A gentle cough in the direction of the NYT

One of the Plenary speakers at the conference I am at this week, was Alan AtKisson who spoke on Sustainability.  One of the innovations in his talk was to have the audience join in song - for one of which the chorus was "Exponential Growth" - shades of the Bartlett Pair.  But sad to say, unlike their excellent presentations,  his talk, while emphasizing the point that we can't go on like this, did not indicate the immediacy of some of the boundaries to such growth.  

Not, of course that he is alone.  There is an NYT story today about the upbeat US economy, and the future thereof.  However in speaking of gasoline

Gasoline prices - the national average is now $2.15, according to the Energy Information Administration - have fallen because higher prices held down demand and Gulf Coast supplies have been slowly restored.
Hmm! And I suppose that those import loans had nothing to do with it?

But is the story even factually correct? Checking in with the EIA we see that, in fact, demand is up from 8.988 mbd a year ago to 9.124 mbd and it has now been higher than last year for over a month.

As for imports they are still at 1.13 mbd as opposed to 0.763 mbd last year.  Though it is about now, I believe that the term of the loan begins to expire, and sometime in the Spring some of it needs to be paid back. (Perhaps when the remaining refineries are back on line)

Speaking of the return to online status a quick trip to MMS brings the news that:

Today's shut-in oil production is 564,229 BOPD. This shut-in oil production is equivalent to 37.62% of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD.

Today's shut-in gas production is 2.994 BCFPD. This shut-in gas production is equivalent to 29.94% of the daily gas production in the GOM, which is currently approximately 10 BCFPD.

The cumulative shut-in oil production for the period 8/26/05-11/29/05 is 95,331,305 bbls, which is equivalent to 17.412% of the yearly production of oil in the GOM (approximately 547.5 million barrels).

The cumulative shut-in gas production 8/26/05-11/29/05 is 492.370 BCF, which is equivalent to 13.490 % of the yearly production of gas in the GOM (approximately 3.65 TCF).

And while we are updating information, Rigzone has a story that Thunder Horse will be in production by the middle of next summer
Thunder Horse is fine. The problem is, of course, the weather has been so bad we can't connect it up to the wells on the seabed," BP Chief Executive John Browne told reporters after speaking at the Brookings Institute. "We do expect to do this next year, and we expect it to be on stream in the second half of next year, probably in the earlier part of the second half," he said.
Which no doubt explains why they plan on fielding it plonk into the middle of the next Hurricane season.

And the BBC has announced the start of production at Bonga.  This is one of the deep offshore projects counted in all the lists of Megaprojects.  It is late, initially being scheduled for last year,  and $900 million over budget.  But it is now in production.

The market is so short sighted.

Because stocks have built over the last couple of months they think there is an over supply. This neglects the fact that the IEA released 2mbpd of oil and product onto the market but as long as this happens the party can continue.

There has been some discussion here about the ability of the market to predict the future. It cannot it is driven by greed and fear. When you have a large number of people doing something the market finds the middle ground. ie the Average which turns out to be fairly stupid. But this means it can proved some good buying opportunitys:)

From the TOD top right of the page which can be applyed to the futures market

"We have only two modes - complacency and panic."
--James R. Schlesinger, the first energy secretary, in 1977, on the country's approach to energy

"Of all races in an advanced stage of civilization, the American is the least accessible to long views. . . . Always and everywhere in a hurry to get rich, he does not give a thought to remote consequences; he sees only present advantages. . . . He does not remember, he does not feel, he lives in a materialist dream."
--Moiseide Ostrogorski (1902, 302-303)

The one that best describes the futures market simply replace citizen with trader:)

"So one may almost say that the theory of universal suffrage assumes that the Average Citizen is an active, instructed, intelligent ruler of his country. The facts contradict this assumption."
--James Bryce (1909, 35)

The price of the futures in no way reflects what is going to happen in the future. It shows what the "average" trader thinks will happen.

The reason these comments about the market are not correct is that if markets worked that way, anyone with some common sense could become rich by investing in futures markets. All you have to do is to look ahead and find a case where the futures price is way off from what you are sure the spot price will be at that time. Take a position in the market based on that difference. The market price must converge to the spot price as the contract expires. If your prediction were right, you'd make money.

Yet we know this doesn't work. Most people don't succeed in the futures market. It is not an easy road to riches.

I believe that the reason is because the story about bad market predictions is wrong. Actually, markets predict very well, on the average. They may be too high sometimes and too low other times but you can't tell which. There is no safe and easy way to say whether a given market prediction is too low or too high. If there were such a way, people would exploit it to make money, and by their actions they would correct the mistake.

That's the great thing about markets: when they're wrong, you can get rich. And by doing so, you make them right. No other institution has this property. Polls and surveys certainly don't, nor do predictions by experts or interested parties. Markets are fundamentally different from polls. They have self-correcting properties which make them the best institutions we have for making predictions.

Markets are for allocating resources, they are not for predicting anything. They may seem to predict because they can sometimes feel weaker signals of something that is already going on. But this is not really predicting. If the economy has started to weaken the companies adjust their expectations and plan to purchase a little less oil in the future and this shows in the markets. But the markets only react to the changing conditions, they do not predict them.

The markets did not predict the US oil peak, nor the North Sea  oil and gas depletion. They will set price for the supply and demand to meet, always.

They may seem to predict because they can sometimes feel weaker signals of something that is already going on.

They also seem to "predict" because marketeers use fallacious "observational selection" in the way they interpret the market.

Another term for this is "filtering." Basically, with any predictions you want to trumpet, you highlight the "hits" and ignore the "misses."

Markets aren't merely "short-sighted." They're reactionary.

The problem in trying to use market trends to predict the future is this.  

Not all players in the market have the same goals or the same amount of cash to invest.  A small minority of people, controlling a significant amount of money, can move markets in order to make a profit.  A lot of money has been made just selling when prices go up and buying when prices go down.  Far seeing, well informed, sustainable minded people are going to loss their shirts in this environment if they can't hold onto investments for years (at no cost) to realize a change in price.

The market has no interest in what the long term scarcity of the resource will be.  Traders make money off of choppiness not long term trends.  The money has to cycle in and out with profitability on each trade.  You have to sell to make a profit.  Buying and holding doesn't make you any money.  It doesn't matter if the long term trend is up or long term trend is down.  As long as there are short term spikes and dips there is profit to be made on relatively short term trades.  Consumers don't have this luxury.  They only buy once, hopefully at the lowest price they can get.

IMHO this short term choppiness of markets tends to mask all real trends of scaricity of commodities unless a graph of long term (always more than 12 months) is used to put things in perspective.  

My dear OilTrader, there are many irrational markets in the world (the real estate market in the US just now is a very good example of a market in a pique of irrationality) but crude oil is behaving very rationally at the moment.  

Supplies are up relative to demand. Prices are falling. It is a correction in the upward trend. OPEC wants to sell. I pull up at the local gas station and want to buy. Everyone is happy.

Yes, your criticism is of "futures" prices, by which you mean prices for crude oil not in December or January but perhaps March or June.

But those prices are led about by the current price as a horse is by its bridle. The most fear or greed can add or subtract is a dollar or two.

Whatever Mr. Halfin may say about the matter, you and I both know that anyone buying June 2006 crude oil at the current price of $59 is going to make money so long as he or she can hold till delivery.

And 2011 crude at $52? Well now, that is irrational.

you and I both know that anyone buying June 2006 crude oil at the current price of $59 is going to make money...

You can not know that. It is the price of risk that stops people from speculating largely even though the supply/demand equation is close to clear.

We have new summer driving season and  hurricane season coming soon to a theater near you.
Yeap, what this means is that maybe with 90% confidence I could say that price will go up. But with how much? And how do you know that it would be in these 90% not the 10% left?

Now look at the market. Maybe 80% of the futures deals are an insurance against future price volatility. If speculators (20%) manage to influece the price significantly (say futures go to 100$/barrel) the spot price will also grow to say 95$ (because it would become cheaper to buy now and store until maturity). But at 95$ there would be a disbalance because producers would not be able to clear stock and storing crude would cause huge loss, consequetivly both prices will drop. It turns out that the marginal barrel matters for the futures price, and only a major change in market expectations can change that.

In short I believe now is a good opportunity to become a speculator... anybody know how I can participate?

I prefer my own analysis of the raw numbers. If you use the EIA's weekly millions of barrels supplied(demand) numbers for gasoline going back to 2000,you find that November ranks 7th out of the twelve months. August rating a 1, September a 9, and October a 5. This is done by grouping every week that ends in that particular month and averaging them.

Now if you compare the average for the month of November against that of November the year previous, this is what you find. Between 2000 and 2004, the year-on year average for November increased in the range of 1.27% in 2003 to 4.10% in 2001. The first three weeks of November 2005 show an increase of only 0.13%.  If one were to look at the trend from the first and the second weeks of the month this year - it is a distinct possibility that year-on-year demand this month will be negative.

It was down in October. And it was down a whopping 3.52% in September. The September number appears to be the largest monthly drop in the last 5 years.

So what do these numbers show? That demand is increasing slowly from the point of the Hurricane problems, that this demand is relatively low by historical standards of at least the last 5 years, but that the numbers for November are completely within the range of normality.

Demand typically drops off a cliff in September, rebounds in October, and then dips a little in November.

In other words, absolutely nothing to be excited about - for any reason. I would hold off and try to look at some longer-range trends.

I generally agree with you that demand growth is depressed relative to normal and close to zero year-on-year, though I note that EIA has corrected September to only be down 1.5% in the monthly data which is based on a more complete survey.

BTW, how big an oil company are you CEO of, roughly?

I'm sorry, I guess my moniker doesn't make that clear. I am not the CEO of an oil company. I am the CEO of Oil :)
Thunder Horse is fine.

TH took a $100 million hit from Katrina/Rita.  We do not know where it is now.

The pic from Rigzone was dated july 05.

Presentation to a House of Commons All-Party Committee
on July 7th 1999


C.J. Campbell

Unfortunately the public database is extremely unreliable. I might here refer to BP's Statistical Review which many people consider a valid source of information given its reputable author. It is in fact exceedingly unreliable. It simply reproduces data from a trade journal and does not reveal the Company's own considerable knowledge. It is very unfortunate that a company of this standing should put out such misleading information. I don't know why it does so.


BP continues to lie about it's reserves.

Carl Jung, one of the fathers of psychology, famously remarked that "people cannot stand too much reality."

BP's Browne is doing his part to make sure people don't get more reality than they can handle.

On oil trading:  If our great grandchildren were allowed to bid on the price of oil, who doubts that it, oil, would be trading at $100 per bbl. now.

The Markets will not save us.  When push comes to shove, the Market will be shut down and rationing will take it's place.

PS-Deffeyes stands by TurkeyDay 05 as PeakOil.