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Could $30/bbl Oil Happen Before New Year’s Eve?
Posted by Rune Likvern on June 18, 2009 - 9:45am in The Oil Drum: Europe
In this post last month, I described how the recent storage build might serve as a good proxy for describing a well supplied oil market. I also presented data suggesting that actual physical oil consumption may have been running 2 - 3 Mb/d beneath supplies.
In this post, I will present further evidence that oil markets have for some time been well supplied. Furthermore, it appears to me that both the run up last summer and the more recent run up in oil prices bear the hallmarks of an oil market now being heavily influenced by speculative forces.
The chart above shows how IEA (The International Energy Agency) have estimated total supply (blue line) and total demand (red line) in their monthly OMR’s (Oil Market Reports). The diagram also shows the development of the oil price (black line).
As a result of these forces, I believe that there is a substantial chance that oil prices may again experience a rapid drop to perhaps as low as $30 barrel before Christmas. One reason I believe this is likely is based on my research with respect to US Oil Fund USO. In February USO held 100 000 WTI contracts (1 contract = 1 000 bbls), but this had dropped to 50 000 WTI contracts recently, as ETF purchasers increasingly switched to Natural Gas. Strange as it may seem, the sale of these USO contracts may be part of what is holding WTI prices up, and natural gas prices down. As the number of WTI contracts reaches a minimum, this influence may turn around the other way.
DISCLAIMER: The author holds no positions in the oil/energy market that may be affected by the content of this post.
For those of the readers who are interested in learning more about how USO seems to operate, the articles linked below may provide some historical and fresh insights.
From alphaville, quoting Olivier Jakob at Petromatrix, dated May 12th 2009, linked above:
Early in the year, the super contango was for a big part the result of the extravagance of the United States Oil Fund ETF (USO) but their positions have been trimmed closer to the Nymex accountability level and they are now less a factor in the crude oil spread.
The managers of the USO are also running the United States Natural Gas Fund (UNG) and the recent position increases in that ETF are as troubling as what they did on WTI in the first two months of the year. Positions in the UNG have grown 4.5 times since the end of March and the positions held in the UNG could represent as much as 80% of the June Nymex NatGas Open Interest. The four day roll of the ETF starts tomorrow and to avoid the risk of being hanged by the UNG we would already move any NatGas length from June to July. The positions in the UNG are more than 7 times what would be the Nymex accountability limit, the problem is however that they holding the majority of the position in “swaps” rather than Futures.
We do not know the exact nature of those “swaps” and whether they are a swap on the Futures or a monthly pricing swap. The latter would have less of rolling impact than the former but we will assume the former for risk assessment, especially since we sincerely doubt that whoever sold those swaps to the UNG is a charitable organization.
Alphaville, in the post The problem with commodity ETFs, explains the apparently strange price relationship that I mentioned in the introduction, where a sale of ETFs seems to result in a rise in prices of a commodity, and the purchase seems result in a fall in prices. This seems to be related to the fact that ETFs, because their market positions are so large, cannot hold their entire positions in commodity contracts. Instead, they hold a majority of their position on over-the-counter swaps. Changes in these positions behave differently than one would expect.
Let us continue with global oil supplies.
Figure 01: The diagram illustrates the world’s supplies of all liquid energy (stacked columns against the right y-axis, which is not zero scaled) as presented by EIA IPM (EIA International Petroleum Monthly) for June 2009. A 12 MMA (12 Month Moving Average; black dots connected by black line) has been added to smooth the swings. Further the price development for oil (monthly averages for Brent spot) yellow dots connected by black line plotted against the left y-axis.
World total oil supplies have been running flat since 2004, and the recent OPEC quota cutbacks have not come into full effect as of March 2009. As will be illustrated with diagrams later in his post, the reduction in oil supplies has been less than the reduction in demand/consumption from OECD alone.
Figure 02: The diagram shows total petroleum consumption within OECD from January 2000 till February 2009 with blue lines and a 12 MMA is added (black line) to smooth the data plotted against the left y-axis, which is not zero scaled. The oil price developments are added as a red line plotted against the right y-axis.
First of all, it seems like oil consumption within the OECD area will become affected, that is consumption will stop growing and show signs of decline, as oil prices reach US$60 - 70/Bbl and higher. This gives an indication of the OECD economies’ resilience to oil price growth. Increased oil prices will at some point lead to a decline in consumption. The data suggests that OECD economies are able to absorb some price increases when these are growing.
From February 2008 to February 2009, oil consumption within OECD declined by approximately 2 Mb/d, which is close to the reduction in global supplies, and the decline is expected to continue, as illustrated by the diagram below.
Figure 03: The diagram shows the development of US total petroleum consumption from January 2000 till early June 2009 using a blue line, and a 12 MMA is added (red line) to smooth the data plotted against the left y-axis, which is not zero scaled. The oil price developments are added as a black line plotted against the right y-axis.
The diagram also illustrates that US total petroleum consumption continues to decline.
Figure 04: The diagram shows the development of US gasoline consumption US from January 2000 till early June 2009 using a blue line, and a 12 MMA is added (red line) to smooth the data plotted against the left y-axis, which is not zero scaled. The gasoline price developments are added as a black line plotted against the right y-axis.
The diagram above also illustrates that changes in consumer behavior earlier started as gasoline prices rose above US$2,60 - 2,70/Gal. In other words, petroleum products need to be affordable for consumers. Too wild price increases will affect demand and consumers are in general in worse shape than a while ago.
Figure 05: The chart above shows how IEA (The International Energy Agency) have estimated total supply (blue line) and total demand (red line) in their monthly OMR’s (Oil Market Reports). The diagram also shows the development of the oil price (black line).
Based upon IEA’s estimates it seems like the oil price growth through 2007 was mainly demand driven (demand was larger than supply). Note also the unusual steep climb in oil prices in recent weeks.
IEA’s estimates also show that during all of 2008, global oil supplies were running higher than demand. If the laws of demand and supply still worked, these should not have been the cause of a growth in the oil price. Instead, it seemed like the laws of demand and supply had been suspended, and oil prices continued to defy gravity until early July 2008, when gravity again caught up with prices.
Presently it looks like some of the speculative demand (money) is shifting from oil to another related commodity ….natural gas.
The above and the continued decline in consumption, higher than “normal” storage levels (within OECD), weak economies suggests an oil market that will remain “loose” for some time
What are the signs that oil prices might continue to weaken?
- Unemployment is still rising
- House prices are still declining
- Credit lines are or have been reduced
- The Dow Jones is presently down close to 4 000 points relative to this time 2008
- The dollar has lost some strength (which may explain some of the price growth)
- Many big economies are still contracting
Households’ purchasing power and equities are now, in general, considerably weakened compared to last year at this time. This does not sound like an economic environment that is ready to absorb huge price rises in oil and energy.
Figure 06: The chart above shows how the present contango continues to flatten.
Furthermore, some analysts using Elliot wave theory suggest that Oil will fall more than 30 %. In addition, even the IEA thinks speculators were part of the oil spike.
Because of the various issues described in this post and in previous posts, I believe that the Christmas present from the oil market may to households arrive early this year.
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Recently, I have been asking this question to myself a lot. Which would you prefer: a job and $4 gasoline or no job and $1 gasoline? Another way to put it is: how do you like your pain?
Cinch
Cinch,
I think what is happening is very serious, and I fear from reading the "tea leaves" that things will get worse before they get better.
I have no doubt that a high and stable oil price (i.e. high enough to grow needed capacities) would be better for most people. This results in predictability for consumers and producers.
I, and most, would say a job and $4 gas. Hell, I would take a job and $20 gas over no job.
But the rich and greedy would proobably prefer to thin their numbers rather than their wallets. It will take many more angry, jobless people to change this.
Its hard to gauge your argument without storage levels.
Obviously storage levels dropped sharply in 2008.
And all kinds of numbers on gasoline take your pick which ones are the right ones.
And of course although US consumption is a big part of the worlds oil prices its not the only game in town and its difficult to get good global numbers on anything.
Next NYMEX is not the only game in town the other big one is Brent but you have a variety of places to buy oil for a wide range of contract terms. Some indexed of NYMEX some not. All of these real oil and other market would have had to show significant and widening discounts vs NYMEX. The spot market is not going to follow a gamed oil market for long. The North American NG market is not a good example its much smaller and well known for being sensitive to speculation and is inherently highly variable. There are simply to many checks and balances in the many global oil markets for speculative movements to have any long term effect on price. Certainly at any given time speculative positions influence the price of oil I tend to give 10-15% of any price move to be the result of speculation. Thus the move from say 100-115 or 115 to 130 could be entirely speculative if it does not hold for at least a few weeks. If the global oil markets except the price then its real.
Given the post is simply incomplete its difficult to argue. I'd have to think that if the oil market was this simple then why on earth did so many people in the world get duped ?
Certainly large position moves can influence the market over the short term no doubt about it. But its difficult to see any speculative position unless its funded by and almost infinite source of money capable of influencing the global oil markets for long say two months at most. Now you throw in 100 million barrels of physical oil plus a lot of money and yes by hold over a days supply of oil and making moves you can move the market significantly for some time. Say even up to four months maybe five at most. Throw in the near collapse of the banking system second half of 2008 and you could even get six months where very speculative moves could have much longer term effects than normal.
I'd argue that if people know that TSHTF and that it might be the end of the world you can pretty much push the price of oil as low as you want esp if your betting this is not the big one.
Anyway like I said I'm not really arguing agianst your position simply because I don't think you have made a valid argument. I think that if you put together a more complete scenario that you would see that several different viewpoints with major differences in their underlying assumptions can fit the recent i.e last two years worth of data.
However I'd argue that we have already reached the point of divergence i.e I think your wrong in claiming 30 dollar oil by Dec even with your argument. Why not right now or last week or last month ?
Even with your incomplete argument it does not make sense that the price has not already collapsed.
Regardless of if your argument is incomplete or not I'd argue that what ever position you take your facts would work for a price collapse back to 30 after oil passed 50-60 a barrel. I'd be willing to give you a speculative move to say 50 and even 60 but why on earth did prices not collapse say two weeks ago ?
Or even next week ?
memmel, you ask some tough and interesting questions, the one below being one of the most interesting:
"I'd be willing to give you a speculative move to say 50 and even 60 but why on earth did prices not collapse say two weeks ago?"
Let me turn the question around: Why did oil ever collapse from $147 at all?
If supply and demand had driven oil to that price, has the supply/demand situation already improved that much since then?
If supply and demand did not drive prices to that level, then why should we assume that supply and demand has anything to do with price now or in the near future?
Either way the jigsaw puzzle is missing a few pieces. We seem to be back to Matthew Simmons great riddle about what oil is actually worth. The range begins at the absolute bottom, the "lifting cost" plus transportation and refinery costs and goes all the way to the top, which would include the fear factor of war, fear of refinery or drilling accidents and failures and even fear of "running out", fear of currency collapse (making the oil worth more because currency is worth less, i.e., inflation)etc.
The above makes for a considerable range. In the recent past we have seen a range of roughly $20 to roughly $150. Have we left anything out? Ohhhh, that's right, as unpopular as the word is here on TOD we do have to count in those rowdy speculators! Notice that in the above calculation we have not had to resort to that old bugbear of real supply and demand yet! Surely it must have an effect?
Supply and demand does have an effect, but only after all the other factors have applied, unless we are in oil up to our eyebrows or down at near critically low level on production or oil in storage. At either of these extremes, or the perception that they may exist, supply and demand can then begin to overtake the other fear factors and in fact fuel them to even wider swings. It is amazing the power a few published graphs in souping up panic or euphoria, depending on their nature.
Now we are beginning to get a "sane" outlook for oil prices. The problem is of course that short term events or perceptions of events can drive swings wildly to one side or the other of the "sane price" in the short haul, making short term projection very difficult and easily manipulated by the media and by the large traders who can hurl massive amounts of money into and out of the oil market.
We know, even here at TOD, that the world is not "running out" of oil this year. Or next year, or the next year after that, in fact we can safely assume there will be oil 5 years from now. Fortunes can be made and lost in 5 years.
An old joke: The man asks the woman if she would go to bed with him for a million dollars and she says "I would have to think about it, but I probably would"...he then asks her "would you go to bed with me for $100?", and she says "what kind of a woman do you think I am!" Punchline: "We've already established that, now we are just arguing about the price." With oil, we are not arguing about it's existence, but simply about it's price.
If we take the top and bottom "fear and euphoria" price out by discounting the risks at the margins, we are arguing about how wide those discounted margins would be. How wide should they be, and is there a mathematical way to predict this?
It is very hard to do, because we are discounting risk factors that cannot be easily predicted. A coup in Saudi Arabia would of course exceed normal risk factors, while an assured North Sea sized find of easily extracted oil would exceed risk factors to the other side. Good news and bad news both pose a risk to the investor/speculator, and the variables become quickly unmanagable. What effect would a dollar collapse have? What about a full blown Sunni/Shi'ite civil war in southern Iraq as the American forces try to leave? These are real world forces that are possible in occurance but almost impossible to predict, and there is virtually no way to time them. They could happen in only a matter of weeks, or never.
We can discount the liklihood of finding a new easily drilled North Sea, or of "running out" of oil, but beside that all bets are just that, bets. This is why oil speculation is still a risky game for all but the big professionals, and is not risk free even for them.
If we take an arbitrary figure of some 20% discounted between the all time historic ranges, you should end up with a number somewhere between just below $30 on the bottom side and just below $130 on the high side. If the move begins to occur out to those extremes, you will have some warning if you are alert (but not much) and that is IF you are alert. Most people are not, so you will still be in the advance guard IF you have the nerve to act on what you know. Most people do not. So that is two big IF's on top of all the other risk.
Of course you can hedge: If you decide to buy a new car, have the money to pay for the fuel for the expected life of the car (at your high end expected price as discussed above) already sitting in a CD at the credit union. Don't laugh, I have known old guys who planned in just such a fashion. if the worst never happened, they still had the cash plus interest. Or have some dividend paying stock in the energy industry paying for the fuel you use. If the price of oil goes up, the stock and divident holds or rises to cover the added expense of the fuel you purchase. It is really not that hard to hedge and you don't have to deal with the sludge that is the "hedge fund" firms to do it. the key is actually being able to afford what you buy. It's radical, but it can be done.
So, how much is oil going to be by Christmas? Better question: who the f**k cares. If need be, someone translate the prior sentence for our European friends. Thanks.
RC
RC wrote;
Perhaps the commenter could offer the readers his thoughts on why oil prices collapsed?
It could be interesting if RC could elaborate about all the benefits from a highly volatile oil price before he returns to the trees.
I'm sorry I was not clearer in what I wrote, I had thought my reasons for the oil price to collapse from the the high were implied in the post: You can only pile one fear on top of another for so long before they start tripping over each other, or you have simply run out of plausable reasons to fear a higher price, and even the one you have does not add up, thus, a drop. The sellers of fear ran out of anything to sell.
Volatile oil price good or bad? Depends on which side of the trade your on. For the people who make the market in oil and the speculators who hope to win, volatility is their life blood. For the small consumer it probably isn't worth much, except to propel serious thoughts of an alternative, either in lifestyle or technology. Volatility is not good or bad in todays world with the high speed internet and floods of hedge fund money moving about, volatility just is, like the wind or the air. We all just have to learn to deal with it by hedging in a truly effective ways.
RC
"Volatile oil price good or bad?"
Chaos Theory says that there is a region of instability between one stable state and another.
The climate will become volitile due to CO2.
When a stock market collapses there is a period of instability.
I see Volatility as a symptom of change to another state.
I disagree. I see volatility as an advantage to short-term traders and speculators, therefore it will be induced by every means possibly by them. I'd guess we're only seing the beginning of their experiments with methods to induce it everywhere we turn. Long-term price stability is unprofitable for those who gain by making bets.
This must be the statement of the year.
Last time I checked the consumer group referred to is the largest.
What about Prof Hamilton's Study?
Supply/Demand, market inelasticity and some speculation?
Causes and Consequences of the Oil Shock of 2007–08 by Prof Hamilton
Oil inventory may have dropped just because oil prices were high, not because of of a lack of supply. This is the reason why you don't see a whole lot full of Ferraris at dealerships, they are just too expensive to keep in inventory!!!
My supply demand spreadsheet (calibrated from the previous year) estimated that the price of oil last year should have averaged around $90 per barrel, much lower than the peak of $147/bbl. When I dummied down supply such that the elasticity of demand would have been correlated with $147/bbl, 2.5 million barrles per day of crude oil would have to have disappeared from the crude oil supply, this is separate from the 3.5 million barrel per day of assumed depletion and new oil fields estimated to come on line from the Megaproject data base, and it ignores the additional crude oil which would have come on line from the old depleted oil fields that were then economic to start up again. I did not find any evidence of a large increase in depletion like that, did you? Also, others who conducted similar analyses (Skrebowski, Erickson) showed similar price behavior.
The real smoking gun for me is that was trying to figure out why the price of crude oil was going up and down during the beginning half of 2008, and it seemed always correlated to the value of the dollar. Most all commodities increase in value as well lockstep with the declining dollar. On the other hand, when Nigeria's oil supply decreased because of a rebel attack, the price of oil did not respond to such incidents, and in some cases, the price of oil went down if the dollar strengthened in value.
All this strongly suggests (greater then 90% certaintly in my mind) that the run up in crude oil prices in 2008 was almost all due to speculators investing in oil as a hedge against the falling dollar. We are seeing similar behavior again this year.
Now, I do admit that there was an oil supply issue in the background which is why my spreadsheet was estimating that the price of oil should have been $90 per barrel. It is just that I am convinced that the very fast run up in oil prices last year was not a supply shortfall driven artifact.
Retsel
How does your supply demand spreadsheet factor in the lack of OPEC spare capacity when such a state had never occurred until 2005-2008?
My spreadsheet works by using 2006 crude oil supply as the base year. It assumes that we were at maximum crude oil production capacity with respect to the existing oil fields. I then subtract the crude oil production loss due to depletion for each year thereafter (for 2008, the number I used 4 million bbl/day), and add new crude oil production from the Megaprojects data base. Thus, my spreadsheet assumes what you asked about, that OPEC (as well any anyone else) does not have spare capacity from their existing oil fields (thus, the spreadsheet is conservative because of this).
Retsel
I'd not use the MegaProjects as the basis for real oil flows.
You can try and read up on the project and see if its actual flow gets published in any given year.
Unless you do the work to verify the capacity projections in the Megaprojects with real flows I'd suspect your spreadsheet is erroneous.
I disagree that its conservative I suspect you will find its wildly optimistic using projected nameplate capacity.
You may be right that my analysis may be optimistic with respect to the Megaproject Database (both startup dates and prodution levels). To shed more light on my analysis, I also assume that larger oil fields (>200 kbbl/day) come up to full production over three years, middle sized oil fields (100 to 200 kbbl/day) come up to full production over 2 years, and smaller oil fields (<100 kbbl/day) come up to full production in the year of startup). For deepwater oil fields, I assume that they only produce at peak oil production for 5 years and then decline at 18% yer year. What do you think about these assumptions and do you have a recommendation on how to adjust the numbers lower? What do you do? I vaguely recall that someone assessed the crude oil production levels of Megaproject Database crude oil production after the fact (Skrebowski maybe?), so if I am remembering that right, I could look back at that analysis.
Also, I would need to account for the new smaller crude oil production projects which don't make it on the megaproject list, as well as a price elasticity of supply for the remaining crude oil in depleted oil fields. Right now (by default) my analysis essentially assumes that the shortfall in the Megaproject Database crude oil production is offset by the smaller fields and increased production from older fields with higher crude oil price.
I wonder if Erickson and Skrebowski go this extra step and account for all that (if so, then my inherent assumption is not far off as my analysis seems to mirror theirs)?
Retsel
Thats sound about right the problem is the start dates. And peak flows are really capacity.
So you can be off by 1-2 years on a start date and even as high as 50% on the flow rate.
Some of the claims are highly suspect KSA, Russia and even Brazil.
If you want to use that data you have to check its performance its existed long enough that we can
see if any of the early prediction even came close to meeting reality.
I did look into this a bit but once a project come online getting actual data seems impossible.
We seem to be able to fairly consistently add about 4mbd every year of new production how long
this lasts is unknown. This is probably fairly consistent with our underlying decline rate which
is probably higher thant the 3% often used.
Put it this way production has remained fairly flat therefore new production and decline have been fairly well matched. That does not give you much more than what I just posted i.e about 4mbd of new production a decline rate of around 5% or so.
My experience has been that attempting to use published new capacity never works. To many unknowns. You can do a fair job of figuring out real new production by figuring out the underlying decline rate.
As a scientist the first thing I'd say you need to do is verify that the data your proposing to use in your model actually means what you think it means. Even a cursory look at past production history and new production claims indicates the two are not in sync.
And of course the decline rate is probably accelerating and if I'm right rapidly without a good handle on decline rate your approach is doomed :)
Obviously barring bringing online massive new fields its the decline rate that matters since historical production indicates new additions have at best managed to halt overall decline at least to date.
Obviously I just treat new annual real production capacity as a constant of about 4mbd, works quite well.
Concerning figure 5, IEA Oil Demand and Supply vs. Oil Price, the right hand scale ranging from 80 Mb/d to 88 Mb/d indicates that you have plotted total liquid fuels, not oil and not crude oil. Total liquid fuels includes crude oil & condensates, liquefied natural gas, ethanol and other biofuels. The blue curve, total supply, may also include sour crude oil, which is part of Saudi Arabia's reserves, that either no one wanted to buy or for which there was insufficient refining capacity in 2008. Your comparison of total supply and demand for liquid fuels to the price of Brent crude is invalid.
You are right these are all liquid energy. If I have had the data set for crude and condensate I would have put them in.
In what way is my comparison invalid?
Data for supply and demand are the estimates as presented by IEA, and the actual price movements for oil is hard to argue.
To be meaningful comparisons must be between like things. Total liquids reported by the EIA and IEA is meaningless because it adds by volume different types of fuels with different enthalpies of combustion. In the case of ethanol with a low ERoEI there is significant double counting of fuel since both crude oil and natural gas are used in its manufacture. The supply and demand curves for liquid fuels are thus distorted.
Rembrandt Koppelaar provides graphs of crude oil production and energy content of liquid fuels production in The Oilwatch Monthly. The price of crude oil in the free market is essentially determined by the amount of crude oil available for export and the price of the marginal barrel, not the total global production. Many of the oil producers subsidize their domestic oil consumption which is not reflected in the Brent, NYMEX or WTI prices. As Rembrandt explains on page 13 there is not enough data to accurately determine the amount of exported crude oil making it difficult to determine how supply and demand translate into the price paid by importers. Chart 49, World Liquids Exports Estimate Jan. 2002 - March 2009, shows global liquid exports to be essentially constant since 2004 because the data has an error margin of about 1 Mb/d. It also shows exports declining while the price skyrocketed during the first half of 2008. Unfortunately this data still contains distortions limiting its usefulness in understanding the relationships among supply, demand and price for crude oil.
I do not think that IEA and EIA data are perfect, but as of now these are the data most relate to and being loyal to them gives anyone a chance to establish a platform related to the same datasets. This does not necessarily mean all will arrive to the same conclusion.
No doubt that comparing apples versus apples is preferred, if such data is available.
Given the unceartinties in the data, question is what signals is it the market shall make their evalutions from?
If these producers were not subsidizing their domestic oil consumption, prices will have gone higher and reduced demand/consumption making more oil available for export. That would have an price impact following your reasoning.
Yes, and I am saying that their evaluations are made from the supply of and demand for crude oil traded in the market which is a subset of global crude oil production and global liquid fuel production. Trying to make sense of market prices by looking at global liquid fuel production will lead to incorrect conclusions. It is entirely possible for global liquid fuel production to rise, domestic consumption to increase and the supply to the export market to diminish causing the market price to rise.
There is no guarantee domestic consumption in oil exporting countries would decrease because more money flows into those countries when the price rises. That oil money could be spent on energy intensive projects, such as construction, that could cause consumption to continue rising. The premise of Export Land Model is still valid in the absence of subsidies. A low price for oil or geopolitical factors decrease demand in oil exporting countries by weakening their economies.
I do not think that i have tried to make sense of prices just by presenting the supply side of all liquid energy.
I think I have spent more space on describing (on this and previous posts) actual demand/consumption and also documented movements in petroleum stocks.
Stocks may serve as an good indicator of how the market is supplied or the balance of demand and supplies.
If a commodity is heavily subsidized its consumption goes up. Remove the subsidies and consumption decreases. China is now changing their subsidies for petroleum products.
There is also a question not of how high or low oil will go but how low or high the US $ will go. I could quickly name twenty or so items that one could purchase for 5 cents during my youth, including an ice cream cone. Then there was the penny post card that actually cost one penny, including the stamp. I am having difficulty getting a handle of certitude on the current inflation/deflation debate or the various international currency debates.
Rune - thanks for interesting thoughts and really great charts. A couple of points:
Do you actually understand the mechanism by which swaps behave counter to intuition? If so can you explain it in simple terms? I wonder if a correlation has been seen and causation assumed.
Does Figure 5 not explain everything - if one allows a time lag for the market to catch up with reality. The chart shows demand projected to rise later this year, with supply falling and looking like it will cross the demand curve 1Q 09, does a recovery in price not flow from that?
That said, I do believe the oil price will shortly meet significant resistance, but I believe that middle term we will see $80 average annual prices since I also believe that market mechanisms will ensure future supplies, albeit in a volatile environment. The 2008 average was $97. $30 by Christmas will see oil cos shelving projects in their budget planning exercise this Fall leading to a near term supply crisis.
Euan thanks, and this is heavy stuff, and short answer is no.
The reason is that this is opaque and it is hard for an outsider to get information about the nature of these swaps.
Some of these things seems to be counterintuitive, a large sell off of futures should result in a downward pressure on price, while actually the opposite seems to happen.
As you point out normally it should be expected to be a time lag between physical changes in demand/supply and the price. A time lag of around 6 months does not seem to reflect an efficient market as sometimes press releases about movements in (oil) stocks seems to swing sentiment.
It remains to be seen how much further supplies will drop and thus the size of the gap between supplies and estimated demand, referring to 2Q 09 and 3Q 09.
It looks like IEA has discounted increased (global) economic activity as from 3Q 09, if this does not happen it would suggest a “looser” oil market.
I think both consumers and producers would prefer more predictable and “fair” oil prices.
No doubt that a (too) low oil price somewhere down the road will be the seeds for increased future price volatility.
Rune states:
Consumers do not immediately react to higher gasoline prices for a couple of reasons.
First off, some of their responses take time to execute. For example, they can change jobs, cancel trips, buy a more fuel efficient car, organize a car pool, or get permission to work from home some days of the week. Purchase of a more efficient car might be delayed by the need to pay off the current car or to save for a down payment.
Second, why change your lifestyle until you are sure the price change is permanent. The lifestyle changes have costs of their own. Why change jobs or move if you aren't sure it is necessary? There are risks involved in changing jobs.
I think the market is more efficient than it looks. A price increase to $100 per barrel wasn't enough to make people change fast enough to dampen demand. So the price went even higher. Eventually the price got so high that it accelerated decision making by energy consumers. Demand dropped.
I doubt it. OPEC has restricted production with the intent of raising the price of crude oil to about $70 / barrel which leaves spare capacity. Because the rest of the world is mostly producing at their maximum rate, a unified OPEC is a swing producer. OPEC has a fresh memory of the price undershooting after it spiked at ~$147 / barrel last July. OPEC will increase production as necessary to prevent the price from rising too high until they are no longer able to produce enough to meet demand.
Exactly right. This is the kind of factor that so many people seem to overlook (with no implication that any particular person in the current discussion has done so). As long as the oil market has at least one entity (OPEC) that can individually influence prices by a significant amount and is willing to do so, then predictions about the price of oil are, in effect, political predictions.
To me, the real question is how long will it take us to eat up the slack between world production capacity and consumption. The number I've seen mentioned most often says we currently have about 6.5mb/d of "excess" capacity worldwide. Combine a recovery with a global production peak, and we could be back to virtually zero excess capacity, and therefore OPEC's control reduced purely to upside price moves, in a year or two.
The next few years will be a lot of things, but "dull" ain't on the list.
So true lou. And it should be obvious that as the oil exporters continue their declines the KSA will be able to exert greater control over the supply/demand balance. And that might not be a bad thing. Assume that at some time over the next few years Saudi has absolute control over the market: they can drive prices to $20/bbl by opening wide up or push it to $150/bb by shutting in production. No predicting exactly how they'll handle their stewardship but we've just witnessed in the last year what volatility has done to their planning as well as the global economy. Not a scenario the KSA would care to see repeated IMO. So let’s assume the KSA, in their great financial wisdom, see $70/bbl as a price that provides economic growth (or at least stability) for the world economy while also allowing them the cash flow they need to continue BAU.
In the end, though, politics will drive their policies. And IMO predicting future political worlds is much more difficult then predicting the price of oil at anyone point in time.
Although, if SA was already pumping all it could and then some from storage at $147, it is possible that their true spare capacity is already less than the 3-6 mpd variously quoted. If the gloomier forecasts of 3% annual global decline starting last year are also true, then OPEC could run out of spare capacity in a lot less than two years. SA is not offering to open the taps for anything less than $100 oil, which must be music to the ears of speculators, so they clearly want to rest their wells for every barrel they can leave in the ground.
I think oil might be at $30 by year's end, but it is just as likely to get their via $120.
They said $50 was fine considering the state of the economy in March. Now they're talking $100. Green shots?
But look at what they actually did: according to Oil Movements, OPEC (minus Angola, Ecuador) increased shipments by 580 kbpd between early May (before Brent broke out from its range around $50) and early June.
While it's possible that these variations are due to supply-side issues I guess, it also looks like the price has already overshot their effective target.
As I frequently remind everyone, "Peaks Happen," even in the best of circumstances, e.g., the prior swing producer, Texas. In fact, some have argued that Saudi Arabia was to 2005 as Texas was to 1972. In any case, my bet is that Saudi Arabia will probably never again exceed their 2005 C+C annual rate of 9.6 mbpd (EIA), although it is of course a possibility.
However, I think that it is extremely unlikely that they will ever exceed their 2005 total liquids annual net export rate of 9.1 mbpd. Here are the past four years of net export data for Saudi Arabia (EIA):
2005: 9.1 mbpd
2006: 8.6
2007: 8.0
2008: 8.4
If nothing else, consider their recent increase in consumption (EIA):
Saudi Arabia can play swing producer now because demand is down. But once demand recovers Saudi's ability to prevent another price surge is pretty limited. Declines by other producers will make surplus capacity of today into needed capacity of a year or two from now.
OPEC may have great influence on supplies.
Demand also matters.
Yesterday EIA published weekly data on (amongst a lot of other things) gasoline stocks.
Gasoline stocks built 3,4 Mb.
This has made someone suggest that this is a sign of slowing demand and recently media reported Rising gas prices hit drivers nationwide.
Petroleum products needs to remain affordable, if not demand will be affected.
The diagram also illustrates that US total petroleum consumption continues to decline.
The following graph shows gasoline consumption rising, even though total petroleum is declining, does this indicate someone(China) is using diesel and the gasoline is going to US?
Figure 06: The chart above shows how the present contango continues to flatten.
Sorry, it looks like May and June contango curves are identical, what was March and April?
It looks like gasoline consumption has dropped below long term trend by 8-9%, surely those who reduced consumption at $4 a gallon are not going to reduce further at $3/gallon or even $4 a gallon. For the 140 Million working paying $4 /gallon is cheaper than not going to work. Is there any evidence that $4 a gallon causes demand destruction or was it the subprime banking and stock -market decline that destroyed demand? Stock markets are still up a long way above lows. The Baltic dry index is way up off lows showing that at least China is expanding ( and using more oil?).
The EIA always thinks price rises are due to speculators, the link you gave ended with"So if an ‘it’s only fundamentals’ argument strains credibility, so too does the idea of a single ‘speculative’ smoking gun underpinning higher prices,
you seem to be disagreeing and saying the price rise to $70 is due mainly to speculation!
The following graph shows gasoline consumption rising, even though total petroleum is declining, does this indicate someone(China) is using diesel and the gasoline is going to US?
In the US there is a diesel (distillate build), but I have no data showing a (if any) redistribution of gasoline between the US and China.
The contango is slightly down (June data compared to May).
Obviously there are several factors that will affect households decisions or change of spendings like interest rates, job status (job or no job), food prices, savings available credit etc..
What the diagram shows is that at some price level consumption will be affected, and for the US this seemed to happen as gasoline prices reached an annual average of $2,60/gal.
I wrote;
And yes I think that presently the market has been affected by speculation, to what degree is hard to tell.
Here are two charts I've made recently examining US consumption:
VMT both rural and urban vs. gasoline supplied:
Domestic airline passenger emplanements vs. jet fuel supplied:
Visible correlation shows in both, no big surprise.
US exports of diesel to the Netherlands are on the rise. Based on March volumes China is actually ranked 6th as an importer of product from the US, lower than Chile.
Actually, a lot of things or anything can happen before New Year’s Eve! It's the year of the wild speculations...and anyone's guess !
Hmm.. I don't think oil prices will go back down to $30/bl.
http://edition.cnn.com/2009/BUSINESS/04/28/china.consumer/index.html
Car sales in China exceeded U.S auto sales in the 1st quarter of 2009.
How much does an additional 1 million cars in China add to consumption?
Assuming one car on average uses 1 000 liter (approximately 260 gallons) of fuel a year translates into added consumption of approximately 17 000 b/d.
With all due respect Rune, the Chinese economy is ticking over (albeit on life support like everywhere else). Although their exports production has caved in, they have done a reasonable job to promote domestic consumption and production.
http://news.bbc.co.uk/2/hi/business/8106314.stm
It could be that Chinese oil demand now is driving oil prices, but I would prefer to see some hard data on that.
I am surprised that the whole analysis does not mention asia, and only the last couple of comments mention asia
in rough numbers, asia has 3.5 billion people and uses 22MBD
north america has 350M and uses 22MBD
asian demand growth has not slowed down
lest say there is 300M barrels excess supply (above average levels) now in stockpiles.
this could be used up in a matter of months if demand goes up one and supply goes down one
again, the three fundamental factors driving price
- dollar decline
- asian demand
- flat/declining supply
the real thing you need to keep an eye on is the oil/gold ratio. this gets very interesting
Polytropos wrote;
All data below are based upon data from BP Statistical Review 2009.
Last time I checked Japan (world’s 3rd largest oil consumer) and South Korea was members of OECD (in addition to Australia and New Zealand if we include the Pacific basin).
From 2007 to 2008 oil consumption in China and India increased with approximately 0,4 Mb/d and for Japan and South Korea it shrank with approximately 0,3 Mb/d.
For Asia and Pacific oil consumption grew with 0,062 Mb/d or 0,2 % from 2007 to 2008.
So much for the impact from demand growth in Asia and Pacific.
More recent data (meaning as of YTD 2009 for Asia is hard to come by), but the development from 2007 to 2008 shows that Asia is miles away from soaking up the declining US petroleum consumption.
Stock building is part of the demand. Could you please be more specific about what your initial conditions for your scenario.
Here's an extract of Table 2 from the latest IEA OMR Public PDF (new public edition out next week).
It is clear that according to the IEA, Asian consumption growth has gone into reverse in 2009. Only Africa and the Middle East are up in 2009 versus 2008
Undertow,
Thank you.
Short version is that;
IEA in their Oil Market Report for May 2009 forecast OECD demand to be down 2,34 Mb/d for all 2009 relative to all 2008.
For Non OECD IEA forecast demand to be down 0,13 Mb/d in all 2009 relative to all 2008.
The whole speculation argument (at least as expressed through futures/swaps) is lost on me. For every contract/swap bought a contract/swap is sold. the NET value is always zero.
Very similar to the whole "we lost billions on CDS" nonsense.
WeekendPeak
What causes high oil prices? Over the short term: 1. Falling inventories (demand greater than supply); and 2. Falling OPEC spare capacity. Over the longer term: 3. Increases in the required price to bring on marginal production.
In regard to these factors, the oil market is forward looking. Why is this important?
The second quarter of each year (between winter heating and summer driving seasons) is the period when oil demand is weakest. In the second quarter, oil inventories almost always increase and OPEC has the highest spare capacity. If you perform an analysis of the oil market in the second quarter of any year it will look bearish. You have to look through the short term data to see that the market is pricing in the seasonal demand pick up from current second quarter 2009 82.87 million barrels per day to the fourth quarter 2009 84.73 million barrels per day (EIA data). This will cause inventories to fall.
Longer term, the required price for marginal oil production now appears to be firmly above $60 per barrel.
Speculation has been proven empirically to have minimal impact on oil prices. It is often used as a convenient scapegoat by those (OPEC ministers etc.) trying to deflect attention from true underlying fundamentals.
Looking at Q207 and Q208 and judging by the price the market was anything but bearish.
Both EIA and IEA publishes estimates for quarterly demand, so it remains to be seen how supplies has developed for the remaining quarters of 2009.
As of now it looks like many economies are struggling and this will affect demand. Then we have the demonstrations in Iran that could develop into something more serious.
There is some divergent opinions about the influence from speculation on oil prices.
Given that oil prices also are GDP constrained there will be a limit to what oil price growth an economy can absorb and still grow.
Sustainable growth in oil prices seems to be related to real growth in the economy.
Thanks for the comment and link to the presentation.
It seems to me that the linked presentation is based on studies completed by June 2006.
ETF’s (Exchange Traded Fund) methodology was constructed in 2006. In April 2006 ETF’s started flowing into the market and had as of July 2008 grown to around $6bn.
Regarding this point:
"For every contract/swap bought a contract/swap is sold. the NET value is always zero."
But, isn't that also true for anything traded, e.g. stocks. For every share bought, a share is sold. Yet stocks clearly fluctuate hugely based on market sentiment.
Sentiment can affect certain financial instruments - particularly those without physcial underpinnings. Sentiment in the oil market is limited because oil cannot be printed and storing oil costs a lot of money. So, bullish/bearish sentiment in oil markets is severely outweighted by fundamental physical supply and demand.
Stocks/Bonds are fundamentally different from derivatives such as swaps, futures and options and CDS.
Stocks/Bonds (some of the instruments which make up the capital structure of a company) are issued by the company who receives the proceeds (the initial offering) and, say uses it to make widgets.
In the secondary market there are several ways to value the stocks and bonds, and a common way to value them is the Net Present Value (NPV) of thte future expected cashflows. As the economic prospects change the value of the stocks/bonds will fluctuate. Obviously there is an overlay of specific supply/demand for the stocks/bonds which can cause swings in valuation, but the point is that there is a fundamental, though arguable, value to the company.
Derivatives are contracts which reference the value of an underlying asset, but there is no "primary market / initial offering" for them. In essence all derivatives are secondary market transactions.
If the company that originally issued the capital instruments stops being a going concern the assets are sold, the liabilities (the bonds) are paid off, and whatever cash is left over goes to the share holders.
For derivatives there is no such thing. The only thing that happens is that the two parties who agreed to buy/sell a derivative reverse the transaction and are now both out of the transaction. The underlying asset value is not affected. Only if you have a participant who has the ability to have positions in the underlying asset you can have a spill-over effect between the time the financial instrument is unwound and the underlying assets is exchanged, and that is the reason why in futures trading there are separate limits for the so called "hedgers" (participants with the ability to trade the underlying asset) and "speculators" (who cannot trade the underlying asset).
Hope that helps,
WeekendPeak
robert wilson said:
"I am having difficulty getting a handle of certitude on the current inflation/deflation debate or the various international currency debates."
Short term I feel the same way, but long-term I believe inflation is a slam dunk.
The ability to print fiat money out of thin air I believe trumps everything in the long-term.
The only restraint on the Fed not to print money with abandon will be when price inflation shows up, at which time the Fed will feel pressure to tighten monetary policy since one of its supposed mandates is to keep inflation in check.
However, the economy will still be in dire shape, and tightening monetary policy would mean interest rates would shoot up, which would cause a second and perhaps even bigger downturn in the housing market.
I don't believe such a policy would be viable politically. Hence, the Fed will maintain a loose monetary policy even in the face of major price inflation.
I doubt we are headed to Zimbabwe type conditions, but I do believe the dollar will lose about half its value in the next 5 years.
If the economy also remains in recession during that time, which I believe it will, wages will not be going up during that time.
Consequently, inflation combined with recession will lead to about a 50% drop in the real incomes of people in the developed world.
Ironically, that 50% drop in the standard of living may be the solution to the fact that we have been living way beyond our means.
Once we have experienced this unintentional "downsizing" of the economy, we would probably be in a position to pursue a sustainable future from that base, although more likely we will instead pursue more booms and busts.
The author mentioned:
However it is worth noting that the USO purchasing power has been diminishing steadily due to the contango in the oil market, this contango was sharpest earlier in the year, thus forcing USO to buy less contracts with each rollover.
Regards,
Nawar
Yes,
You are right about USO losing a number of contracts due to the effect from the rollover.
The number of contracts did however not decline by 50 % in 2-3 months due to only rollovers.
-Rune
I musr admit that I have a hard time following the technical arguments made by he variuos commentators who are seriously into the oil markets.They are probably communicating just fine with each other.Probably ninety percent of the regulars here are in the same boat-but the programmers among us could dazzle every body else with even a simple discussion of the programming,etc.
So far as I can see the net results of these technical discussions is thatjust about everybody admits that he may be wrong in part at least and that each commentator is pretty sure that he is smarter than the rest-although mostly that is left unsaid.
One thing that seems to work for me is "following the money" when I am trying to understand a market or a business.
At the consumer end-meaning ALL consumers-it seems to be perfectly obvious that prices can and often do rise faster than consumption falls off when business is good.Conversely oil prices may fall and do fall faster than consumption declines when business is bad.
This situation is a classic well known to the producers of food-namely farmers.The consumers of food know that variups food prices go up and down seasonally and in response to floods and droughts and so forth,but the magnitude of the WHOLESALE PRICE SWINGS are usually hidden from the consumer because the "wholesale" food price is the farm price.The farm price is only a small part of the retail price,so the consumer is not as a rule affected nearly so dramatically as the farmer.
It is not unusual for the wholesale price of apples to drop to eight or ten cents a pound-at which point the orchardist simply lets his crop rot in the field.This must correspond very well to the an oil producer "shutting in" his well at a certain per barrell price.
Both oil wells and apple trees require long lead times to be brought into production,and it's easy to see how prices can rise fast when demand grows beyond capacity.
Conversely if there is a widespread drought in one area and a late frost in another area,the wholesale price of apples might shoot up to sixty cents a pound.In either case the price at the supermarket does not change in nearly so dramatic a fashion.When farmers are letting apples rot at eight or ten cents supermarket apples are still near a dollar.When apples are at sixty cents on the farm,they are seldom over two dollars at the supermarket.The wholesale price varies by a factor of ten or twelve sometimes(apples already harvested and boxed HAVE to be sold)from as low as a nickel to as high as sixty cents.The retail price varies by a factor of two or three at most.
When markets and prices behave this way,the market is described as inelastic by economists.
Now I can find out pretty fast just who collects what part of the shoppers apple dollar by making a few phone calls any month or any year.A farmer can sell ahead on the futures market and buy a delivery contract and lock in his price for next falls corn or next springs wheat. Nobody may know exactly where the money is at any given minute,but who got over on who is not hard to figure out a few months later.
The oil markets seem to work NEARLY the same way as the farm commodity markets,but no one(except the biggest players maybe) knows WHAT'S GOING ON.
Now what bothers me is this: WHY ARE THE OIL MARKETS SO OPAGUE? HOW has this situation come about?I am not asking why the traders like opague markets but rather why the oil producers simply don't contract thier output to refineries and the refineries to the retail chains and so forth?
It seems that unless the producers are in some way not obvious benefiting from all this volatility,they would insist on contracts.Ditto refiners and retailers.
And one more question almost to foolish to ask-Is there any hope that there will be more sunshine in the future?
A puzzled oldfarmer wants to know.
:) Good questions.
First and foremost the big difference between oil and other commodities is that the wholesale price makes up a larger precentage of the retail price so the volatility in the wholesale price is not well hidden. Its about 50% of the price for the finished product. Next refining costs are fairly fixed along with all the other downstream costs so the price variability is pretty much totally from the wholesale price. And again unlike other commodities its very much a just in time market. Your talking huge volumes moving on a daily basis with less than 60 days supply as a buffer if you count storage on land and ships at sea.
What kept the oil markets stable for many years was not this intrinsically volatile above ground market but spare capacity available throughout the world as demand changed if you have significant spare capacity then you simply open the taps and the oil flows. The real buffer for the oil markets was thus spare capacity.
Obviously everyone dancing around making strong predictions based on above ground oil movements is making implicit assumptions about spare capacity. In the end for oil thats all that matters.
Memmel
I always enjoy your comments - even if I don't always fully understand them (not the case here - crystal clear ;-)).
From other threads I infer that you and others (e.g. Rembrandt?) have serious doubts about numbers for OPEC spare capacity that are currently presented as gospel by the media.
In the short term and medium term this seems even more important than Matt Simmonds doubts about KSA reserves - and related widely held doubts about other OPEC reserves.
Given than non-OPEC production and reserves growth prospects are more transparent, and do not seem to be brilliant, this is very worrying.
Is there a need for a Joules Burn-like exercise to better understand OPEC spare capacity - or at least to probe it's soft underbelly? Enter Homer Simpson ...
- Colin Moorcraft
Well given it was difficult to get numbers in the past that where reliable we can assume that if any OPEC member is in decline previously poor numbers will become worse.
I can assure you that its not a coincidence that the "numbers" are subject to multiple interpretations.
The truth is some of the things presented as truths are lies if you want to know the truth you have no choice but to rejects one of the facts as a lie.
I happen to be comfortable excepting what Mr. Market says as the truth even if I don't always understand why the market moves in certain ways till after the fact.
The recent collapse of the oil prices turns out to be a huge signal if you understand it. Took me a bit to realize what happened and to be honest its left me a bit shaken once I realized what really happened.
Our society is a lot further gone then most people realize. The coup has already happened.
Could you be a bit more specific on the above?
That would take a book.
I'll try for the short version.
In general the world is entering a period of resource constraints primarily oil but water food etc are also big issues. This means of course the general populace is going to get poorer and if the wealthy continue to maintain and increase the amount of wealth they concentrate even poorer than the fundamentals predict.
The US has at least decided to bet on the wealthy and to ease the bet the consensus is technology will save us.
We believe we can play the above game and still win since technology will allow us to beat the underlying resource problem, this will not keep people from becoming poorer but ensure that the flow of wealth to the top remains robust and even expanding. As long as the flow of wealth remains then the US believe the populace will continue to be sheep. Things are a bit worse but people are still getting rich so I still have my chance.
This conclusion is based on a meta analysis of everything.
We are already post peak and the decision of what our society will do post peak has already been made. The sad thing of course is that if technology fails to deliver then all this means is that regular people suffer more.
Its a win win situation for the wealthy the only question is how much did they win ?
Memmel,
If I understand you correctly you are saying that oil price volatility is driven mostly or primarily by no more than uncertainty about suppliers capacity to deliver more oil on short notice.I can see how this could be so,since the traders seem to buy a hell of a lot NOW to sell LATER.Fear of and enthusiasm for rising prices can both drive real estate bubbles like a diesel locomotive.Some will buy to actually use because they fear higher prices later,and others will buy not to use but in the expectation of higher prices later.
Additional uncertainty is also obviously injected by the political machinations of various exporters,as nobody can be sure what they will or won't do.Obviously some of them are very suspicious of others,and all would probably like to cheat if they could on market quotas.
And of course there are the real unknowns-not just the state secrets of each country,known to at least the top engineers and beuracrats of each state,but the geological secrets unknown to any body-until holes are drilled every where there is any real likelihood of success.
The next thing that comes to mind is the theory of the marginal producer,which essentially says that as production is increased,the new producers in many or most caese can be expected to have higher expenses,and that the cost of production of the last truckload of apples,or the last oil well drilled,determines the price of everybodys apples and every bodys oil.Low cost producers can and do enjoy very high profits in this scenario.If a market really is a free market,the price is determined by the the high cost producers costs and the consumer.
The oil market is obviously not a free market.
it is easy to see why some producers will continue to sell even at prices below actual costs,if strapped for cash-maintainence and other expenses can often be deferred for months or maybe even years.
But none of this explains why oil is not sold on contract,which it appears would be very much in the interests of every body but the traders.
So why do the producers tolerate the traders?
Why do major buyers not offer a deal, perhaps at a premium,to producers and lock in thier supplies and costs?
Is trading oil a zero sum game,meaning that all winning trades are necessarily offset at some point by losing trades?This does not seem to be the case,but I'm not sure.
Well first and foremost its a traditional futures market. It allows producers and consumers to lock in prices and get a assured price. Given the volatility recently for better or worse.
The traders provide the liquidity that effectively covers the bets. Without the side bets then its not a futures market you need this excess cash betting on the outcome to "cover".
http://en.wikipedia.org/wiki/Futures_contract
On that note its my belief that this whole recent economic collapse was triggered by a potentially huge failure to deliver issue in the oil markets. The players taken out initially where targeted because of their positions in the oil markets. We probably won't know the truth for a long time why Lehman and Bear Sterns were taken out. But regardless of who the original loser was eventually Morgan Stanley and Goldman Sachs ended up in control of 100 million barrels of oil. Certainly things got a bit out of control but once the dust clears my assertion fits very well with the final outcome. Many other players in the oil market where roughed up over the second half of the year so it was a fairly widespread witch hunt and it continued even as the economic crisis unfolded.
But to get back on track most of the worlds oil is sold on contract like you suggest its just the prices of these contracts are themselves settled as prices derived from NYMEX, Brent or other related top exchanges.
Generally every barrel of oil is sold at a discount or premium to one of the benchmark grades.
The actual price is often fixed to the market at a certain date.
This is why I have a hard time believing the oil markets are easily manipulated for long since way to many real oil contracts are tied to the market prices. 100 million barrels of real oil will of course move the market so our recent price history from about June to March is and exceptional period. That happens once during the lifetime of the oil age. I understand that a similar build by traders back in 1993-1994 may have occurred but I don't know much about it. Eventually nothing happened so who knows what triggered it.
http://financialsense.com/editorials/navarro/2006/0409.html
Things where of course different back then so its not clear what applies and what does not. Generally I argue we have left any historical precedent in the dust its a new world.
Btw my own prediction for oil prices over the next few weeks is for them to hover in the 70-75 band for several weeks say 2-3 then break out and move into the 80-90 band. This is actually basically a pure technical move i.e the market has for some reason fixated on 70 as a "good" price for oil it tends to get stuck here.
However we might see fundamentals actually work for once and oil move smoothly through 80 over the next several weeks I'm not holding my breath its more a hope then a prediction. Thats what it should do which means it probaly won't the reason I'd like to see it move smoothly is if the market tries to stall the rise in oil prices out of conviction or internal dynamics or technicals whatever you want to call it it will simply induce a sharper increase later. My opinion is that at least for now a smooth rise in prices is preferable.
Until we get over 100 a barrel I don't see KSA shipping even if they can and it won't be till after we get past that that we will found out what spare capacity actually exists.
Can oil go the 30 by December sure but I'd argue if that happens then the US has a 40% unemployment rate and our financial system would again be on the brink of collapse so I'm not sure how useful it would be. It was not exactly useful the last time we tried that stunt. I tend to doubt we will play an more games for a bit. And the new oil bank set up by MS and GS will ensure that problems in the physical oil market can be dealt with. I'm pretty sure they will maintain control of at least 30-50 million barrels of oil if not more for the foreseeable future to ensure that for a price the markets have oil. This does not help the price of oil at all but it will prevent any sudden problems from occuring and exploding into the rest of the financial world.
Again if you look the only thing that was actually fixed following the recent financial problems was the worlds oil markets, traders will hold a lot more real oil for some time. Good news for stability but in general not good news for prices since its effectively hoarding and the formation of a hoard only happens when shortages are expected and you generally pay a premium to both obtain goods from a hoarder and because the hoarder is using his financial strength to take control of the original source.
What are the drivers in your analysis?
Tea leaves :)
Seriously I don't reduce the problem just roll it till its self consistent. How do generals win wars ?
First and foremost your being lied to. The underlying basis of peak oil is simple determining when depends on clarity of data. It should not be relegated to some blog on the internet.
1.) Subprime is contained
2.) The banking system is sound.
3.) Global Warming is not a problem.
4.) Green Shoots.
5.) The oil supply is not a problem.
6.) The ME claims are beyond reason.
Hopefully you see a pattern. If you wish to believe these people then you have already failed in doing any sort of reasonable anaylsis of the situation. Start from there read about how General win then put the data together and learn to spot the lies. They are there and some are so big it takes a bit to recognize them.
A HUGE lie is that production increased in 2008. Not only did not not happen it can't happen.
Figure out how I figured that out then you know my method. Your going to have to do it yourself its just something you have to work through its like giving the result of the proof without the proof the nature of the proof is more important than its conclusion. Debating the results without debating how the proof works is senseless. You have stated you believe the EIA etc well thats your first mistake. Your wrong right off the bat.
Don't believe them prove their data is sensible if its not then ...
The rest is up to you.
Did I any place state that I believed in your 6 numbered points?
I would rather say the opposite as I have for some time been aware more (financial) unwinding has to be done.
We know that data from some producers may be educated guess works, but so far I have found that EIA precisly reports what Norwegian, Danish and British governmental agencies reports.
There are a lot of people in the PO community that uses EIA/IEA data to explain there positions. If everyone were to construct data as they saw fit, the whole PO discussion would be hopeless.
You are the one claiming that production did not grow in 2008 (and you could very well be right), don't you think that you owe the TOD community the documentation or reasoning for this?
Look lets take a relevant theoretical example.
The King announces to his subjects that he will be doubling the chocolate ration.
This creates joy throughout the kingdom.
Next the king goes to his minister and orders him to half the chocolate ration and order that it
be shipped in twice as many trucks and delivered twice a day instead of once a day.
The news reports that chocolate deliveries have doubled !
The reason for the sharp price increase is of course nasty chocolate speculators in the market.
The King will work hard to ferret out these culprits.
And everyone was happy in the Kingdom.
Our world is not all that different form this Kingdom.
mac -- I'm not sure the producers have any choice but to tolerate the traders...at least some of them. Many producers don't cover theselves with futures directly. But I can cut a deal with a company to provided a "floor". The deal: I'm guarenteed a minimum price of $60/bbl. Anything over $60/bbl (or say $4.50/mcf) I get 40% and the trader gets 60% of the difference. I also pay the trader a few percent of the total value. As a producer I can now keep my banker happy by securing a very predictable cash flow. But this exposes the trader to a huge liability. He covers his liability by buying futures. How risk free his efforts depends on his greed factor. But in this scenario he actually has a contract for physical oil backing up his trade.
And don't ask me why some operators cover themselves this way. Being a geologist I overhear these deals but never get in deep enough to follow the details.
Oh, for the good old days when the seven sister ran the oil world from well head to gasoline pump. Those days are gone forever along with gun boat diplomacy.
Actually I believe in a world of increasing scarcity producers and actual consumers will revert to simpler long term contracts as was done in the past, for the sake of stability. Anybody agree?
Obvious differences between apples and crude oil present themselves; you don't run cars on apples, for one thing. Oh, alright, you can ferment some ethanol, smart guy.
Obviously if crude oil is comparable to a fruit crop the prospect of imminent decline in production would be the equivalent of some devastating macrophage affecting the crop. Consider what money could be made foreseeing the onset of chestnut blight or Dutch elm disease. This explains the opacity, I'd say. That and just good ol' fashioned state secrecy. Why hand out all that transparent data for your enemies to peruse?
In absence of solid data about production, demand and depletion rates
and having no idea how much money will be printed by governments everywhere in the immediate and intermediate future,
taking a wild guess about future unemployment rates, housing prices and growth rates,
the author has to rely on Elliot wave bullshit to support his oil pricing guesstimate.
The USO explanation supported by a 9 months chart is absolutely ridiculous...
The truth is demand and supply numbers are very close. Nobody knows the exact numbers and they could change quite quickly. We have a few mbd of spare capacity, mostly OPEC- again, nobody knows the exact numbers- it could be 3mbd, it could be 6mbd...Trouble is, when you cut production like OPEC did, you also cut budgets and that diminishes the spare capacity...you need money to maintain it even if you don't use it.
And there is depletion...again, no solid numbers...Ghawar's depletion rate?...only the Saudi King knows for sure...How long it would take for the lack of investment in maintaining spare capacity and for the depletion rates to make the spare capacity disappear?...one year?, two? four?...
And demand...many indicators started pointing up...inventories are fast depleting...check the new cars days_of_sales numbers...near 10 year lows...BDI pointing up...today's leading indicators pointing up...continuous claims improving...and the "stimulus" money didn't even kick-in yet...check the EIA oil report: gasoline consumption up 1.1% yoy; total product supplied down 6%, but it was down 7% last week and close to 8% two weeks ago...
We're walking a fine line here. Too many unknowns and too many variables to bet on a short term outcome with any degree of confidence….but I’d take Henry Groppe’s forecast rather then going with Elliot waves, candlesticks and Ichimoku clouds.
LOL
Its like a crime scene investigation lying witness corrupt police tainting the evidence the works :)
Believe no one trust nothing discover the real truth :)
This means I have to trust what the market is saying in the end its the judge, jury and executioner so dismiss it at your peril.
Now why it does certain things and when I feel like I've figured out who, what, when and why may be well after a the market made certain moves. But so far at least all the moves made by the market to date have eventually turned out to both be self consistent and consistent with a fast drop in world production and exports. The formation of a large hoard was only obvious after the fact of course. It makes sense in a shortage situation but when and how its created is certainly not predictable. You always have hoarding when entering shortages but I'd argue that when a hoard is actually going to form is really hard to predict. And given that the market said we really did not have any spare oil the formation of our current hoard took some doing.
However after all was said and done the formation of this hoard after a major price spike is the most compelling evidence that we are not only post peak but the real situation is deteriorating rapidly.
Memmel,
Thanks.I have had my "ah ha" moments for the last couple of days reading you.Your very last line above comment concerning hoarding after a price spike makes the little hairs on my mental crisis alarm stand up straight.One must assume that the hoarders are savvy businessmen,otherwise they wouldn't have the money to play.Who said originally "A fool and his money are soon parted"?
I believe I will lay in another tank of diesel.
Diesel stores pretty well.A lot better than electrons.
Somebody else above comments that chaos theory predicts a period of volatility become steady states in systems.The only likely new(more or less)steady state is obviuosly permanent high prices afaics.
Chaos theory is over my head.I can make some sense out of it,but probably only enough to draw some really bad conclusions.The older you get the faster you fall behind,no matter how hard you try to keep up with at least the freshman level basics.I've tried to read it,but without a teacher it's a tough subject.That comment somehow does seem to be correct from an intiutive view point.
I did worked in Chaos theory be careful about getting sucked into it. In the end its just pretty math because its not predictive real physics is a game of predicting the future if your mathematics does not lead to firm predictions then its a small tool in your toolbox. Chaos give you a "feel" but no firm answers.
As far as models go the Shock Model by WHT is the best.
However in my opinion we have a much bigger problem which is not the models but the data. The shock model uses discovery data which includes reserve expansion and the other popular one HL uses production data directly.
The problem is reserve expansion numbers reported by the industry is heavily influenced by current production numbers i.e they uses increase or stabalization of production levels to justify larger reserve values.
This is fine if production is only influenced by the reserve base but technology has progressed to the point that we can extract a given field 2-3 times faster than we could 30 years ago. This implies that our reserve estimates
are probably overstated by 2-3X regardless of what model you use because your inadvertently using technical progress in extraction as excess reserves. The faster we extract the more we have which is rubbish.
The problem is if you correct the URR estimates then you get and uncomfortable answer. We are not 50% depleted but more like 70-80% depleted in oil we can produce using our current methods in our current fields.
And I clarify because not all of the reserve increases are a simple result of better extraction technology some are obviously real like deepwater production and some large like the tar sands. But they are not replacements for our current land and shallow offshore production. Some is of course a bit of extra oil extracted via better methods but thats where things start getting fuzzy is it more or faster. Certainly no doubt about it faster more is very questionable.
luscar99,
What do you think are the driving forces behind the recent price spike in oil prices?
You are free to list the drivers and how these are related.
During the last 6-7 weeks oil prices has grown approximately $24/b or around 50 %.
Can you point to any other period in recent history that the oil prices had such a strong price growth?
Rune,
what about this one:
http://www.spectrumcommodities.com/education/commodity/charts/cl.html
Now, combine that with robry's consumption index signaling the start of the economic recovery:
http://robry825.blogspot.com/
"During the last 6-7 weeks oil prices has grown approximately $24/b or around 50 %.
Can you point to any other period in recent history that the oil prices had such a strong price growth?"
What about '99, and '05?
http://ngc891.blogdns.net/pub/pictures/oil-price.jpg
Thanks,
What does the chart you first linked to show? Average relative oil price movement through the year relative to the low?
Then the two last years oil price movements have broken the pattern, with highest price as annual consumption should be at its lowest.
I would expect to see several indexes moving in the same direction before I would conclude.
Diesel is also a good indicator for industrial activity.
Still I was referring to a 6-7 weeks period.
Yes, some years do break the pattern. And I believe the most important factor is spare capacity. Last year spare capacity was close to zero- everybody was pumping all they could and China was buying every spare barrel to prepare for the Olympics. The US dollar was going down and the "speculators" did their thing- speculate, that is...That's how we got to $147.
Talking about diesel, please note the trend in EIA data over the last few weeks. The yoy is still dismall, but the trend is clearly up.
About the 6-7 weeks...I think there are many things we've seen in the last year that we have never seen before...remember what the quants were saying last year- stuff that according to their mathematical models was supposed to happen once in a million years, happened 2 weeks in a row?...we never had 800k cars sold in a month in China, just happened in May 2009...
30 bucks oil huh?... the break-even prices for at least 1mbd of production from marginal wells in NA is about $45: http://www.bloomberg.com/apps/news?pid=20602099&sid=agZ4vkjbFVhE...it did go down to $37 but many could afford to pump at a loss for a few weeks...they had some money put aside from the good times...gone now...and very little credit available to patch over...if it goes down to under $45 again, they are going to shut them down in a matter of days...not gonna wait to see the price going to $30...
Hello luscar99,
And thank you for your contributions to the discussion.
Last year this time OECD consumption were literally falling off a cliff which is documented in figure 02 in my post.
Data from BP Statistical Review 2009 shows consumption growth in China and India did not fully soak up the consumption decline from OECD.
The IEA estimates shows a market where total supplies were running higher than estimated demand, ref figure 05 in my post.
The diagram above shows the development in US diesel consumption (green line) and prices from January 1st 2000 to June 15th 2009 (black line).
There is nothing in the EIA data (from This Week In Petroleum; TWIP) that supports your statement.
Below is a link to the weekly EIA data;
TWIP Distillate
Can you for the benefit for the other readers provide reference to your data source.
Could you please be a more specific of which “Black Swans” you refer to.
A net addition of 1 million cars (in China or elsewhere) would increase consumption and thus demand by approximately 20 000 bbl/d (ref. Also comments further up).
So far demand in OECD continues to drop. The macro economic fundamentals are still weak and will still (IMHO) weaken (a sustainable high oil price (i.e. above $70/bbl) will contribute to that) How far down it will come remains to be seen and also if this has an effect on other economies like the BRIC.
If oil prices move down to $30/bbl there is the distinct possibility (as you point out) that some of the global marginal production will be shut in (those who does not have the financial strength to weather such a downturn.
If the market is efficient it will set a price that balances supplies and demand.
From last 6 EIA reports:
06/17 Distillate fuel demand has averaged 3.5 million barrels per day over the last
four weeks, down by 8.9 percent from the same period last year.
06/10 Distillate fuel demand has averaged about 3.6 million barrels per day over the last four weeks, down by 8.4 percent from the same period last year.
06/03 Distillate fuel demand has averaged about 3.6 million barrels per day over the last four
weeks, down by 8.8 percent from the same period last year.
05/28 Distillate fuel demand has averaged about 3.6 million barrels per day over the
last four weeks, down by 9.9 percent from the same period last year.
05/20 Distillate fuel demand has averaged 3.5 million barrels per day over the last
four weeks, down by 12.0 percent from the same period last year.
05/13 Distillate fuel demand has averaged about 3.5 million barrels per day over the last four weeks, down by 14.1 percent from the same period last year.
Trend: -14.1%, -12.0%, -9.9%, -8.8%, -8.4%, -8.9%... I believe we just turned the corner and the next reports will confirm...Let's revisit this issue 6 weeks from now.
The trouble with "Black Swans" is one cannot foresee them...as such, I won't be able to be specific about...but I think modern inventory management techniques, large scale introduction of "just in time inventories", the advent of Internet and computers providing immediate global feedback...stuff that wasn't there in previous recessions...could make the recovery quicker then most people would expect...
The trend you describes is YOY and shows decline all the way and a slight decellaration of the decline.
The decline thus continues....and continues. A reversal of the trend would give a trend of growth in demand.
You wrote
From that it should be fairly easy for you to describe the "Black Swans" you had in mind.
Well, we will all know when a robust recovery is forming.
But the data is available, and production rates/reserves and new reserve finds for virtually all oil fields outside OPEC are available. We also know OPEC has inflated field reserves and that they are pumping significantly more water into their fields, and have have made statements that they are not happy with the current price of oil, meaning they are not happy with having to pump a lot of water into oil fields to keep flow rates high. The rate of production is clearly at maximum, or most likely has passed.
On the demand side, the number one economic engine in the world, China, along with India, continue to buy cars (which for the most part are not electric) at a rate which exceeds that of the United States (granted, US sales went off a bit of a cliff, but Y-O-Y sales of cars in China are way up), but with a car population that is far less than the US, meaning net number of cars on the road in China is rising rapidly. If the Chinese actually intend to drive them (and why else would they have bought them) that MUST mean that Chinese oil use is going to rise and that there will be increasing competition/conflict between China and the US (as well as Europe)to get access to the remaining oil in the Middle East and Russia. The Saudi Arabians and Iranians are also buying cars. In general, on the demand side, world population continues to increase.
China will also increasingly look to export coal from foreign countries, the US being a prime candidate, to fuel its economic engine.]
This analysis is mainly a synthesis of perhaps 100's of online and paper articles and documents I've read. They consist of oil field reserve and production analysis from peak oil websites, analysis and documents from oil companies themselves which release quarterly and annual reports (BP & Chevron), the IEA, EIA, USGS, the Economist, National Geographic, The New Internationalist, the Hirsch report, Global Trends 2025 by the National Intelligence Council, and surveying documents of areas where car sales are increasing.
The supply side is well known and is not significantly changeable (bar some renewable algae oil production, but it doesn't look like it will be able to produce any signicant quantities cheaply compared to just pumping 100's of millions of tons of ready made oil out of the ground), the demand side is. If oil use continues to increase now, the reserves will rapidly deplete. It is possible that there may be a sea change in oil consumption, and if there is a rapid collapse in oil demand, then that is the only way that the oil price could drop again, and that demand remains low when it does.
Otherwise supply will constrain demand, and I think that is the general trend now.
"... that they are pumping significantly more water into their fields..."
http://www.arabnews.com/?page=6§ion=0&article=116324&d=14&m=11&y=2008
Contrary to claims of peak oil theorists, water cut at the Ghawar field has fallen in recent years, Nasser said. “Water cut in Ghawar is 28 percent, whereas the industry norm for the water cut is 80 percent. This is exceptional. Ghawar is 50 years young.”
http://www.investorvillage.com/smbd.asp?mb=2234&mn=46954&pt=msg&mid=1580817
from your first link:
"We would not have put any increments into development if we did not have a minimum of a 30-year plateau. That is always our initial plan; we ensure a 30-year plateau and then we extend it as required.” Nasser said.
As per the ‘audit report’ compiled by Fatih and his team, Ghawar produced 5.1 million bpd of crude oil in 2007, down from a peak of 5.5 million bpd in 1980 (when the field’s capacity was fully utilized in response to the loss of Iranian production following the revolution.) and a recent peak of 5.3 million bpd in 1997. The observed post-peak decline rate is thus a mere 0.3 percent per year. Ghawar is still at the plateau phase of production, the report underlined — and this must get steam out of the peak oil bogey — one can’t help assuming.
--
so if the 'plateau' phase of production was designed to be ~30 years (with extension due to better technology, more drilling etc...) and the plateau began before the peak back around 1980 the expected 30 year plateau should be ending somewhere around now. An examination of this topic by Stuart Stanford (http://www.theoildrum.com/node/2470) suggested that the oil-water contact would reach the gas cap sometime over the next few years. Euan Mearns also, using independent methodology, produced an estimate of future production for Ghawar showing a drastic drop in production over the next 6 years (http://europe.theoildrum.com/node/2507).
AFAIK, no extra data has been released with significantly modifies the results of either methodology, and recent discussions (http://www.theoildrum.com/node/5432) seem to centre around the watering out of various sections of Ghawar. (perhaps someone else could comment on the continuing accuracy of these predictions, this is definitely not my area of expertise ?)
One cannot guage prices based on storage levels.
Last summer, we had multi-decade lows in gasoline inventory. A CAT 3-ish hurricane (Gustav/Ike) hit some KEY refineries on a Sunday knocking out more supply of gasoline. Folks had to wait in line to buy gas.
Did the longs in the futures market catch a windfall??? Nope. Instead they lost more money than EVER, as the price COLLAPSED.
Its a FUTURES market. There's a reason they don't call it a PRESENT market.
I've traded/hedged ag commodities forever. Its perfectly normal for a massive bull market to hit when stocks are at the extreme HIGH end, and its highly common for prices to COLLAPSE when the inventories are close to zero.
That's why they call it a "Futures" market. You may be right about $30 oil by years end. Whether it goes to $30, or to $300, the discussion of inventory has little to do with it.
I don not think I tried to correlate stock levels and prices, but stock movements and supply situation.
For stocks to build supplies needs to be higher than consumption. If stocks builds during a lengthy period, say months, that would suggest to me a "loose" supply situation.
Does anyone have any information on the quality of oil that is building in inventories. Is a increasing amount heavier crude? Could there be a refining bottleneck due to an increase of heavy crude on the market?
==AC
According to EIA the stocks of petroleum products seems to be good, which suggests no refining bottlenecks.
http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_pe...
I had a millionaire real estate mogul ask me once how much I thought a building was worth. I said how about 600k, and he said how did you arrive at that value? I said it was based on what I thought he could sell it for. He retorted that it was my perception of its value that led me to that number, not some intrinsic gauge based on tangible square footage or whatever, just plain perception. He said the perception of what it was worth just 10 years ago pales in comparison to what people believe it is worth now. So his point was perception was the key to determining value.
The same goes for oil. When oil sold for 147 it was perceived to be worth that much, just as it was perceived to be worth 37 just a short period later. Perceived I say, because use of oil only dropped a few percentiles - not enough to warrant that kind of drop. It was the perception of a real estate & energy cost bubble bursting economy that dropped the perception of its value to 37.
The perception now is right around 70 dollars, so I don't see anything occurring in the edconomy to change that perception to allow for such a sharp drop in price as suggested by this article. In fact, I only see the price gradually rising from here to over 100 in early 10. That's my perception.
What was your perception of where the market was going to go last August?
Just asking...
As I understand any market it may simply be described by buyers and sellers and the price is subject to a negotiation.
In an extreme situation like spending several days in the baking sun of some desert brought to the threshold of death by dehydration and without water carrying a briefcase holding $10 Million, a gallon of drinkable water will suddenly be perceived worth much more than what the briefcase holds.
Economies are not run on some participants perception. I start to sense that some has programmed their belief systems for a set of wished outcomes and by that refusing to see what the hard data tells them.
There are elements suggesting that the oil price last summer also was a bubble phenomena and there is no way that the OECD economies would have been able to grow and simultaneously absorb an oil price of $147/bbl.
That some of the highly leveraged financial Instruments started to unwind (and still will for some time) just added (and will continue to add) to the growth difficulties.
Demand/consumption is still falling and physical demand/consumption will play an important role in establishing the future oil price
quote: "In an extreme situation like spending several days in the baking sun of some desert brought to the threshold of death by dehydration and without water carrying a briefcase holding $10 Million, a gallon of drinkable water will suddenly be perceived worth much more than what the briefcase holds."
This is a more interesting comment..and I assume you haven't read some of my other comments ;-) A reworded form of the camel and the rich man?
Just an observation: right now in Finland, the 21st of June, 2009 (and probably in other European countries) the price for a liter of gasoline (95 oct) is 1.37 euro. That's 7.19 USD/a US gallon. Total motor vehicle stock increased 5.6 percent in 2008 and it looks like there is as much driving as before. Curiously, the price of gas is almost as high now even though the barrel price is only $72USD.
The following is an interesting PDF, from the Argonne National Laboratory, U.S Department of Energy, prepared in 2006. My only comment is that I doubt Chinese motor vehicle stock will ever reach 486 million, and certainly not of the fossil fuel powered type.
http://www.transportation.anl.gov/pdfs/TA/398.pdf
There are two demands for oil (as well as any commodity):
1. For use as a material
2. For use as unprintable money
During periods of monetary stability, the first use dominates. During periods of monetary instability, the second use crowds the first use. We are in the second type of period, and, unlike 2003 to 2007, the chaotic clashes of demand for use and demand as an unprintable currency make oil pricing unpredictable and dangerous to invest in - you have to predict the gyrations of the currency market. We are going to have an erratic escalation of both types of demand over the coming months and years. See the two posts "Unprintable Money" and "The Alternative Energy No One Is Thinking About" on my stock investing blog.