Oil Bubble Continues Its Burst

Even though the stock market is down 10% since the election, oil is down even more at -13.84%.  Back in mid-2008, most people that called oil a "bubble" were ridiculed for not knowing the true "supply/demand" economics of the commodity.  With a decline of 58% since July, the oil "bubble" callers look pretty prescient these days.

click to enlarge

Comments

[endoftheworld:]

look also at the supply and demand curves.. you'll notice spare capacity nearly went to zero, creating a situation in which demand nearly exceeded supply... in that case, where an inelastic nearly vertical demand curve intersects with an equally vertical supply curve, the skys' the limit... hedge funds and speculation are only noise in a battle of fundamentals

2008 Nov 07 04:30 PM

[phillips49:]

Seems to me that it doesn't take much to cause price changes one way or the other when supply and demand are roughly in balance.

If the sole criteria for declaring and bubble is price decline, then every asset class was in a bubble. I don't seem to recall any prescient bubble callers on all asset classes. The last time I looked gold was off 27%, platinum 57%, copper off 50%, stocks off 40%.

I think supply/demand arguements are still valid for all asset classes.

It is my hope that the USA will use the relief on oil and gas prices to develop and implement plans to liberate us from foreign sources of energy. A world power can not remain a world power as long as it is dependant on foreign countries for it's energy. This is a national security issue that must be resolved before we export all of our remaining wealth. As it stands now, if we make someone out there mad, we're walking to work, if work is still open.

2008 Nov 07 07:16 PM

[mangolfer:]

Face it, housing, tech, and OIL were all bubbles. Alot of people got caught again, because they came to the oil party too late and are now hoping for another oil spike. It should be quite awhile for that to come again. Supply and demand seem to be in balance. Supply is dropping and so is demand. Alternatives are still ramping up and will be on-line shortly. Adios to oil....

2008 Nov 08 07:46 AM

[john s. gordon:]

we knew at the time that commodity speculation and hedge funds operating at 30/1 leverage were creating bubbles in everything. remember gold at 1040?
the saudi oil minister told us at the time that there was no shortage of supply and no excess demand in his order books.
the trading in the commodity pits was at the ratio of 22 paper barrels for every real barrel headed for delivery to a real customer.
goldman sucks did everything they could think of to push oil above 147 but eventually gravity prevailed.
> jack

2008 Nov 08 08:21 AM

[john s. gordon:]

on the basis that excess deliverability of nat gas exists, maybe it is time to take another look at natgas fired MHD power generation.
for those interested in this technology which has been under development since 1948, go to google & look it up.
in the 1970's there was a collaboration between USA and USSR (remember them?) on MHD. the US program concentrated on coal-fired MHD but nitrogen-oxides generation and fouling of the electrodes by molten coal ash were major problems.
the russian program concentrated on natgas firing and was reasonably successful. we had a large superconducting magnet at argonne national lab that the russkies borrowed and enjoyed it so much that we had difficulty getting them to return it. just imagine the spectacle of a large USAF cargo plane landing at moscow airport in 1976 to deliver the magnet.
> jack

2008 Nov 08 08:43 AM

[Ames Tiedeman:]

We go into the 50's next week and then the 40's by April. But guess what? Long term we go much, much higher.

2008 Nov 08 09:22 AM

[smurphny:]

Crude is essentially following the markets in general. If stocks go down again, so will oil. There is no clarity as to how low the Dow can go and no clarity about oil prices. This is what is causing the volatility. What is oil really worth? Fair value? There is no way to even guess because so many traders who could never take delivery of actual oil are playing a game of price manipulation. How our SEC and Congress have allowed these kinds of price manipulations to exist for so long is beyond comprehension. Oil different from shoes, cars and washing machines, it's a national security issue, a basis of our financial well being as a nation. We need sweeping reform of how these commodities markets operate. Maybe a lottery policy of mandatory random receipt of a supertankerful of oil for anyone who wants to bid on a futures contract would work! It would be difficult to take delivery in a Wall St. cubicle. Power companies, refiners, companies that use fuel in manufacturing, airlines, schools, governments, transportation-are all crippled by the games of the idiots in investment firms purposely pushing up the price of oil to line their pockets.

2008 Nov 08 01:20 PM

[Pipo:]

Actually Jim Rogers has been buying oil in the last few days. He is always right, eventually. Maybe is it time to start looking into buying oil.

jimrogers-investments....

2008 Nov 08 01:46 PM

[NOWHEREMAN:]

How does one stimulate an economy the size of the US?

Surely, it will require more energy than a bunch of BLANK idea producers sitting at their monitors reveling in hindsight but still clueless. Reconstruction in the US, if implemented on the actual scale needed would eliminate all of the demand destruction in place and projected. Hell, we could import the tar now called Oil Sands directly for use as asphalt. Lets see, cement, construction equipment, steel not only as reinforcement but also to replace the pipes currently rupturing regularly throughout our major cities, transportation to/from, etc..

This would truly be a Bubble which would strain our internal capacity for years but would not be called a BUBBLE because we would call it modernization. It would be part of the Reindustrialization process in the US because besides our dependency on Foreign Oil, Canada and Mexico for instance, we are also dependent on our overseas manufacturing plants and all of the other base metals no longer prolific in the US caused largely by intense environmental rules and litigation.

Do you actually believe we can achieve any of the currently bubble eyed alt. energy infrastructure needed without extensive use of oil? 10 years from now we could be Blah, Blah, Blah. All of it could be. All of it is just blather because none of it is possible without the extensive use of the oil which everyone knows is constrained.

When the details are finally revealed, oil will start to move up. When it starts to be implemented oil will start a rather steep rise. Because in addition to our own stimulus package, similar Projects which entail the usage of oil will occur simultaneously throughout the Industrialized world and emerging economies.

The pressure on oil and food will be worse this time around because the US will participate in the growth as it strives to achieve parity between the manufacturing and service sectors from 2/3rds - 1/3rd to 50 - 50.

In the short term, oil could go below $50. Some call it good for the consumer, it is. It is also called deflation.

Inflation is just around the corner and Hummer ads are accelerating.

2008 Nov 08 02:49 PM

[bowman711:]

A barrel of oil produces the same number of miles traveled no matter what its price is at the moment. It powers the same number of machines. As the economy goes down, and fewer miles are traveled or fewer machines are producing products, the price of oil will go down as well. But, when the economy turns around, and more people are driving to work, to work on more machines producing products, oil should be one of the first commodities to go up.

Many people will come out of this economic mine field holding stock in companies that no longer exist, or holding dollars that will then be worth much less than when they were received as governments try to inflate their way out of the situation. But, the person holding any interest in oil still in the ground, will still own the same number of miles travel or power for the same number machines.

Which would you say is the safer preserver of wealth for the average person not extremely skilled in trading - stocks, dollars or commodities such as oil?

2008 Nov 08 03:00 PM

[TinyTim:]

Yeah, baby.
Should have put more money on this one.

Fri Aug 1st 13:21 PM
Commented on:
How We Lost Faith in the Financial Superstructure

Peak oil is BS. Sure, it's a finite resource. Sure supply will eventually dwindle gradually and correspondingly demand destruction will occur. What we're seeing now are not supply and demand forces. It's market trading when prices change this fast. Not that there's anything wrong with that. We will see $2.50/gall gas by election day.

2008 Nov 08 04:14 PM

[TinyTim:]

BTW on Aug 1, regular gas was $4.25 in my neck of the woods. It's below $2.50 now. Peak oil is nothing new, other industries call it hi-grading.
The name may be misleading because supply-demand fundamentals don't cause rapid price changes, only political acts like supply disruption or anticipatory trading reacting to the media & politicians sowing FUD (fear-uncertainty-doub... a basic sales and marketing technique. Remember: If it bleeds, it leads.

2008 Nov 08 04:27 PM

[BelaOthello:]

With all due respect to the people who have made comments on here, everyone seems to be missing the critical key issue just as the media and the government although statements keep stumbling across the results of the key issue. Last month was a global margin call which resulted in the selling of ALL ASSET CLASSES and especially those investments which made the most sense like oil, gold, and technology. Countries, large institutions around the world, and central banks were deleveraging the currency trade based on the Yen where trillions of dollars were converted from primarily EUROS TO YEN (which is why you guys should watch the EURO YEN) not the Euro dollar and then these Yen were then leveraged up in many cases 400 times to reinvest in the stock market, oil, and gold as an inflation hedge. Notice how when Bernanke made things 10 times worse back in August 2007 this trade was put on in mass by the world again which is how the Dow went from 11,000 to 14200 and how Gold went from 700 to 1000. But guess what? Party ended in October when the Yen rose and everyone THE WORLD headed for the exits and it made matters worse like a snow ball effect like never seen since the creation of the stock market. It is still a threat. We trade minute by minute based on the value of the Yen. All the banks around the world are doing the opposite of what they should be doing because they are confused and focusing on the "economic crisis" thinking that lowering rates is the answer but THEY ARE WRONG!!! Although we do have an economic crisis, the world is only making all of the currencies weaker and the YEN STRONGER. We need to raise rates and strengthen our dollar first. Obama needs to speak to the G7 and other world leaders and have Japan, BOJ, lower the Yen temporarily and the do an organized deleveraging of this trade after there is stability. Then there needs to be a ban on this type of leverage forever because of the new age of our markets where ETFs have been created and anyone in the world can trade markets at the push of a button in hundreds of milions of dollars electronically via the Internet. This was never available in the 1930s which is why grey beards are being caught off guard and everyone is clueless right now. Forward this comment to everyone you know and get this to our new President if he is truly going to listen to the People because this is the number one critical issue that needs to be addressed first so we stop throwing our tax paying money in the disguise of a stimulus package everytime the market drops due to the Yen rising. The market is not dropping because of the economy; that was the first 25%!! I can explain it better if I had more time but I hope this helps. I did try and get a message to Rahm Emanuel and President-elect Obama but have not heard back. Regards, Jaysen

2008 Nov 08 04:43 PM

[NOWHEREMAN:]

Bela=Jaysen?

The Worst recession since the Great Depression was the one brought about Paul Adolph Volcker who by raising interest rates way above the rate of inflation caused an unemployment rate of about 12%. At its nadir, the DOW was trading at Book Value.

Prior to that the Yen went from 300 to the dollar to parity, Oil rose from $3-$40 and there was a Housing Boom and Bust. A financial crisis existed because of rising inflation. Carter's presidency went down ignominiously. And Reagan was elected. Sound familiar?

All I can really recall about the Carter presidency was his weekly fireside chats, the Hostage Rescue abortion and the Secret Service protecting him from the Killer Rabbit.

The difference is Deflation VS Inflation. If we follow in the footsteps of History, the current deflation will make way for the steepest rise in inflation since the 1970s.

Just a jaundiced view from an inexperienced traveler.

2008 Nov 09 02:06 AM

[sunland:]

What about ALL Basic materials. Steel, Chemicals, Gas, Coal, even Solar, and Shipping, all TEC and most Health related. Didn't mention Oil.
I think the biggest criminals are the HEDGE FUNDS. They don't have state what and how much the own. They can trade anyway the choose WITH NO REGULATION!! Even Finance wouldn't be as bad off with some controls.
We'll now see what good a government controlled by one party can accomplish.
Our own Gas should be first, followed by Solar, Wind, liquid Coal, our own Oil, Bio diesel like Brazil, and Nuclear power like France. Something needs to get get started NOW , not in 6 months or a year. I personally think we go down in flames with our new President and a Democratic Congress that's done nothing in the two years they've had control. I think my wife ,the teacher, analyzes it best saying be careful what you wish for. Well you've got very inexperienced black President who is the most liberal Senator. Pray is all say.
On Nov 07 04:30 PM endoftheworld wrote:

> look also at the supply and demand curves.. you'll notice spare capacity
> nearly went to zero, creating a situation in which demand nearly
> exceeded supply... in that case, where an inelastic nearly vertical
> demand curve intersects with an equally vertical supply curve, the
> skys' the limit... hedge funds and speculation are only noise in
> a battle of fundamentals

2008 Nov 09 06:18 AM

[NOWHEREMAN:]

Do some research on Brazil. Number of cities, population, number of vehicles, etc., time taken on a full governmental support of only one type of renewable.

I don't know myself, but estimate it at 10+ years with full renewable fuel regeneration for the whole country. Comparing what happened in Brazil vs US is a peanuts to pineapples situation.

The time to move is during the recession while demand destruction is ongoing not to help to get out of the recession but to lighten the load when demand accelerates again.

PS. We will do the exact opposite.

2008 Nov 09 10:55 AM

[Pipo:]

I found a good Blog run by Oil Traders at:

oiltradersblog.blogspo.../

Boone Pickens, Jim Rogers, IEA, Credit Suisse and many others gave their oil forecasts. Nice read indeed.

By the way, congratulations ob Bespoke. They have the best articles on this website. Awsome material.

2008 Nov 09 11:55 AM

[dr.doolittle:]

of course all of Wall Street was obliterated in the process. Oil will still be there and be put to all those amazing uses long after all those skyscrapers have crumbled into the ground. That's why I love democrats--let's get to the end sooner! I totally agree with paultaut--from deflation to inflation. And one thing to remember about the seventies--we had high unemployment to go with that inflation, too. I am very concerned about a rise in fascism and a "Hitler" type moment--democracy in America today is not only out of ideas--it's resorted to simply stealing from the taxpayers and giving their money to cronies-- clearly we are not going to fight against a very real material threat to our safety and even our existence. Should another terrorist attack occur on the order of 9/11 I think social disorder will be the consequence.

2008 Nov 10 10:47 PM