[alokin]

We're still living in a $70/barrel oil world

that's what I read in another thread (can't find it anymore).

I would like to know a bit more abotu this statement.

I know that some airlines are buying fuel in advance ( but we don't really need airlines), who else does buy fuel in advance? How about public transport? Industry?
How many month s the stuff usually bought in advance?

[SILENTTODD]

I know that some airlines are buying fuel in advance (but we don't really need airlines), who else does buy fuel in advance? How about public transport? Industry?
How many month s the stuff usually bought in advance?

James Kunstler made a prediction this week the air line majors (United, American, Continental.... ect) would fold in 18 months (end of 2009). Gazprom (Russian national oil) oil would reach $250 next year ($8 a gallon U.S.?).

I don't know about you. But when the Airline industry finally shuts down, that is my Canary in the coal mine signal to bail out to my preselected relocation point outside California. Hopefully I will be able to make my way there by rail with maybe the clothes on my back and what ever I can carry in a suitcase.

[Dreamtwister]

It depends on the context of the original statement.

The statement could be refering to year-old contracts at $70, or they could mean it in the psychological sense - spending habits and whatnot.

If the former was intended, then it means that those contracts are about to, or have already expired. The buyers will have to renew contracts at the new price, which will have disastrous effects.

If the latter was intended, then it means that people have not yet realized that $100+ is here to stay. They have not yet adjusted their behavior and are in for a rude awakening, which will have disastrous effects.

As for who else buys oil in advance, well that's just about everyone who buys. I can't think of a single buyer of crude who wouldn't also want to buy it in bulk, if for no other reason than to smooth out the supply chain.

[alokin]

It was referred to companies which are buying oil beforehand I think they buy "oil futures". The only industry I myself know of doing this are the airlines.

[3aidlillahi]

It was referred to companies which are buying oil beforehand I think they buy "oil futures". The only industry I myself know of doing this are the airlines.

As noted in the asphalt thread, asphalt and other road projects were built years ago when oil was under $30/barrel. Most of the roads were paid with this cheap oil. But as the roads deteriorate, they'll have to be replaced with $100+ (maybe $200+) per barrel. The lack of usable roads is still on the low end and we'll begin to feel the full force of those price increases in coming years.

It's not exactly what you're looking for but it has the same effect if you think of a government as a corporation.

[Aaron]

Oil prices typically take 18-24 months to affect other markets.

Most large oil buyers purchase on 2-4 year contracts.

[MrBill]

$70 per barrel? The Big Three seem to believe they are still living in the 60-70s before OPEC?

Sub-compacts are shooting out the lights in terms of sales these days. The new Ford Fiesta sub-compact is going to be built in Mexico, GM's subcompact Aveos come from Korea, Chrysler is going to get its sub-compact from somewhere in China; but if you're looking for a 400 plus horsepower V-8 that's "race inspired and street legal" then your car is probably going to be built in Ontario.

source: Dodge Challenger charges off Ontario production line

May as well start handing out those pink slips in Oshawa and Brampton now to save time later.

[ROCKMAN]

alokin,

Actually many futures contracts are bought by the oil companies/refiners themselves. The common reason is to secure credit lines from the banks. Even successful operators don't want to wait for accumulated cash flow to pay for projects so they borrow against their future income. Production forecast have a certain amout of risk and are adjusted accordingly. But the biggest risk is the future price of oil/gas. So a company will commonly buy futures to guarentee the cashflow. They may actually loose money of the futures contracts but the goal was to secure the loan and not make money in the futures market. Often special future contracts have "floors": the company is guarenteed a minimum price for their production. A significant fee is paid for this insurance. If production sells for more, the company and guarentor will split that money on a preset basis. These guarentors will commonly buy the futures contracts you hear about on the news everyday to protect their positions.

One aspect of the futures market that's overlooked is the stability it does bring. Many call for eliminating futures trading. While that might rid us of whatever impact the speculators are having on the oil market but it would result in tremendous instability for producers and would certain magnify short term oil/gas spikes.

It would be great if the regulators could take an educated scaple to the process but I lack confidence in that process.

[shady28]

Actually there is some reality to that statement. Two main points to consider - and this isn't a nay say to peak oil being real, it's just common sense to look at it from another angle.

1) - The dollar index, that is the index of the value of the dollar vs a basket of other currencies, has declined from its peak of around 120 to 72 today. That is > 35% decline in value relative to other currencies. Other countries still experience inflation as well, so relative to things like gold they're declining.

- In terms of oil

If the US currency had maintained say an average of 100 in the dollar index instead of falling to 72, oil price would be 72% of its current price, which would make oil 97.20/bbl vs 135/bbl.

If it had stayed at hits peak of 120, it would be 81/bbl.

The rest of the world sees those kind of prices equivalent to where they were 6 years ago - $81 to $97 / bbl - because their currencies have gained so much on the dollar. That is still several times higher than it was 8 years ago.

2) The speculative factor. There's an interesting article Maudlin put out, called 'when bubbles collide'. It talks about how speculative funds are using a loophole to hide activities in the commodities markets, and how those activities have grown significantly in the past few years. Here's a snippet of the article :

"The CFTC created a loophole when they allowed investment banks to be classified as commercial investors. So, when a long-only commodity index fund wants to buy a million barrels of oil, they can go to the investment bank, who will sell them a "swap" on the price of oil, and then immediately hedge their exposure in the futures market.

To be sure, the long-only index fund can now create positions far in excess of the position limits that are enforced upon normal speculators. These funds can grow to be huge - multi-tens of billions of dollars. Even though they are speculators, they are not included in the data as speculators. Because they get their exposure from an investment bank, they are ultimately listed as a commercial. In total, they represent an enormous part of the commodities markets. But they are providing liquidity, so what's the problem? They are not actually hoarding the commodities. The price is still set at the spot price. But.

But that is not the whole story. They are making it difficult, if not dangerous, to short the market. When massive buying comes into the market, it moves the market and sends the signal to the market that prices are rising. Momentum players move in, and prices rise some more."


Most of the information I've seen indicate that these funds make up nearly 50% of the market.

I'll say it again, 50%.


And here is a little graph of their activities :

LINK


You can get the full story here :

http://www.2000wave.com/article.asp?id=mwo052308

"For the first 52 trading days of the year, demand for commodity index funds grew by more than $55 billion, or more than $1 billion a day. And as Masters points out, "There is a crucial distinction between Traditional Speculators and Index Speculators: Traditional Speculators provide liquidity by both buying and selling futures. Index Speculators buy futures and then roll their positions by buying calendar spreads. They never sell. Therefore, they consume liquidity and provide zero benefit to the futures markets."


The end story is that this speculation is responsible for roughly half the increase in oil prices. Now we're back to $40-$50/bbl oil.

This bubble will pop too, it's just a question of when and at what cost.

[Bas]

The end story is that this speculation is responsible for roughly half the increase in oil prices. Now we're back to $40-$50/bbl oil.

This bubble will pop too, it's just a question of when and at what cost.

surely speculation is pushing up prices faster than the primary supply/demand equation. However, the physical market is tight, and can be reasonably expected to get tighter so hence it's a safe bet on yet higher oil prices, until significant demand destruction is happening in the world as a whole at which point the "bubble" will burst, after which we'll probably see huge volatility until the world's economy has adjusted to a declining oil supply. However, my guess at which price oil would ultimately " stabilize" would be around $200 - $ 300 (rough guess from top of head). Whatever the outcome, it's going to be classic in illustrating the transformation of a buyer's market into a sellers.

[BigTex]

The wild card, of course, is U.S. dollar devaluation, which looks to be a VERY long term trend.

Long term downward drift in value of dollar and long term upward drift in price of oil (as denominated in an average of all world currencies) would look like a long term steep price increase in U.S. dollar terms.

I don't know what the difference between $200 per barrel and $400 per barrel would be. I'm certain there would be plenty of buyers at either price, since we have this strange mating of increasing world demand at the precise moment of peak or plateau production.

Isn't that weird?

[Troyboy1208]

OMG use the short link button please!

[DantesPeak]

Yes I did make the statement a few times the US is living on $70 oil. The $70 oil price coming from the average price paid by the US last year for imports. The latest month for which import figures are available shows the cost of oil just under $100 - so we have a long way to go before $140 oil even shows up on our shores.

Basically cheap oil is imbedded int omost of our infrastructure - which is a good thing when consdiering the current replacement costs. Granted while most businesses look at their marginal costs when pricing goods and services, there is some inertia about passing price increases along. It is generally believed that it takes up to two years for most energy price increases to be reflected at retail leevl, but even then, some regulated utilities spread out the increase even over four years.

So why hasn't the economy collapsed yet, as some cornucopians might say? Well they better get ready for the day when that $140 oil doubles the price of food and many other goods. I've been posting since late in 2007 that the real downturn in the economy won't start until the second half of 2008 - and I still expect that to happen.

[alokin]

the second half of 2008 will start in approx. 3 weeks. At least it will start in the US.

[DantesPeak]

[MonteQuest]

We're still living in a $70/barrel oil world

that's what I read in another thread (can't find it anymore).

I would like to know a bit more abotu this statement.

$4.00/gal gas at the pump reflects $70.00/barrel oil. When the $130 + stuff runs through what will the cost of gas be?