Trying to figure out where the oil price is headed

mark000 · Coal Joined: Apr 29, 2008 Posts: 14

I spent yesterday looking at recent graphs and data for oil supply, demand and price. Also I have been reading a lot about the current financial situation/credit crunch and have decided it is totally impossible to tell where the price of oil is going to be come New Years Day 2009.

On the one hand, if lots of banks start failing and the credit crunch morphs into a crisis, I can see the price of oil plummeting as oil traders freak out over demand. On the other hand, a significant disruption to supply could send the price thru the roof.

Which is more likely, based on your take of the situation?

kokoda · Heavy Crude Joined: Aug 24, 2006 Posts: 441

It will jump around a little bit by the general trend will be upwards.

joeltrout · Light Sweet Crude Joined: Sep 19, 2007 Posts: 1317

I put neither because I think it will go to $100 but not because of credit crisis.

I think it goes to $100 because of demand destruction and bearish traders.

Joeltrout

the48thronin

eastbay

Micki

yesplease · Fission Joined: Oct 03, 2006 Posts: 2482

I think it'll $100 before it goes to $200 over the next few years, but I've been wrong before. Embarassed

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TreebeardsUncle · Intermediate Crude Joined: Jun 15, 2006 Posts: 598

Hello.

Actually, have been doing very well prediciting the price movements of oil (average 19% stock price appreciation over the last 5 years) and a gain over 90% from October,2007 through July,2008 in Helmerich and Payne which makes flexible drilling rigs.
There are 4 major patterns that typically determine the mid and long-term behavior in oil prices: the business cycle, in which recessions occur about once every 9 years (The housing slump is part of that pattern and the recession will occur in 2009.), the oil investment cycle, in which under-investment in the 80's and 90's has led to under-capitalization in oil development by the 2000's, the annual variation in gasoline demand/ aka the summer driving season, and the peak oil ramp up in price.
Furthermore dollar deflation brought on by the fed's attempt to rescue mortgage brokers and investment bankers has further inflated commodities and deflated stock price valuations in pre-interest-cut dollar terms. In addition, as Stephen Loeb (the author of How to Make Money when Oil Hits $200/barrel) has stated that when the price of oil rises more than about 80% per year the results are deflationary rather than inflationary, presumably largely due to demand destruction which we have started to see in the US when gasoline reached around $4.00/gallon on average in early June, and then started to decline after peaking at about $4.10/gallon about the third week in June. Oil rig drilling stocks, particularly HP which peaked on June 23rd at $77.xx (up from $3x.xx in November), also started to decline around that time.

So What is Next?
In the Very Near Term
This is going to be a week back-to-school selling season. Also retail Christmas sales and spring sales prices are going to be high,
with price increases coming up about 10%, while sales volumes will be lower than average due to American consumers's credit being tapped out. The price inflation is due to the deflation of the dollar and partly resultant gasoline price inflation. The main reasons why gasoline, deisel, and oil have been declining lately is due to investors concerns about demand destruction and particularly the gasoline market sentiment moving from being anticipatory of summer demand before the fourth of July to a sense of the demand being realized and the results conclusive after the fourth.
We are off the peak price now and should expected a jagged fall-off in price through the late summer through at least the mid fall.
The American stock market in general tends to decline in the third quarter due to big banks writing off losses for tax purposes.
A good time to buy into oil rig drillers is in late September through mid October when the annual low in oil is reached. It is good to buy in when a sector is not immediately in favor. Natural gas should also be relatively low in late August through early September before anticipation of winter fuel shortages become increasingly influential.
Next Summer
The fed is planning on raising interest rates this winter. By that time, after housing prices have passed through their period of steepest descent this fall, due to the foreclosed banks setting the prices in a very weak before-returning-to-school season amid a glutted market, the feds will feel safe enough to begin to combat inflation without greatly disrupting the housing market. The banks are in the process of repositioning themselves now through October or so. Thus expect oil prices to be comparable to where they are this summer, with slight to moderate dollar inflation and a moderately recessionary economy competing against the effects of a continued east Asian demand surge, Mexican depletion, and supply development lags.

patience · Expert Joined: Jan 04, 2008 Posts: 1664

TreebeardsUncle, I've read your post several times, trying to understand your thoughts about the banking situation. Do you think then that the banking/credit mess can be largely behind us by 4th Qtr.? Or just the housing market decline?

How do you see the failing of banks and derivatives unwind playing into all this? I'd appreciate your insights.

edit: This may be a bit off topic, but I see it as one big, complex economic knot, each facet affecting all others.
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pup55 · Expert Joined: May 26, 2004 Posts: 3801

Let's look at the four things we always look at when this sort of conversation comes up:

a. Are people using less oil? Well, I have to say that right now, they are using about 95% as much oil as they always did. This would make this period pretty similar to the 1973-1974 time frame as far as the demand destruction goes. Did the price drop during this time frame? Yes, the average 1975 price was about 10% lower than the average 1974 price. The average (YTD) for crude oil is $114, so maybe $100 is your average price next year, if history is any guide, which it may not be.

b. Is there any headline in the paper that can cause the price of crude oil to collapse? No, I still think there are a dozen things that can cause the price of crude oil to skyrocket again. It's hurricane season.

c. China: Are those guys using less energy? No, they had to change their pricing rules to keep their growth at "only" about 4%. At this rate of growth, the 5% demand destruction in the US will be offset within about two years.

d. Economic armageddon: Is there any indication that the US is headed toward some economic catastrophe, so severe that it causes even more significant demand destruction? Well, it appears that at least through November, Bernanke and Paulson have the intent of shoveling as much "funny money" into the economy as it takes to keep the system running. This can and will continue for exactly as long as the Chinese, Russians and Saudis are content to see their USD/Tbill holdings be inflated away. Since the downside for them is even more catastrophic than the current situation, they will keep the game going for awhile longer.

These four factors are not as strong as they were a year ago, but I have to say none of the four suggest any "collapse" in the oil price back down to the levels seen in the good old days, say 2005, when we were "shocked" that crude oil got up to 65 when Katrina hit.

evilgenius

A secular downtrend wrought by diminished demand will be the main driver behind cheaper oil. I have said in the past that I thought oil could come down to the $110-$115 range. I am interested in the thoughts of those that think it could go as low as $100.
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yesplease · Fission Joined: Oct 03, 2006 Posts: 2482

Oil's short run elasticity means that it'll go up and down in price drastically depending on supply/demand. My bet is that demand is going to drop relative to supply such that oil will dip to ~100 before it increases relative to supply such that it'll go to ~200 over the next few years.
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NoWorries · Tar Sands Joined: Jun 05, 2008 Posts: 79

As I predicted a couple of months ago in this forum: The big story by year end will be the Economic Crisis, not Peak Oil. As to how one will affect the other, I predict that oil will drop like a stone once the economy enters full-blown recession. By that I mean < $100 bbl.

However, there are at least 3 significant variables in the mix that could offset this price decline:
1--Hurricane in the Gulf of Mexico;
2--Israeli attack on Iran's nuclear facilities;
3--terrorist attack.

I would assign a greater than 50% probability that at least one of these events will occur by year end, and send oil prices to the $150 level at minimum by end of 2008.

shady28 · Heavy Crude Joined: Jul 06, 2005 Posts: 364

I think you will see oil below $100 by the end of 2008 via demand destruction. It's also happening now in many other commodities.

I also expect oil to be back down below 75 next year, if not this year. If the economy accelerates to the downside, I wouldn't at all be suprised to see an implosion back down into the 40/bbl range. link

"US petroleum deliveries for the first six months of this year, a measure of demand, experienced the largest year-to-year decline since 1991, the last time the US was in a deep recession, the American Petroleum Institute said July 18.
... The effects of slowing demand were visible in US petroleum imports, which sank to their lowest first-half level since 2003, at less than 13 million b/d. Crude oil imports fell 2.5% from a year earlier, while product imports slipped nearly 10%. Imports of most major products showed declines."
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eastbay

After following the price of oil these past few years it's clear no one can accurately (except by chance) predict the price on a quarterly basis. But over the coming two or three years and on into the future, it will be so costly our lives will have to adjust in ways 99% of people today couldn't even imagine.

We all know these events will occur over time:
* War
* Rapid Depletion
* Storms
* Inflation Risk
* Emerging Markets
* ??

That's why, although the energy bears seem to be having their fun for now, the bulls will win in the end. And win Big!

edit for typo...
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