June futures closed today at $118 on the NYMEX. Think back 10 years ago when oil traded between $12/bbl and $14/bbl.What factors have caused the price to increase almost 10X in 10 years?
Is supply 10X less than 10 years ago?No.
Is demand 10X more than 10 years ago?Not quite.
What’s the OPEC effect?They’ve increased output by roughly 25% since 1992 while prices increased five-fold.The US is the largest consumer of oil in the world, but has only increased consumption from 17MM bpd to 21MM bpd in that same time period.
What about OPEC excess capacity?It was 6MM bpd 5 years ago and slid as low as 1MM bpd in ’04 and ’05; insufficient to cover any OPEC-induced diminished production.It’s now at 3 MM bpd, but at today’s prices it makes sense to keep supplying at a nominal rate instead of storing.The US tapped into its SPR after Katrina/Rita in ’05 and Ivan in ’04 but has since brought it back to 96% capacity.
What about the Iraq war?Prices spiked to $35 from $28 before settling around $32 at the end of ’03.It’s tripled since.
OK, well what about world demand.China and India, for example, are growing at staggering rates and have moved the needle for usage, right?Yes, but the IEA and OPEC are each forecasting slower world demand growth in 2008, due to the US recession (yes Washington, it’s here and it’s real) and lower Chinese usage.In fact, April’s forecast cut to demand growth is the largest since 2001.
Oil prices have been forecasting higher since 2002, which spurred exploration and production growth rates not seen since the late 70’s.At $100 bbl, lots of inefficient extraction ideas get green lighted, however there’s a strong correlation between increased rig construction/well completion and a decrease in oil price.
That's a lot of basic economic indicators that contradict the continuing rise in oil prices. Is the risk premium built into the market that significant of an effect?
This smells like a textbook bubble; like tulips and tech stocks.The only question now is when is the right time to short oil futures?
Alternate theories and assertions are welcome.
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To remove first post, remove entire topic.
June futures closed today at $118 on the NYMEX. Think back 10 years ago when oil traded between $12/bbl and $14/bbl.What factors have caused the price to increase almost 10X in 10 years?
Is supply 10X less than 10 years ago?No.
Is demand 10X more than 10 years ago?Not quite.
What’s the OPEC effect?They’ve increased output by roughly 25% since 1992 while prices increased five-fold.The US is the largest consumer of oil in the world, but has only increased consumption from 17MM bpd to 21MM bpd in that same time period.
What about OPEC excess capacity?It was 6MM bpd 5 years ago and slid as low as 1MM bpd in ’04 and ’05; insufficient to cover any OPEC-induced diminished production.It’s now at 3 MM bpd, but at today’s prices it makes sense to keep supplying at a nominal rate instead of storing.The US tapped into its SPR after Katrina/Rita in ’05 and Ivan in ’04 but has since brought it back to 96% capacity.
What about the Iraq war?Prices spiked to $35 from $28 before settling around $32 at the end of ’03.It’s tripled since.
OK, well what about world demand.China and India, for example, are growing at staggering rates and have moved the needle for usage, right?Yes, but the IEA and OPEC are each forecasting slower world demand growth in 2008, due to the US recession (yes Washington, it’s here and it’s real) and lower Chinese usage.In fact, April’s forecast cut to demand growth is the largest since 2001.
Oil prices have been forecasting higher since 2002, which spurred exploration and production growth rates not seen since the late 70’s.At $100 bbl, lots of inefficient extraction ideas get green lighted, however there’s a strong correlation between increased rig construction/well completion and a decrease in oil price.
That's a lot of basic economic indicators that contradict the continuing rise in oil prices. Is the risk premium built into the market that significant of an effect?
This smells like a textbook bubble; like tulips and tech stocks.The only question now is when is the right time to short oil futures?
I guess I'm a contrarian. I don't understand why the public keeps bidding it up while basic economic theories contradict. What am I missing? Greenspan's "irrational exuberance" comments seems to fit.
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I guess I'm a contrarian. I don't understand why the public keeps bidding it up while basic economic theories contradict. What am I missing? Greenspan's "irrational exuberance" comments seems to fit.
I think oil is vastly underpriced given it is the absolute necessity of modern economies. Depriving the West of oil would cause its collapse, pure and simple.Given that simple fact, paying less than $200 for a barrel of the stuff is a bargain, especially considering ipeople pay $4 for a cup of coffee, and a mere bottle of 2000 Lafite goes for around $1200.
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I think oil is vastly underpriced given it is the absolute necessity of modern economies. Depriving the West of oil would cause its collapse, pure and simple.Given that simple fact, paying less than $200 for a barrel of the stuff is a bargain, especially considering ipeople pay $4 for a cup of coffee, and a mere bottle of 2000 Lafite goes for around $1200.
While I think you idea is the right one. Oil has essentially doubled in a year there is no way it is the right time to get in front of that train especially, rightly or wrong of how much this effects oil, the upcoming summer driving season. Eventually, there will be money to be made but momentum and Bernake blinders to inflation are stopping that from coming.
If you want you can track it via a DUG correspond to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index but as you can guess it has been hammered the last year or so.
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While I think you idea is the right one. Oil has essentially doubled in a year there is no way it is the right time to get in front of that train especially, rightly or wrong of how much this effects oil, the upcoming summer driving season. Eventually, there will be money to be made but momentum and Bernake blinders to inflation are stopping that from coming.
If you want you can track it via a DUG correspond to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index but as you can guess it has been hammered the last year or so.
find me one reason it should go down --- you probably should also be in steel in some capacity...AKS has been able to raise prices the past few months
check the runs of AKS, CLF, X to name a few
SLX is a Steel ETF i just found the other day
I've outlined the economic factors that usually correspond with a price drop. I'm trying to find reasons why it's going up, other than as a safehouse vs. inflation. Is the risk premium built into today's price that huge??
I agree with your opinion on steel, as long as you stick to companies with enough of a global presence that they are not impacted by a domestic contraction of the economy.
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Quote Originally Posted by KOAJ:
oil goes to $180
find me one reason it should go down --- you probably should also be in steel in some capacity...AKS has been able to raise prices the past few months
check the runs of AKS, CLF, X to name a few
SLX is a Steel ETF i just found the other day
I've outlined the economic factors that usually correspond with a price drop. I'm trying to find reasons why it's going up, other than as a safehouse vs. inflation. Is the risk premium built into today's price that huge??
I agree with your opinion on steel, as long as you stick to companies with enough of a global presence that they are not impacted by a domestic contraction of the economy.
While I think you idea is the right one. Oil has essentially doubled in a year there is no way it is the right time to get in front of that train especially, rightly or wrong of how much this effects oil, the upcoming summer driving season. Eventually, there will be money to be made but momentum and Bernake blinders to inflation are stopping that from coming.
If you want you can track it via a DUG correspond to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index but as you can guess it has been hammered the last year or so.
0
Quote Originally Posted by SteelHop:
While I think you idea is the right one. Oil has essentially doubled in a year there is no way it is the right time to get in front of that train especially, rightly or wrong of how much this effects oil, the upcoming summer driving season. Eventually, there will be money to be made but momentum and Bernake blinders to inflation are stopping that from coming.
If you want you can track it via a DUG correspond to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index but as you can guess it has been hammered the last year or so.
While I think you idea is the right one. Oil has essentially doubled in a year there is no way it is the right time to get in front of that train especially, rightly or wrong of how much this effects oil, the upcoming summer driving season. Eventually, there will be money to be made but momentum and Bernake blinders to inflation are stopping that from coming.
If you want you can track it via a DUG correspond to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index but as you can guess it has been hammered the last year or so.
This is a gambling website right?
Maybe it's as simple as throwing economic theory out the window as it relates to this run-up. Other posters promote a more technical approach to forecasting price movement, which may be more appropriate given the above point.
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Quote Originally Posted by SteelHop:
While I think you idea is the right one. Oil has essentially doubled in a year there is no way it is the right time to get in front of that train especially, rightly or wrong of how much this effects oil, the upcoming summer driving season. Eventually, there will be money to be made but momentum and Bernake blinders to inflation are stopping that from coming.
If you want you can track it via a DUG correspond to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index but as you can guess it has been hammered the last year or so.
This is a gambling website right?
Maybe it's as simple as throwing economic theory out the window as it relates to this run-up. Other posters promote a more technical approach to forecasting price movement, which may be more appropriate given the above point.
Don't you feel this is more a case of the dollars collapse than oils rise. Price OIL in Gold and it's barely moved. I agree with KOAJ there is nothing stopping it besides even T Boone Pickens going short couldn't stop this parabolic move and now he's flipped back to the long side. JMHO
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Judge,
Don't you feel this is more a case of the dollars collapse than oils rise. Price OIL in Gold and it's barely moved. I agree with KOAJ there is nothing stopping it besides even T Boone Pickens going short couldn't stop this parabolic move and now he's flipped back to the long side. JMHO
Don't you feel this is more a case of the dollars collapse than oils rise. Price OIL in Gold and it's barely moved. I agree with KOAJ there is nothing stopping it besides even T Boone Pickens going short couldn't stop this parabolic move and now he's flipped back to the long side. JMHO
That's certainly a factor. In fact, we could take your argument further and apply it to grains, metals, lumber, many other commodities.
So, I thought I'd map the change in oil prices to the US$-Euro the past 3-60 months. There's a fairly strong negative correlation in the short-term, but the rate of change in oil doubles that of the dollar in the long run. That's still a pretty hefty risk premium and perhaps overreaction to supply issues in Nigeria and the Middle East, along with the ever-present radical Islamic terrorism threat.
Don't you feel this is more a case of the dollars collapse than oils rise. Price OIL in Gold and it's barely moved. I agree with KOAJ there is nothing stopping it besides even T Boone Pickens going short couldn't stop this parabolic move and now he's flipped back to the long side. JMHO
That's certainly a factor. In fact, we could take your argument further and apply it to grains, metals, lumber, many other commodities.
So, I thought I'd map the change in oil prices to the US$-Euro the past 3-60 months. There's a fairly strong negative correlation in the short-term, but the rate of change in oil doubles that of the dollar in the long run. That's still a pretty hefty risk premium and perhaps overreaction to supply issues in Nigeria and the Middle East, along with the ever-present radical Islamic terrorism threat.
There is a part of me that agrees with your general premise.However, I think you may be underestimating the impact of a radical increase in demand from developing and producing countries.Producers are finding that they have to devote more of their output for internal usage. Being heavily subsidized, the consumption there is uninflected by the price we might have to pay. You also have the stark mismanagement of existing fields, and those fields are mismanaged and naturally declining. Mex ican Russian and Venezualan fields are in this category.North Sea fields are being consumed and Britain is an importer now, not an exporter (I think, may be wrong on that for now, but it is surely coming) .While there are new fields, the location and methods of extraction are going to make their exploitation expensive. Add in the decline in the USD, and you have several negative trends combining to pressure price. The best thing that could happen is a rise in the USD, and that must happen at some point soon.After all, it has been in free fall.But given the expectation of further Fed cuts, and increased deficit spending, it is hard to see a quick resolution to the price problem of oil. Lastly, I think oil was vastlt vastly underpriced, so to compare present pricing to that of years past is misleading.
All that being said, can any substance continue a relatively parabolic rise? Not really. But I am not sure that there are grounds for feeling that should it cease rising, it will plummet. More likely to me at let is that is planes off temporarily. As I have written before here, I think China would pay, with absolutely NO hesitation a per barrel price of $200 USD if they could lock in all Saudi production, and consider it a steal.(and it would be a steal).If they ever could do so (and they can't happily), at that moment the demise of the West would be guaranteed, and the dominance of China would be guaranteed.
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There is a part of me that agrees with your general premise.However, I think you may be underestimating the impact of a radical increase in demand from developing and producing countries.Producers are finding that they have to devote more of their output for internal usage. Being heavily subsidized, the consumption there is uninflected by the price we might have to pay. You also have the stark mismanagement of existing fields, and those fields are mismanaged and naturally declining. Mex ican Russian and Venezualan fields are in this category.North Sea fields are being consumed and Britain is an importer now, not an exporter (I think, may be wrong on that for now, but it is surely coming) .While there are new fields, the location and methods of extraction are going to make their exploitation expensive. Add in the decline in the USD, and you have several negative trends combining to pressure price. The best thing that could happen is a rise in the USD, and that must happen at some point soon.After all, it has been in free fall.But given the expectation of further Fed cuts, and increased deficit spending, it is hard to see a quick resolution to the price problem of oil. Lastly, I think oil was vastlt vastly underpriced, so to compare present pricing to that of years past is misleading.
All that being said, can any substance continue a relatively parabolic rise? Not really. But I am not sure that there are grounds for feeling that should it cease rising, it will plummet. More likely to me at let is that is planes off temporarily. As I have written before here, I think China would pay, with absolutely NO hesitation a per barrel price of $200 USD if they could lock in all Saudi production, and consider it a steal.(and it would be a steal).If they ever could do so (and they can't happily), at that moment the demise of the West would be guaranteed, and the dominance of China would be guaranteed.
There is a part of me that agrees with your general premise.However, I think you may be underestimating the impact of a radical increase in demand from developing and producing countries.Producers are finding that they have to devote more of their output for internal usage. Being heavily subsidized, the consumption there is uninflected by the price we might have to pay. You also have the stark mismanagement of existing fields, and those fields are mismanaged and naturally declining. Mex ican Russian and Venezualan fields are in this category.North Sea fields are being consumed and Britain is an importer now, not an exporter (I think, may be wrong on that for now, but it is surely coming) .While there are new fields, the location and methods of extraction are going to make their exploitation expensive. Add in the decline in the USD, and you have several negative trends combining to pressure price. The best thing that could happen is a rise in the USD, and that must happen at some point soon.After all, it has been in free fall.But given the expectation of further Fed cuts, and increased deficit spending, it is hard to see a quick resolution to the price problem of oil. Lastly, I think oil was vastlt vastly underpriced, so to compare present pricing to that of years past is misleading.
All that being said, can any substance continue a relatively parabolic rise? Not really. But I am not sure that there are grounds for feeling that should it cease rising, it will plummet. More likely to me at let is that is planes off temporarily. As I have written before here, I think China would pay, with absolutely NO hesitation a per barrel price of $200 USD if they could lock in all Saudi production, and consider it a steal.(and it would be a steal).If they ever could do so (and they can't happily), at that moment the demise of the West would be guaranteed, and the dominance of China would be guaranteed.
Some very good points. I read a report from CIBC World Markets today forecasting $225 bbl oil in 2012. He actually makes some solid and similar points about increasing demand in non-OECD countries negating any decrease in the US or China.
Although, Jeff also forecast a 60 cent Canadian dollar in 2004 and we all know how that turned out
Re: China, they are slowly removing currency controls as the US$ is tanking. Aren't they the world's largest holder of US Treasuries now? So with all those cheap dollars, $120 or $150 or $200/bbl doesn't really matter to them. But if (when, elasticity) the dollar comes back, that's no longer as attractive. Could be another reason why they are looking for cheaper, controllable sources like Sudan (human rights be damned).
Bottom line, and thanks all, I think my question has been answered. Too many other non-economic factors are in play that make shorting a wee bit risky today. To WSC's point, sell on weakness, buy on strength.
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Quote Originally Posted by Vermeer:
There is a part of me that agrees with your general premise.However, I think you may be underestimating the impact of a radical increase in demand from developing and producing countries.Producers are finding that they have to devote more of their output for internal usage. Being heavily subsidized, the consumption there is uninflected by the price we might have to pay. You also have the stark mismanagement of existing fields, and those fields are mismanaged and naturally declining. Mex ican Russian and Venezualan fields are in this category.North Sea fields are being consumed and Britain is an importer now, not an exporter (I think, may be wrong on that for now, but it is surely coming) .While there are new fields, the location and methods of extraction are going to make their exploitation expensive. Add in the decline in the USD, and you have several negative trends combining to pressure price. The best thing that could happen is a rise in the USD, and that must happen at some point soon.After all, it has been in free fall.But given the expectation of further Fed cuts, and increased deficit spending, it is hard to see a quick resolution to the price problem of oil. Lastly, I think oil was vastlt vastly underpriced, so to compare present pricing to that of years past is misleading.
All that being said, can any substance continue a relatively parabolic rise? Not really. But I am not sure that there are grounds for feeling that should it cease rising, it will plummet. More likely to me at let is that is planes off temporarily. As I have written before here, I think China would pay, with absolutely NO hesitation a per barrel price of $200 USD if they could lock in all Saudi production, and consider it a steal.(and it would be a steal).If they ever could do so (and they can't happily), at that moment the demise of the West would be guaranteed, and the dominance of China would be guaranteed.
Some very good points. I read a report from CIBC World Markets today forecasting $225 bbl oil in 2012. He actually makes some solid and similar points about increasing demand in non-OECD countries negating any decrease in the US or China.
Although, Jeff also forecast a 60 cent Canadian dollar in 2004 and we all know how that turned out
Re: China, they are slowly removing currency controls as the US$ is tanking. Aren't they the world's largest holder of US Treasuries now? So with all those cheap dollars, $120 or $150 or $200/bbl doesn't really matter to them. But if (when, elasticity) the dollar comes back, that's no longer as attractive. Could be another reason why they are looking for cheaper, controllable sources like Sudan (human rights be damned).
Bottom line, and thanks all, I think my question has been answered. Too many other non-economic factors are in play that make shorting a wee bit risky today. To WSC's point, sell on weakness, buy on strength.
Agreed Palladium - thanks for sharing. What is Nigeria's share of world oil production? Seems like far less than the 2-4% of US consumption it represents, which is a typical daily price swing anyway. Plus this shortfall can easily be supplied through the Saudis or any other friendly.
Now that I've swung to the bullish side, I'm looking to make a small investment in BP after they announce earnings Tuesday. Looked at MRO too but the majority of their revenue comes from marketing (i.e., gas stations), whose margin increase would lag the producers assuming crude futures rise.
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Agreed Palladium - thanks for sharing. What is Nigeria's share of world oil production? Seems like far less than the 2-4% of US consumption it represents, which is a typical daily price swing anyway. Plus this shortfall can easily be supplied through the Saudis or any other friendly.
Now that I've swung to the bullish side, I'm looking to make a small investment in BP after they announce earnings Tuesday. Looked at MRO too but the majority of their revenue comes from marketing (i.e., gas stations), whose margin increase would lag the producers assuming crude futures rise.
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