[mefistofeles]

There are alot of people, some who are very intelligent like Richard Rainwater that believe oil prices have plateaued.

However being a believer in speculative bubbles and peakoil I don't believe we are at the plateau.

As far as speculative bubbles are concerned I believe that there are three phases:

1. The smart money gets in early
2. The instituational investors get in.
3. The general public gets in (this is usually the most dangerous phase and when the bubble is likely to burst).

So far I believe that we haven't even completed phase 2 never mind 3.

Another thing that sets oil's current situation apart from both the internet and real estate bubbles is availability.

There was no limit on the number of internet stocks you could buy, and there is still ALOT of empty land in Ireland, California and Nevada. Oil however is different from these bubbles in the sense that there are definite limits on supply vis a vis demand.

In fact with oil there is actually less oil available now because you can live in your home for years but wells eventually start to decline. Production decline and stagnation are becoming the key issues for many of the worlds largest oil producers ,this implies increasing prices.

However high prices will curtail demand.

So I guess the real question is this. Will oil supply decline faster than demand? Or will oil demand decline faster than supply?

[BigTex]

Given that there is the oil price rise coinciding with the dollar fall, both would have to stop for the price to stop rising in U.S. dollars.

Since I don't think both are going to stop, and probably neither in the intermediate term, I predict prices will keep rising.

They will plateau somewhere, but it might be a crazy number.

Think about how crazy $135 would have sounded three years ago.

[MonteQuest]

However high prices will curtail demand.

No, higher prices will slow the rate of growth of demand. Energy, like and water, are necessities. If we curtail a lot of superfluous consumption, unemployment will rise quickly.

Demand for energy will never go away; people will just be harder pressed to access it. Connect the dots.

So I guess the real question is this. Will oil supply decline faster than demand? Or will oil demand decline faster than supply?

Demand will always outstrip demand destruction...until everything folds. China's 11.4 GDP growth has a lot of steam behind it.

[FreddyH]

Based on fundamentals, the equilbrium price is $101/barrel today. Most of the speculator fraternity changed over to short positions last week, so only one buck of the price is due to their spec/hedge activity. The producers are enjoying a $21/barrel windfall thanx to the media noise-de-jour.

Even the base price of $101 is not sustainable as several quarters of price bumps are still trickling down thru the marketplace. It is an 8 quarter process.

This pent up demand destruction awaits substitution/alternatives/conservation decisions and will result in sub-hundred pricing later in the year.

MegaProject flows for 2006/7/8 commissions are still in build mode. The culmination of those projects plus upcoming 2009 capacity will replenish fundamental factors as inventory balance and surplus capacity and reduce the base price further.

Adjusting for underlying decline etc, next year's supply should be 87-mbd.

[Duende]

FreddyH wrote:

This pent up demand destruction awaits substitution/alternatives/conservation decisions and will result in sub-hundred pricing later in the year.

Adjusting for underlying decline etc, next year's supply should be 87-mbd.

That's awesome news, Freddy!

Ok, on the count of three I'm gonna start holding my breath...

[DantesPeak]

Based on fundamentals, the equilbrium price is $101/barrel today. Most of the speculator fraternity changed over to short positions last week, so only one buck of the price is due to their spec/hedge activity. The producers are enjoying a $21/barrel windfall thanx to the media noise-de-jour.

I don't even want to know how you came up with figures, but maybe you should expand your chart to include the increase in price you weren't expecting - due to those pesky speculators who only seem to be worried about supply, demand, tanker availability, diesel shortages, steeply falling output form nearby Mexico and Venezuela, possible nuclear war, and many other factors too numerous to even mention.

[Arsenal]

Ouch.. $139 today. $11 change in one day... Somehow I think your price of $101 seems a little low. Oil prices have not peaked, only oil.


Arsenal.

[emersonbiggins]

One wonders why FreddyH even bothers with all the pretty charts if the benchmark crude price (WTIC) accounts for, by his own admission, less than 5% of outstanding oil contracts. Much ado about nothing?

[bonehead]

They'll peak when Morgan Stanley says they'll peak.They've got the last word on oil now.

[careinke]

FreddyH,

You are a very, very, funny man. You should be on TV. That graph is just Hilarious! $87.00 oil, that just cracks me up.

Cliff (Start a rEVOLution, grow a garden)

[MrBill]

They'll peak when Morgan Stanley says they'll peak.They've got the last word on oil now.

I think you mean Goldman Sachs?

Energy Weekly

Timespread rebound propels largest daily oil price move on record

But tight fundamentals suggest risk remains skewed to the upside

Timespread rebound underpins recent dramatic price move

Oil prices rose sharply on Thursday and Friday last week, scoring the largest daily price move on record and reaching new all time highs, now close to the $140/bbl mark. The rally was underpinned by a sharp rebound in timespreads, which drove the shape of the forward curve back towards a degree of backwardation more in line with the tight underlying fundamentals of the oil market.

Risks to timespreads still to skewed to the upside

We believe that prior to last week, timespreads had weakened excessively relative to the underlying fundamentals, as concerns over a deterioration in US oil demand had likely translated into significant short selling and a liquidation of net speculative length. The rapidity and strength of the rebound suggests that the recent price move was due in large part to short covering of these positions as US and global fundamentals continue to tighten on the back of declining supply and supportive non-OECD demand. Despite the rapidity and magnitude of the adjustment, we believe that the risk to timespreads is still skewed to the upside. Current timespreads are still likely too low relative to the 15% front-to-back backwardation suggested by current low inventories and stocks could further tighten. As a consequence, if long-dated oil prices were to remain at or above current levels, the oil price could reach our $149/bbl year-end target by this summer.

Structural supply declines contribute to tighten fundamentals

Evidence of a structural decline in supply are mounting. Mexican decline rates are confirmed to be very strong as production in May has likely remained flat from April, averaging almost 13% below year-ago levels; Russian production continues to show strong signs of weakness, while Venezuelan and North Sea production continue to decline structurally.

Source: Goldman Sachs Commodities Research
June 9, 2008