How would a sharp drop in demand change your numbers?

Small US E&Ps? With the above data by CERA showing average barrel to produce in North America is between $60-$80 cost? You better pick the right ones...

As are those of us who have followed your 'simple little model' and get it's implications. Without ELM it's just the bathtub draining w/o noticing the growing elephant standing in the tub drinking his fill. I showed the chart of Indonesia net exports to our two young professional offspring this holiday for a nice family oh shiite moment BTW.

A room full of unhappy elephants can't be wrong. It's the primary reason why I don't see demand related oil price falling much from here. With much lower price the potential for conflict will be much higher and put a floor down IMHO. Low cost producers HAVE to cut, or create tension to bring their production/price in line with the high marginal supply destruction cuts coming from the OECD. Who wants to produce their remaining net barrels for cheap printed script while gold to oil is so far out of whack and their own budget deficits grow?

A new non-bank trillion dollar stimulus (one nation only) that may actually make it's way down to the consumers (who will spend) will buy a ton of gasoline at $1.65 a gallon and these two factors provide the juice to ensure increased economic activity. And ,hey, newly reinfused GMAC will get you into a low interest two for one deal on a shiny new guzzler with a Cobalt on the side. Plenty of fuel tanks around the world to soak up the remaining 100 Gb net export barrels at 1% per 50 days.

Thanks for helping us keep it in perspective WT and a pleasant new year to you.
(It ain't gonna be dull)
I went for $75 to $100 for end 2009 but wouldn't be surprized if it went higher.

It's good to see you are using the tool for gas as well as oil.

The article says that the OMV company intends to expand it's gas production by 20% by 2010, not 20% of Austria's usage.

I think that 0.06 million cubic metres domestic production is an almost insignificant proportion of the ~339 million cubic metres actually used in Austria ... that's about 0.02% of Austria's needs ... certainly not 20%! ... yet.

year production consumption

1980 0.075 186
1981 0.051 159
1982 0.047 154
1983 0.043 157
1984 0.045 175
1985 0.041 188
1986 0.039 182
1987 0.041 190
1988 0.044 181
1989 0.047 195
1990 0.045 215
1991 0.047 228
1992 0.051 224
1993 0.053 235
1994 0.048 242
1995 0.052 262
1996 0.053 281
1997 0.05 271
1998 0.055 279
1999 0.061 285
2000 0.064 272
2001 0.061 288
2002 0.066 291
2003 0.074 315
2004 0.069 317
2005 0.058 339

I'm still thinking about it. My best guess is new lows in Q1, followed by a slow but consistent rise the remainder of the year to close at high end of $50-$75. But as this year showed, things can move fast, quickly. E.g. if our poll ended in Nov 2009 or Jan 2010 instead of Dec 2009, it might fall in a completely different price bracket. If we start 09 out of the gates with Iran shutting in production due to this Israel/Hamas issue, well then that would change things a bit. Pretty small geopolitical risk premium in current prices..

And yes, hedge funds are going to play less of a role than last year, though a large part of the drop (say from $90 to $40 was more linked to rule changes impacting ALL hedge funds and credit availability than any oil contract teeter totter. In fact, the current 'longs contracts' in oil are even greater than they were in July when prices were $147+:

Net Fund Length at $145 bbl (7/1/08)
WTI Crude - 99,782 contracts
Heating Oil - 12,629 contracts
RBOB - 63,716 contracts

Net Fund Length at $100 bbl (9/30/08)
WTI Crude - 78,793 contracts
Heating Oil - 5,908 contracts
RBOB - 21,113 contracts

Net Fund Length at $75 bbl (10/14/08)
WTI Crude - 53,156 contracts
Heating Oil - 5,150 contracts
RBOB - 21,141 contracts

Net Fund Length at $50 bbl (11/25/08)
WTI Crude - 92,198 contracts
Heating Oil - 8,507 contracts
RBOB - 42,612 contracts

Net Fund Length at c. $40 bbl (12/17/08)
WTI Crude - 128,140 contracts
Heating Oil - 8,929 contracts
RBOB - 51,819 contracts

Net length for WTI futures and options (subtracting outright short positions from outright long positions) totaled 128,140 contracts last week. Since each contract reflects an underlying 1,000 barrel futures position, the length represents a buying bias of more than 128-million bbl of WTI crude. Of course, the 30 million barrels more of 'long' now represents same amount of oil but much smaller amount of 'dollars', so it's hard to say.

Guessing on oil prices in 2009 is really much more a guess on the economy and geopolitical/structural changes than it is on decline rates. But 2010-15 will be different stories.

Housing in the US has been in a speculative bubble since WWII.

As with any bubble market there have been short periods of retrenchment but in all cases prices have consistently increased.

Your wrong to tie speculation in housing with the tech bubble in fact if you look the popping of the tech bubble had almost no effect on housing.

Lowering interest rates after the tech bubble burst accelerated the housing bubble and arguably caused it to pop early but it would have eventually popped anyway because of peak oil and baby boomer retirement.

Next bubbles are trivial to detect all thats required is to identify speculative demand and also notice that its growing. Speculative demand is simply someone holding a product for later resale at a higher price. Hoarding is what causes price bubbles.

Speculative demand in housing became blatant at the end however for a lot of the housing bubble effective speculative demand was fueled by racism and bigotry as housing stock was abandoned to escape living with people who where different again in the southern US it was obvious in other parts it was less blatant. Banks and governments where willing players in this game.

For oil you have a problem for speculative demand to cause a bubble you would I'd argue need to store a crapload of oil for later delivery very few entities are capable of storing enough oil to actually effect the markets. The US spr and I'd argue KSA are the only two entities capable of even a short term speculative move in the oil markets. You can figure it out yourself but I figure your need 30-60million barrels of oil added or removed to the oil markets over a period of 30-60 days to even influence the oil markets.

The only entity that speculated in the worlds oil markets was KSA and it did it be surging oil exports as demand was falling they are the only people that can realistically provide or withhold the required oil for real speculation.

Now with that said if the market is very very tight then and only then could a small amount of speculation using both oil and money actually have a influence on prices. Thus if supply is not really meeting demand one can see that storing a more manageable sum like 5-10 million barrels of oil could say move global prices by a few percent but thats a small speculative effect.

You have the same problem in reverse for oil again since no one can really store all that much of it if you produce it you have little choice but to sell it for whatever price you can get. Thus is supply exceeds demand for oil once storage is full the price falls dramatically if you continue to produce.

In the excess case it actually works like a traditional commodity like grains if the crop is large and storage is full the price for excess grain goes to zero. Same for oil. Next season everyone is forced to plant less and with oil production is pulled back to match demand you cannot overproduce oil for long.

Given the relative lack of storage for oil vs daily supply one can further see how devastating surging exports during a normally low point in demand and further more with real demand falling is. You quickly fill all available storage.

About the only thing that kept oil from falling to 10 dollars a barrel was the simple lack of storage itself i.e people had to keep making new orders forward and the contango remained in the market as actually supply into the future was not sufficient to allow the futures market to collapse.

Show me storage for 300-400 million barrels of oil owned by speculators and then I'd change my opinion. Using the housing bubble as and example when speculation finally really drove prices about 50% of the homes where bought by speculators. In the Hunt silver bubble its my understanding that they bought 70% of silver production near the peak. For the DeBears Diamond cartel 90% of production is bought by the cartel to maintain prices.

So lets say for oil given the lack of storage speculators would need to corner say 4mbd of production and store it for say 60 days thats 240 million barrels of oil. And thats well under known conditions where speculative bubbles zoomed to bursting point.

Now one could assume that a pure financial manipulation of a market is possible but again its difficult to see how this could last for months given the nature of the oil market and inability to store. I know of no single example of a speculative bubble without hoarding. I'd certainly be interested in reading how one could be created but its not easy to see how it can be done without artificially increasing demand and traditionally this is done by hoarding the actual product. I'd argue that if you think the oil market can actually be manipulated with pure financial speculation to the extent that prices where tripled then how on earth can you assume current prices are not the result of massive short speculation ?
The argument works both ways if the oil markets are really that rigged that they don't represent the actual physical market then god only knows whats going to happen. I'd have to think that if they where that rigged given the size of the worlds oil markets then the US government would have to be a big player in rigging the markets. This leads to not leadfoil hat speculation not tinfoil.

Occam's razor states that the market has for the most part correctly price oil all of last year. The nature of the market ensures that speculative pressure with the single exception of Saudi Arabia cannot effect the market significantly. Given the movements Saudi Arabia made in 2008 and demand I'm perfectly comfortable that the price was correctly set by the market.

The only point I question was the consistently low prices following the Hurricanes however the other speculator capable of influencing prices i.e the US government with its SPR did step in during this period. It seems that offers of draws from the SPR and a few actual draw where sufficient to keep prices low. Certainly at the same time we had hedge funds unwinding so the combination of forced selling of futures and real oil from both the SPR and continued large shipments allows oil prices to remain low and falling even as GOM production was taken offline. Thus I do question the price movement over a small time period which still seems questionable. In general from July through November very large and complex forces where roiling the oil markets and this includes a serious surge from KSA but as November ended it was clear that the market was finally starting to become more attuned to simpler supply demand issues.

In conclusion I see no speculative bubble in oil and doubt given the nature of the market that one could actually occur. I do see a number of complex and large forces that effected in the market in the second half of 2008 that probably to complicated to call it a bubble.

And finally right now current supply simply exceeds demand. Despite the complexity of what happened in the second half of 2008 when the smoke finally settled we had a simply supply demand issue. Thus no bubble first half of 2008 complex forces second half finishing with excess supply and the market for the most part responded correctly. I find the factors behind the price decline in the second half of 2008 far more interesting and informative then the supposed speculative bubble in the first half I think most people are looking in the the wrong place and wrong time for when oil prices where significantly distorted.
In doing so they are missing very important information.

Not sure how to do it but its important :)

On the same note if you look at non-OPEC oil supply you will notice that seasonal variation in oil shipments seems to have disappeared. The variation in OPEC exports was interesting and in general counter seasonal.

The combination of another bidding war erupting and OPEC actually able to control oil because of the decline of non-OPEC supplies is very volatile.

Throw in the current political situation of Israel invading Gaza as OPEC member who are in general against Israel being under orders to cut and life gets interesting. I.e we could well see OPEC almost accidentally act as a cartel as I'm sure not cutting could be viewed as in a way supporting Israel. Thus we have a very good short term reason for a lot of OPEC members to actually do what they said they where going to do.

I think a sort of volatility graphic would be helpful your estimate of prices with say a swing of 2-4mbd in production up and down from OPEC post peak.

Sort of the strong OPEC case.

I think the production side is easy its just compression in a sense of your supply and demand curve. The really interesting aspect is not the potential for OPEC to discover it can control price but the demand response if OPEC manages to manipulate prices to high.

I'd suggest that because the supply imbalance would be correctly viewed as a short term supply problem from OPEC that demand would be robust since price increases are expected to be temporary.

Now what gets really fascinating is at some point looking at your graphs is that by late 2010-2011 we would actually see a real permanent supply/demand gap open up after and OPEC induced price spike. Lets say that it takes six months of consistent OPEC control of the oil supply to cause 150 dollar oil this puts us into the second half of 2009. So assuming that the US manages to continue to prop the economy up and keep it and general world demand continues to grow at a small rate we still see a noticeable and real gap opening in 2010-2011.

Your big arrow as plataue through 2009 for example. The point is if you throw in OPEC/Bidding war/ Export land volatility on top of your demand gap prices get crazy and the real obvious no way to hide it post peak signal is literally pushed out until after 2011 maybe even 2012. It could be that long before the world is actually forced to grapple with the fact the world really peaked !

Whats actually really fascinating is how this plays out politically for Saudi Arabia by the time they actually have to admit peak it may literally not matter any more since the rest of the world would be well pass peak. They in my opinion just pulled off the political move of the century almost.

If I'm right about a lot of my thoughts through this year esp that the surge from Saudi Arabia was unsustainable and drew down their own strategic stockpiles then they will have to cut and cut deep to ensure that the world views price increases in 2009 as a result of OPEC cuts not peak oil. Its in my opinion absolutely critical for them to ensure that the world thinks that their cuts are the cause of price increases for as long as possible. I'm sure at the right time they will claim that speculators are again driving the market interfering with them trying to set a just price. Basically they have to do this to hide the fall into post peak production until they can safely point out that the rest of the world is screwed and they cannot increase production to make up for the rest of the worlds decline.

At this point they should have consistently high priced oil assuming we don't have widespread economic collapse and I think if you look going forward past say 2012-2013 that even if whole countries collapse price will probably remain high. Given the game I think they have played to date I have a lot of faith that they can make it till oil becomes a valued commodity even in a ruined world.

Makes me wonder if at some point Saudi Arabia may not play the Iran card and acquire some of its own nuclear weapons to protect against someone killing the golden goose. You can see that they could really use some at some point in the next ten years. And whats really fascinating is if Iran really does develop nuclear arms for KSA to arm itself would probably be accepted by the international community in say 2012-2014.

And last but not least if Ghawar is in as bad a shape as I suspect then Saudi Arabia actually need to do a repeat of their cutbacks in the 1980's to ensure they can play the game I think they are playing. Thus for me at least everything points to us seeing some incredible cuts coming if I'm right about the Geopolitical/Oil depletion game KSA is playing.

I could see KSA wanting to reduce production to the 4-6mbd range for as long as a year if not longer. Indirectly I think we will learn a lot about KSA true production capacity as we watch how much they cut and for how long.

If they do cut and don't increase if prices cross their threshold then they have physical reasons to cut. Next if they cut and prices stay low and they keep production low for a long time they have physical reasons.

Only the case of them cutting production less then what I'm guessing and prices remaining low then increasing before the end of the year indicates that that they have both ample reserves and low lifting costs.

So overall the next year or so is going to tell us a lot about KSA's real production capabilities. And if they play the game I think they are playing by the time they finally have to admit to their true situation it simply won't matter.

So to go off on this KSA tangent but given my price volatility concept you can see that the lynch pin is really KSA what it does will determine the short term future of both oil prices and production.