I think this is the beginnings of an economy based on perpetual growth and fossil fuel energy running headlong into geological energy constraints. Basically I see an undulatory downward path for the rest of my life. From here out, I think any rallies in our economic condition are going to be met with spiking commodity prices that knock us right back down.
Posted: Tue May 13, 2008 10:22 pm Post subject: Re: The Oil Nonbubble
Doug Noland--considered by some to be the best analyst out there:
During this period, crude prices surged almost 300%. Chinese reserves ballooned more than four-fold over this period to $1.68 trillion; India's reserve position tripled to $303 billion; and Brazil enjoyed a four-fold increase to $189 billion. After beginning 2004 at $73 billion, Russian reserves have almost reached the half trillion mark ($493 billion). And in just the past year, reserves of Organization of Petroleum Exporting Countries reserves have inflated 42% to $490 billion. To be sure, the world is awash like never before in excess "liquidity" for which to bid up prices of critical tradable resources.
Especially since the US Federal Reserve's credit system bailout, anticipating heightened global monetary disorder has been a key Credit Bubble Bulletin theme. The ongoing relevant question: how much would (in particular) China, India, Russia and Asia be willing to pay to procure adequate supplies of food and energy for their populations and economies? The obvious answer is "we have no way of knowing", but the market is becoming increasingly cognizant of the reality that today's massive international reserve positions provide virtually unlimited purchasing power. The bidding war has begun in earnest, in what increasingly appears a new inflationary epoch.
Posted: Tue May 13, 2008 11:29 pm Post subject: Re: The Oil Nonbubble
max_in_wa wrote:
Graeme -- I appreciate both stories. I invest in some energy production companies and the price of oil and natural gas affects my returns.
I've been concerned recently about the run up in the price of oil wondering if it really is speculation as so many seem to want to believe. I remember after Katrina being amazed at how quickly energy prices rose, and dismayed as they cratered for a time afterward. Of course by "cratered" we're talking a price that was half today's price. It's amazing how prices have recovered -- which is why I'm nervous.
In fact -- I'm nervous that prices will rise or fall. If they rise, rather than reap the rewards of my investment, I expect governments to start punishing the evil oil companies. If prices fall, nobody is going to write me a taxpayer funded check for my losses. Maybe I shoulda bought houses.
I am not giving you financial advise but some things to think about.
If you have owned the investment for a while then you might consider taking some profits but leaving a little skin in the game.
If you really believe peak oil is happening now or soon then leave all your investments in energy because prices can only go up.
Or you could buy some puts and take out any downside risk. However if you are not familiar with options trading then I would stay away.
Regardless good job for picking a good industry to place some of your money.
Joined: Mar 04, 2005 Posts: 2730 Location: New Zealand
Posted: Tue May 13, 2008 11:30 pm Post subject: Re: The Oil Nonbubble
There seems little doubt now that there is at least some speculation.
Hearings planned on energy market speculation
Quote:
A House committee has started investigating speculation in energy markets, with plans to hold hearings in May and June, the Wall Street Journal said on Monday, citing a Democratic aide and several other people invited as witnesses.
Lawmakers are aiming at hedge funds and investment banks in particular, blaming them for playing a crucial role in driving crude oil prices to record levels, the report said.
The House Energy and Commerce Subcommittee on Oversight and Investigations has scheduled a May 21 hearing on gasoline prices, which will bring up the issue of possible market manipulation, the Journal said, citing the aide and witnesses.
Engdahl thinks it is as much as 60% of oil price. _________________ Human history becomes more and more a race between education and catastrophe. H. G. Wells.
Fatih Birol's motto: leave oil before it leaves us.
Joined: Apr 05, 2005 Posts: 1647 Location: Springsteen Country (NJ)
Posted: Wed May 14, 2008 12:07 am Post subject: Re: The Oil Nonbubble
Graeme wrote:
There seems little doubt now that there is at least some speculation.
Oh my dog, of course there's speculation, there's always been speculation. Speculators are rampant in both the commodities market and the stock market. Every single person that buys a stock or commodity is speculating the price is going up, and every single person who sells the same is speculating the price will go down. That's the nature of markets.
The real question is, is speculation driving up the price? I think the answer is an unequivocal "no", since as of last Fridays's Commitment of Traders, net speculator positions are only about 54% long. Since speculators are only about 16% of the market, that's not enough to drive up the price more than a few dollars. People don't seem to realize that many of the non-industry speculators are betting the oil price is going down in the near term.
Meanwhile, actual users and vendors of petroleum trade in the futures market to lock in their price. They are the ones that move the market in the long terms, not the speculators.
But then again, since we all use oil, buying a futures contract isn't really speculating, since we're buying something we will eventually use in one form or another. People think the futures markets are like the stock market, but they're not. Nobody needs to buy shares in a company. Everybody needs to buy oil or food. That makes a big difference.
Edit to add: Graeme, you linked an article that called peak oil a "myth" to prove some point about "speculation" affecting the oil markets?
Sorry, I discounted the entire article when he called a documented fact a "myth". _________________ Joe P. United Political Debate
"Only when the last tree is cut; only when the last river is polluted; only when the last fish is caught; only then will they realize that you cannot eat money." - Cree Indian Proverb
Joined: Feb 27, 2008 Posts: 57 Location: Washington State (US)
Posted: Wed May 14, 2008 1:59 am Post subject: Re: The Oil Nonbubble
joeltrout wrote:
Or you could buy some puts and take out any downside risk. However if you are not familiar with options trading then I would stay away.
Sadly, options is not something I've studied at any real depth so I'll be opting out of that game.
As for energy investments, I'm going to stay in. I'm rather terrible at timing things and I tend to do better when I hold back and don't let my worries and fears get the best of me (or arrogance either -- charts are interesting to look at but they aren't crystal balls). Besides, there was profit to be made when oil was under $40, and even at my most paranoid moments, $40/bbl seems pretty far fetched.
Joined: Mar 04, 2005 Posts: 2730 Location: New Zealand
Posted: Wed May 14, 2008 2:15 am Post subject: Re: The Oil Nonbubble
Joewp, You are partly right. Engdahl's speculation proportion is likely to be wrong but that he may well be correct when he says there has been recent speculation (see highlighted section below). Speculation adds more than a few dollars though. See US government report below.
Quote:
The most important factors contributing to the current rise in worldwide oil prices have been an increasing demand from expanding economies[citation needed], mainly in China and India but also elsewhere, while supply has been artificially curtailed through the OPEC oil cartel.[citation needed]
The United States has started to increase oil reserves while crude oil prices per barrel continue to rise. Not to mention a country that prides itself with technology has out-dated refineries and hasn't built a new refinery since the mid 70's. To believe the major source in the increase of oil is mainly the economic growth of China and India is extremely misleading. The US plays an important role in the worldwide supply of oil whether they are pumping from there wells or importing from a foriegn country.
Besides supply concerns, many other issues have also had some effect on oil prices. Labour strikes, hurricane threats to oil platforms, fires and terrorist threats at refineries, and other short-lived problems are not solely responsible for the higher prices. Such problems do push prices higher temporarily, but have not historically been fundamental to long-term prices increases.
Recently, there has also been increasing speculation on the oil futures market that tends to push up prices. Speculators try to preempt increased demand, decreased supply, or both, which leads to a long term increase in the price of oil. If speculators are wrong, current prices trends may become a price bubble, which would be followed by a price collapse.
Although it is difficult to quantify the effect of speculation on prices, there is substantial evidence that the large amount of spec-ulation in the current market has significantly increased prices. Several analysts have estimated that speculative purchases of oil futures have added as much as $20–$25 per barrel to the current price of crude oil, thereby pushing up the price of oil from $50 to approximately $70 per barrel.
Senate _________________ Human history becomes more and more a race between education and catastrophe. H. G. Wells.
Fatih Birol's motto: leave oil before it leaves us.
Joined: Mar 04, 2005 Posts: 2730 Location: New Zealand
Posted: Wed May 14, 2008 2:47 am Post subject: Re: The Oil Nonbubble
And here is another analysis by Jerry Taylor of the Cato Institute:
Is There an Oil Price Bubble?
Quote:
The initial driver for the oil price increases we’ve seen since 2003 appears clear to me. A combination of tight production capacity and a surge in demand provided the foundation for the current price run. The oil market moves in rather predictable boom and bust cycles, and historic market patterns foretold the timing of this event if anyone was paying attention.
The best argument against “speculation” in the subsequent price spiral is offered by oil economist Phil Verleger, a fellow I think quite highly of. Verleger believes that, whatever truth there might be to the simple “supply-and-demand” story I offered above, those price increases were greatly exacerbated by a huge move of dollars into commodity futures. That influx of cash was not driven by speculation (classically defined). According to Verleger, it was driven instead by the market recognition of the fact that, historically speaking, (i) commodities provided better returns over long periods of time than provided by equities, and (ii) returns on commodity investments are negatively correlated with returns on equities.
Hence, market actors thought they found an investment vehicle that provided a hedge against volatility in stock markets while also promising excellent long-term returns to boot. Even more interesting for our purposes, however, is the fact that this huge flow of cash into commodity futures (with a very large share of that investment going to oil and gas) came primarily from large institutional investors such as pension funds, university endowments, and the like. Those investments tended to be fully collateralized (that is, institutional investors were not borrowing to invest) and they are buy-and-hold investments for the long term. Neither of those two investment strategies is consistent with the popular vision of what constitutes “speculation.”
Verleger goes so far as to put the “bubble” tag on oil markets, but again, he does not attribute that bubble to simple speculation. Nevertheless, he predicts a (big-time) crash, but does not predict when that crash will occur. I am less certain about the “bubble” tag (see my introductory paragraph), but I wouldn’t bet against it. I think Verleger’s narrative regarding the root causes of the oil price boom is better than any other I’ve run across.
cato-at-liberty _________________ Human history becomes more and more a race between education and catastrophe. H. G. Wells.
Fatih Birol's motto: leave oil before it leaves us.
Joined: Sep 25, 2005 Posts: 2050 Location: Waiuku, New Zealand
Posted: Wed May 14, 2008 3:13 am Post subject: Re: The Oil Nonbubble
OilFinder2 wrote:
Well here's the EIA's STEO chart (for OECD). Sorry 'bout the mix-up on the data source.
Again, you are misleading, though you have admitted that it is OECD only. That chart shows current stocks about 10% below peak stocks, on the basis of days supply. Worldwide stocks have been falling for almost all of the last 18 months, according to the EIA, and fell by 278 million barrels in 2007.
OilFinder2 wrote:
Would be nice if they had a chart like that for non-OECD, but at least judging from this, doesn't look or sound like anything noteworthy to me.
Maybe not to you, because you're an oil optimist. But production has not kept pace with consumption for a long time (a year and a half). You might not think that is noteworthy, but it shows a real gap developing, so it must be noteworthy in an objective sense.
Joined: Sep 25, 2005 Posts: 2050 Location: Waiuku, New Zealand
Posted: Wed May 14, 2008 3:21 am Post subject: Re: The Oil Nonbubble
Isn't it quite simple? Production is below demand, as evidenced by stock drawdowns over the last 18 months. Until production and consumption are equalised, prices will continue to rise. At some point, the price will cause enough demand destruction to bring those two into equilibrium, or to an excess of production. Then prices will stabilise or fall.
Posted: Wed May 14, 2008 4:54 am Post subject: Re: The Oil Nonbubble
Ok, call me stupid, but how can speculators buying Crude Oil options or futures push up the price of oil?
These people don't actually take delivery of oil, and sell back onto the exchange before expiration (or let the option pass). Therefore, the real oil price is unaffected, as only the same few refiners etc are in the market to buy the physical oil itself.
Feel free to show me I'm stupid... _________________ All that we are is the result of what we have thought. The mind is everything. What we think we become. - Buddha
Joined: Mar 04, 2005 Posts: 2730 Location: New Zealand
Posted: Wed May 14, 2008 9:52 pm Post subject: Re: The Oil Nonbubble
Greenspan Says Oil to Keep Rising on Capacity Limits
Quote:
Former Federal Reserve Chairman Alan Greenspan said oil prices will keep rising as energy companies have invested too little in production and infrastructure to cope with higher demand.
Companies haven't been reinvesting enough to keep supply growing in line with demand, Greenspan said via satellite to a conference sponsored by Deutsche Bank AG in Singapore, according to an investment strategist who attended the event and who spoke on the condition of anonymity.
Increasing futures-market activity is expanding the aggregate demand for oil because more needs to be held in storage to meet contracts, Greenspan said, according to the person who attended the event.
bloomberg _________________ Human history becomes more and more a race between education and catastrophe. H. G. Wells.
Fatih Birol's motto: leave oil before it leaves us.
Posted: Wed May 14, 2008 9:59 pm Post subject: Re: The Oil Nonbubble
davep wrote:
Ok, call me stupid, but how can speculators buying Crude Oil options or futures push up the price of oil?
These people don't actually take delivery of oil, and sell back onto the exchange before expiration (or let the option pass). Therefore, the real oil price is unaffected, as only the same few refiners etc are in the market to buy the physical oil itself.
Feel free to show me I'm stupid...
Dave, Read the Doug Noland link I posted. The more money flowing into the oil market the more money to bid the price up. It's like an auction.
Joined: Mar 04, 2005 Posts: 2730 Location: New Zealand
Posted: Wed May 14, 2008 10:29 pm Post subject: Re: The Oil Nonbubble
Threadbear, Thanks for the simpler explanation. _________________ Human history becomes more and more a race between education and catastrophe. H. G. Wells.
Fatih Birol's motto: leave oil before it leaves us.
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