.
It's a 3 1/2 year CD, $4k minimum. The return is based on the gain in the S&P GSCI.
You are guaranteed to get back at least the money you put in. Your principle is federally insured up to $100k. Your return on investment is not federally insured. Your money is put into T-bills, and the bank uses leverage on your money to trade actual commodities.
I'm not an investment advisor, this information is for entertainment purposes only, read the prospectus, yada yada yada.
Most people already have their money in stocks/bonds/CDs. Having a percentage of your money in oil may protect you against poor S&P performance and dollar devaluation. The SEC regulates commodity accounts also.
Check out the SEC education center before opening an account.
In that vein, if you're less doomerish than I am and think that the fiscal system will necessarily be up and running still in 5 years, you could probably see a lot of upside on an everbank gold CD. If they had 'em in one or two-year lengths I'd be all over 'em. Five years... well, a lot can happen in five years.
Still, if the dollar keeps tanking they could pay off (which is to say 'hedge') very well, and the principle is FDIC insured... so in 5 years you'd be guaranteed to still have however many dollars you started with. Looks like they're still offering them through early Nov. Gold seems to track oil pretty well.
http://www.everbank.com/001CertificatesMS.aspx
Still, would have been sweet to turn that $1300 into $13000. And options don't need to be held to maturity; they're reasonably liquid
I really can't recommend with any authority, but if you click on my user name I'll tell you who I use; they seem to have been OK so far.
I think that most folks at TOD would agree that "back in the day" when oil was at $20 a barrel or less, that price did not reflect any fundamental reality.
It is safe to say that now the oil price does not reflect any fundamental reality, but is on the upside. I say this not because of the current price per se, but because of the extremely rapid price moves, gyrations, justifications and volatility. Who really believes that the situation changes to any great degree almost dialy? The price moves are being driven by hysteria and speculative playing of the volatility market. The traders are working the "volatility" market, not the oil market. They could care less what the nominal price is or even what the commodity is, they just need volatility to function.
Given this situation, the sky is the limit. The nominal price could easily go to $100 to $130. Remember that the higher the nominal price, the smaller percent is any nominal move, i.e., a $10 price move at $30 dollar oil is much greater percent than is a $10 price move at $90 per barrel. Try to think in percent.
RC
The price will go up until people use less of it. Is USD93 changing your behaviour yet? Not me.
My guess is 150 before the increase affects pump price and that affects driving habits, higher if it rises quickly.
But you're not paying the $93.. you're paying the $2.87 or whatever, which we're generally inured to at this point. If refined products kept up with crude, US gas would be some $10/20 a gallon by now, compared with the 2000 prices..
I think many people are at the cracking point already, but it's not going to show up in Driving patterns as soon as it will show up in outstanding credit, mortgage defaults, food and prescriptions, dentist visits, and more vague measures like how many two-income families are now 3, 4 and 5 income families (which looks to the economy like improving labor statistics), how many hours less the kids in this generation will spend 'as a family' than even our paltry figures from the 70's.
Bob
What? You mean dentist visit prices are up too? Curse those durn A-rabs.
Roger,
consider also that the Standard Oil monopoly started in the 1870's. Oil prices have never had much to do with the cost of production or its utility.
The next round may be started by a margin call on another security, so its totally unpredictable, just like real life. My favorite real life story of investment banking concerns Bob Mosbacher, Reagan's Secretary of Energy in the newly constituted cabinet post and an excellent oil operator. Mosbacher's father had a nervous breakdown because of the volatility of the markets and was ordered by his doctor to sell his securities which totalled $10 million US and buy Treasury bonds for his mental health. He followed his doctor's advice and had $10 million cash starting in the summer of 1929 and put aside until the summer of 1930. It turned out he wasn't insane!
Bob Ebersole
Today Greenspan said that $100 oil will help the economy switch to alternatives. He probably thinks prices are still going higher...
This one's harder. $100 is such a big psychological milestone, I would expect either a clean break through it or a large amount of hovering under. I'm betting on a clean break though, and faster rise once the shock of that has passed through the system, as some of the nervous hover for $100 has been built into the rate of rise so far. I don't believe demand destruction is going to result in any significant price decrease, at least in USD terms.
So, what oil price before gas prices break free and start shooting upward again?
My punt is for a bit of holding around where we are now, followed by a rally through $100, not sure when - depends mainly on the Wednesday stock reports, and maybe on the IEA report on the 13 Nov (assuming no attack on Iran, hurricanes, terrorist attacks etc).
Then, a reluctance to move up further, perhaps a correction down to around $90, followed by gangbusters up to $130 or so.
But I have no more confidence in my predictions than yours or anyone elses -- infact, as it's 10:24 as I write this, I've decided that I now think it'll hit $102.40 before correcting.
:-/
Seriously, the much bigger question for those of us holding CLZ09-12 or whatever, is when will the market start to absorb this absurd $13-$14 short term 'risk premium' - or perhaps this time it's a longer term 'recession risk' - except I don't credit the market with that much sense.
My strategy for last week and this, each morning, if there's still more than $12 between CLZ07 and CLZ10, buy another CLZ10...
--
Jaymax (cornucomer-doomopian)
Using all of my rational analysis skills to solve an irrational problem would lead me to say #1. Worldwide, there is excess refining capacity for light sweet crude, and a shortage for heavy sour crude. Light sweet crude will be relatively overpriced (relative to any other grade.) The dollar is weak and looks to get weaker, and the price of crude is denominated in dollars, so to a buyer who will convert Euros to dollars, the exchange rate will favor the buyer with euros. Some bad news will tilt the market, and the market will not return to where it was before the bad news hit - it still hasn't backed off the premiums from Gonu and the two Cat 5 hurricanes in the Carribean this year.
Long term, the US economy is not as dominant as at the time prior recessions began, so it will take a worldwide event to crater the price of oil in dollars. If we were now using a marketbasket of currencies pricing method, I would say that the equivalent of $55 would be the bottom, if, as, and when such an event were to occur. In the meantime, oil denominated in dollars will go through the roof until we resolve our energy usage problems, which will probably happen (sorry, you've been disconnected. Please try again later.)
Wow. I was only expecting a 50-50 split between over and under 100. 2-1 is pretty surprising...$100 is a big psychological barrier.
The old poll was 9-11 against breaking 93. This one is 2-1 for breaking 100.
I guess, as the guy in the article said, there's a lot of reasons to expect the price to go higher, and very few reasons to expect it to go lower.
If the Fed drops the rate 1/2 a point on Wednesday, we might see $100 oil this week!
I agree. It depends on the Fed.
The question is this:
Figure 1 - Oil prices in United States Dollars
Connected to this:
The terminal decline in Saudi production has clearly taken a pause. Question is what next, and does it really matter? My current guess is that the Saudis may stand back and watch prices rise till pips begin to squeek - $120+? - before opening the spiggot to save the world in a last hurrah.
So I'll bet no.1 - and gather Robert is somewhat concerned about his thousand bucks - but needs to take into account the fact that they are now worth much less than before.
If Greyzone is around, we need to mark that we are possibly in the vicinity of flat / falling production, falling stocks and rising price.
LOL!! It could become a kind of game. Bet someone $1000 on some energy or environmental issue to be settled say 10 years down the road, anticipating, of course, the huge inflation of the dollar.
The USA could single handedly delay peak oil for 5 - 10 years since it imports 30+% of all exported oil. It could do this by cutting demand 10% intentionally (say by rationing) or unintentionally (with a severe recession).
China and/or India would just use it up.
GLT;
One customer's NOT using the supply doesn't just leave 'IT' lying around free for the taking, though. The oil that gets produced WILL be used up by someone, but they still have to buy it.. they still have to be able to pay.. so the implication that if we were able to cut consumption 'would amount to nothing' cause someone else would just use -what coulda been ours- instead is contorted from the observation that everyone's consumption is a blend of availability, price and choice.
No matter who used the oil that we didn't is not important as long as we have started learning how to manage with less, which will be an Invaluable tool very soon. Then we can sell that knowledge to them, if they are not selling us our shirts instead..
Bob
That is very utopian and quite noble but the simple fact is, right NOW there is no economic substitute for oil.
Because we are human we behave in quite predictable patterns.
While it is economically viable to purchase oil it will be.
The only way you will "manage" with less is if everyone else is.
"Managing" with less oil means your country is broke, cannot afford the oil and its people are suffering.
After we have plundered the last bit of economically viable oil, then you will see us using the alternative sources of energy but so will everyone else, except maybe some producing countries which can get away with a bit of hoarding.
Alternative systems would/should have been developed many years ago.
Imagining that we can now in the face of a collapsing economy, manage with less oil and sell the knowledge, is in my opinion just plain ludicrous.
It is best to dig the well before you are thirsty.
Euan,
The Saudis announced last week that they were going to put another 500K barrels on the market. The Mexicans announced today that weather had removed 600K from the market,plus the UAE had already shut in 600K barrels a day for some scheduled field maintainence. But the real answer was in a link yesterday that said China's imports are up 18.7% over imports a year ago because their economy is booming .
Everything changed this year, The market changed from how much the oil industry could sell to how much the producers could produce, and this happened about two months ago as a realisation... The sky is the limit now, and $100 is only 6.5% above today's close.
Bob Ebersole
Bob - I was sorry to not meet you in Houston - I gather you were at ASPO.
Yes, at least until the Olympics - which may mark a watershed in the demand for resources and the world economy. Its worth noting that the London FOOTSIE is basically an international resource play these days.
How high do you think prices might go? I find the oil price as % of GDP data presented in Houston and also by Asebius over on Drumbeat, to be quite a convincing argument.
SAT - are you still around?
The GDP arguments constantly try to frame that we do more with less oil. This is true. But these arguments deliberately ignore the underlying loss of resilience - more units of GDP are dependent on the same amount of oil, thus the loss of one unit of oil now costs far more GDP than before. Try viewing that relationship from the other direction.
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone
The cost of gas rising results in higher wages. As people are priced out of long commutes they will quit their jobs. Then the people still working will get more money.
If it was evenly distributed, this would be great for poor people. Half would lose their jobs, half would make more money.
This can happen if we have gas rationing.
During the great depression, my father sold a 300 pound hog for $5.00. Plenty of people were hungry and would have liked to buy the hog, but they did not have the money.
When people are thrown out of work, they do not have to drive to work. Nor do they have the money to buy gas. Demand destruction.
My father called it a viscous circle.
At some point demand distruction will set in. Will it be a "long emergency"?
Are you sure it wasn't vicious circle?
I thought I had coined the term viscous circle, but was keeping it under cover. I was planning to use it for our increasing dependence on heavier crudes or something clever like that.
Another $51 and the terrorists win.
I'm picking choice 1 above that oil will hit 100, before 86 because there are more and more people stating that oil has either peaked, about to peak or is on a peak production plateau.
Here is the latest admission, courtesy of The Energy Bulletin.
Oil production has peaked - al-Huseini
David Strahan, Last Oil Shock
29 October 2007
There is an admission today that Sadad Al-Husseini, former head of exploration and production at Saudi Aramco, stated that "global production has reached its maximum sustainable plateau and that output will start to fall within 15 years" and "that oil production had reached a structural ceiling determined by geology rather than geopolitics".
I think that Husseini usually refers to "total liquids production" when he says "production".
In the interview, he said that Saudi Arabia can sustain its existing capacity but that the EIA and IEA have overestimated their forecasts of Saudi Arabia. It was unfair, he said, to expect Saudi to “pull everybody’s chestnuts out of the fire”. OPEC 30 mbd to 47 mbd is unrealistic, he says. Even staying at 30 mbd is a feat, he adds.
Here is the Energy Bulletin article
http://www.energybulletin.net/36400.html
and the original article which contains an interview with David Strahan.
http://www.davidstrahan.com/blog/?p=67
Let's see if the EIA or IEA take any notice of Al-Husseini's statements. It's worth listening to the interview.
With this statement and the statements of other knowledgeable players, you would think that the mainstream media would have wall-to-wall, 24/7 coverage of such an important issue.
They do:
Oil prices drop from fresh record highs
I don't get how the last two choices fit in with the first three. Three of them are numerical values, the other two are explanations. How do they fit within the "next month" time frame?
Seems easy to me. Stay long oil as long as the long-term trend is intact. Yes, we will see corrections, and they could be big ones, but the trend will move relentlessly higher. So who cares if we just had a big run-up in the last couple weeks and the market's due for a correction? Peak Oil is not going away. Energy use is not going away. I say just hold the position. If a 20% correction will wipe you out, then lighten up a little and wait for another entry to rebuild your line. But no matter what, stay long!
It is likely to go to $100 in the long term as the United States has a monstrous deficit funded by borrowing and monetary inflation. However, the price of oil might not always rise as quickly as the 16% it rose this month. I recall an article published in TOD showing that the yearly average total liquids production in 2007 so far was greater than the production in 2006, that was greater than the production in 2005. Exports available on the open markets may be shrinking due to higher internal consumption of petroleum products in OPEC nations and Russia. Demand for autos was growing there as well as in two of three large nations that did not sign the Kyoto treaty and where increasing coal and hydrocarbon use to fuel industrialization. At what point in time will higher prices force people to use less gasoline? So far refiners in the U.S. have lessened the impact of higher oil prices by reducing the amount they earn per barrel of refining. This cannot go on indefinately without putting weaker refiners out of business. Some refinery expansion is currently underway.
I think there is a big chunk of market speculation in the price at the moment and the bulls are running.
Remember that so far they still view oil as 'just another commodity' that can be horse traded in and out at a whim, run up and sold off, etc, etc.
If the market had really accepted the PO argument $100 would be cheap as chips...
I bet 2 but am willing to admit it may go above $100 short term. I think we will see mostly $80-$120 in the next year or two upto 2009. After PO is 'declared' (what will this take?) prices in the multiple hundreds seem more likely than watching the odd decade up or down...
And some real questions: What is the actual impact of high oil prices if Petrodollar recycling brings a big chunk of it right back to higher 'value-add' producer Nations? Is any wealth actually being destroyed by these high prices?
As an analogy consider this: If a country produces mostly bananas but drinks higher priced imported smoothies (with a high 'banana content') what is the impact of higher banana prices?!
Nick.
There has been wealth destroyed in poorer countries, as they are priced out of buying enough oil for electricity generation and affordable public transportation. think myanmar.
However, what I think is happening right now, is a power shift. Wealth has not been destroyed so much so far, but moved massively to oil producing countries like saudi arabia and russia. Even if they invest that money back in the US, which might keep stock prices up and result in cheap credit to keep buying gas, they end up owning more and more of your country!
And Russia for instance has used they oil revenue for big increases in military spending.
matthias
Is $100 oil a psychological barrier?
Sure it is.
That's why Goldman and their subsidiaries, Treasury and Fed, NEED $100 oil to blame the coming depression on.
Today, we had market jitters and oil corrected.
• Golman Sachs signaling to sell oil and take profits
• Fear the Fed won’t lower interest rates
• Anxiety over tomorrow's EIA weekly petroleum report
All in all, if I had placed by bet yesterday, I would have bet for oil hitting 100 before it hits 86. Then that Goldman Sachs report came out, “sell oil.” It alone trumped all other data. Just a short time ago, they pushed to buy oil and now they are pushing to sell. That Sachs statement on top of Fed and the IEA pre-report anxiety were enough to send oil lower.
Tomorrow, a few things for the next few days will be clearer. If the IEA report is bullish, US fuel supplies drop, it will be good to drive up the price, but it won’t be good enough. The Fed needs to hold true with at least a 25 basis point drop. If they don’t, the stock market corrects downward, and, temporarily, the oil markets with it. In hindsight, Goldman Sach was right, take your profits and go home. There will be another day to invest.
This is a market to take one day at a time. If the stock market drops … sell. It will take oil with it. If there is a drop in demand, well, I don’t think you have to worry about that yet, but it would signal a sell. OPEC ups crude output, I wouldn’t worry about that either, but it would flag a sell. No, the crude oil bull market has been here for quite some time and it picked up some steam these past weeks. It did so without any true “public” justification of why oil is climbing.
Unless the data we have is false, there is only one way for the price to go and that’s up.
If, as Boone Pickens says, we are producing 85 mb/d and consuming 88 mb/d, we have to cover a shortage of 3 mb/d and growing. The issues at hand, without a war or hurricane are bearish, oil is heading north:
• 3 million barrel per day shortage
• Glut of oil tankers on the world market
• Falling value of the dollar
• USA and world fuel inventories low and falling
• Emergence of the Dubai Mercantile Exchange
At the moment of this post, it’s oil will hit 86 before it hits 100. Tomorrow at this time, I may see the world the same or quite differently. At least after tomorrow, there shouldn’t be quite as much “tension” in the market. Goldman Sachs has done their part, the IEA report will be out and the Fed will have told us what they plan to do. As for the IEA report, fundamentals suggest a draw on inventories, but I wouldn’t count on it. As for the Fed, they have far more to gain from a drop in interest rates than the inverse. I would expect the rate cut.
Perhaps, after tomorrow, Goldman Sachs will be recommending buying crude.
“It is the nature of the human species to reject what is true but unpleasant and to embrace what is obviously false but comforting.” H.L. Mencken