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WILL CRUDOMANIA CONTINUE INTO 2009?
First things first, and I will answer that by officially declaring: "It's over and thank goodness for that!" Now crude oil prices will be allowed to float between $40 and $75 per barrel in 2009 depending on the pace for the recovery of the world and U.S. economies.
Just like what happened in Holland in the 1600's with the price of tulip bulbs, the crude oil bubble has burst. Tulip mania was a period in the Dutch Golden Age during which contract prices for tulip bulbs reached extraordinarily high levels and then suddenly collapsed. It is generally considered the first recorded speculative bubble on a product to be rare and in short supply.
A similar collapse happened to crude oil in the last four months of 2008 and it took a huge financial toll on the petroleum industry, mainly with the independent refiners taking the biggest hit. The vertically integrated major oil companies will be surviving since they have their oil reserves safely tucked away in the ground at less than $30 per barrel.
The investors involved in the speculation are still licking their wounds. But they are not about to take any more calls from their stockbrokers expounding the virtues of putting their monies into a no brainer commodity like crude oil.
However fossil fuels, for running our automobiles and industry, will be here to stay for the immediate future. We are about to see a change on that front as well with the new administration taking over on January 20, 2009. Their priority on setting goals will be for the U.S. to become energy independent by going "green" within 10 years.
The petroleum market must feel like Oliver Hardy, who said to Stan Laurel on many occasions: "Well, here's another nice mess you've gotten me into!" They then proceed to do the same things that got them into trouble all over again but we excuse them because they are making us laugh. Nobody is laughing now, but the petroleum industry does have a habit of repeating the same mistakes they made in the past.
So will the petroleum industry repeat itself and allow the speculators and investment bankers to rule their roost in 2009?
If the past two years have taught us any lesson it is that the energy analysts at the various investment banks should not be relied upon to give unbiased advice and make accurate crude oil price predictions.
Who can forget the forecast made in August 2008 by Goldman Sachs equity analyst Arjun Murti predicting that crude oil prices would spike to $150-$200 per barrel before the end of 2009 due to the increase in demand and shortage of supply? Now their commodities team led by Jeffrey Currie has adjusted that price to just $45 per barrel for 2009.
Stephen Roach, chief economist at Morgan Stanley, predicts the price for crude oil to average $82 per barrel in 2009. That is the highest price being forecasted by any of the investment firms.
The Bloomberg Consensus came up with the forecast that oil futures may rebound from their worst year to average $60 a barrel this year. That forecast is based on the median of 33 analysts compiled by Bloomberg.
But crude oil forecasting is like trying to drive a car blindfolded.
Crude oil prices went from $30 per barrel in November 1999 all the way to $147 per barrel in July 2008.
This year, world crude oil prices will likely continue to be influenced by the fear of oil supply interruptions that may come from political or economic pressures, perhaps moreso than actual supply and demand.
The OPEC cartel seems to now have lost its clout after crude oil prices continued to drop in the last quarter of 2008 despite two sizable cuts in production.
The current strife in the Middle East, with Israel's invasion of the Gaza Strip, has sent shudders throughout the crude oil trading world. With the possible Iranian involvement in that conflict they may choose to once again cut off crude oil shipments to any country supporting Israel.
In addition, Gazprom (OGZPY.PK), Russia's state owned oil company, stopped shipments of natural gas to the Ukraine. This has caused pressure to dwindle in the pipeline system that crosses the Ukraine and in turn is creating delivery problems of natural to Western European countries.
BP's former CEO, John Browne, made an attempt in November 2004 to calm the world concerning the then impending oil crisis. He confirmed that crude oil prices will stay very changeable and said:
It is not helpful for the world to believe that it is running out of oil. We are evidently not. If demand returned to historic levels the supply-demand proportion would be back to more normal levels by 2008.
He further acknowledged that if demand continued to grow at the same exceptional level as it had in 2004, the world would run out of spare capacity, but he added:
I think that would be a bit of a stretch in my view, since oil is not immune from the general vagaries of the world economic situation. In the medium term BP expects the oil price to stay above $30 a barrel underpinned by OPEC discipline and their needs for revenue.
Sir John Browne was later interviewed on CBS's "60 Minutes" show that month and reiterated the above statement. He further elaborated that he based his estimate, that crude oil would stay above $30 a barrel, on the fact that BP was drilling for crude oil in the deep waters of the Gulf of Mexico and had calculated that they could bring oil up from those depths at that price.
Will crudomania be continuing into 2009 now that we have been given warning that consumers will cut back on their usage of fuel when prices get out of line?
A current Gallup poll indicated that over 50% of the U.S. public has permanently changed their driving habits even though the price of gasoline was less in the 2008 period when compared to like period in 2007.
The long term answer, under normal market conditions, would have to be that we will not see crude oil at anywhere near the lofty prices obtained in 2008.
Disclosure: I hold no positions in any of companies or commodities mentioned in my article.
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This article has 23 comments:
Despite crude oil prices of $145/barrel and gasoline at $4.50/gallon, worldwide oil supply never got much over 86 million barrels a day.
The only reason crude oil prices have fallen as much as they have is because demand has fallen off a cliff due to the deep economic crisis which was due, in part, to the sky high oil prices to begin with.
The US federal reserve and treasury are printing money as fast as they can to reflate the economy. As long as the US government continues to try to fix a commodity crisis (oil supply) with financial tom-foolery, the US economy will continue to suffer as everytime it begins to recover, oil prices will rise and nip it off in the bud. The *only* structural fix is a strategic long-term comprehensive energy policy (see my website). Instead, the US sticks with its oil centric policy and it's military imperialism in order to gain access to middle eastern and caspian sea oil assets. This will be a failed strategy as, at some point in the next 5-10 years, worldwide oil supply will simply not keep up with worldwide oil demand and the price of oil will skyrocket again. Not a good scenario for a country that uses 25% of the world's oil, imports 70% of that oil, and is bankrupt after the last 8 years of financial mismanagement.
Bob - Could you please post a reference for this Gallup poll?
In fact, the price of most investable instruments - equities, bonds, commodities - you name it - fell by 20%-40% in 2008. I think financial deleveraging and fear were the major factors...
"Since we don't seem inclined to drill here"? Where to start?
Well, how about that fact that there are about 3 million oil wells that have been drilled throughout the world and that 2.5 million of them are in the US. We started first, jumped WHOLE HOG on the train, and poked holes nearly everywhere in the lower 48 that wasn't exposed basalt.
Yes, there are tight rock formations within the US which can yield commercial flows using horizontal drilling and fracturing. Thank goodness for that, because the enormous fall in the price of crude oil has been driven by a drop in consumption of only about 4% worldwide. Given the trajectory of usage by developing countries over the past twenty years, that four percent will be taken up within 18 months or so. Make it 24 because China is in an economic funk right now due to the collapse in exports to the US.
The OPEC exporters buy more than twice as much from Euro and other non-US currency using economies. Do you think that they are going to continue to price oil in dollars forever? The demand for dollars is about to plummet when the de-leveraging crisis wanes, and if oil is no longer priced in the dollar, it will cease to be the world's primary reserve currency. If the Saudi's were smart (and I think they are) they would demand payment in another commodity for their irreplaceable treasure. I think they will, and I think that commodity will be gold; they love it almost as much as do the Chinese and Indians, and it just makes sense to trade one commodity for another. It requires much less storage than most do.
So it's a darn good thing we still have a little bit of crude locked in rocks in the United States; we're going to need it to grow the food we'll need to power our bicycles.
On Jan 06 09:17 AM whisperonthewind wrote:
> Oil is not just gasoline, it is used for way too many things for
> us to stop using it any time soon. Since we don't seem inclined
> to drill here, we must continue to buy it elsewhere. While the price
> of oil was sinking fast, I was picking up a little more here, a little
> more there, and collecting dividends, reinvesting them, and finding
> extra cash here and there to buy a little more. Now, with the price
> of oil up from it's vacation in the 30's, I'm at a happy place.
> It can stay at 50 or go to 75, and I'll buy the gas I need, and heat
> my home, and pay the higher prices because my investments are going
> up at a much faster rate thanks to those low 30's. And when we figure
> out how to replace oil completely, I'll invest in something else.
> Maybe tulip bulbs.
I promise all of you, that till 2015 we will hit 9$ a barrell.
Yeah, Oil is now 50$ and I make money both buying/selling it day by day, but I would never buy December 2017 Crude Oil at 80$, the market traders of all kind predict such a price for 2017 and I have no idea how they come into this 60% above now price call, but may I remind you that in 1999 longest dated futures then for December 2008 were tading, well at around 20-25$.
There are more countries joining the machine and auto era in the last 10 years..
and it appears China has formed stronger alliances with more oil partners in the
Middle East than the US...we will regret that imo....also expecting much more
violence in the world...bad economies tend to make people testy...a cloaked
version of World War III is on the table imo...economies need resources...
On the other hand...if oil stays below $30 for any length of time that I would
interpreting us and the world as collapsing into depression scenario...
oil is so linked to growth that one would say we are in deep do do....
$40-$65 makes some sense to me...keeps the producers happy, yet
still affordable for our country....$25 a barrell leads me to think the
dow and gold are going to get cut in half....which they might..we live in
interesting times and are probably in round 3 or 4 or a 9 round fight..
hard to say the outcome on this one...
Speculators caused the big runup and caused oil to fall too far, too fast. It's that simple.
1) The largest oil field discoveries ever found were made between 1930 and 1975 and all subsequent oil fields discoveries have become smaller and smaller. No elephant fields have been found since Canterall in Mexico over 30 yrs ago.
2) If oil companies thought there is plenty of oil out there, why are they spending billions on painful to extract non-conventional oil and gas from the oil sands, deep sea fields, tight shale, etc ? This raises their marginal cost of production considerably and they would only do it if they were no alternatives to cheap conventional oil.
As Fitz (and T. Boone Pickens and the CEOs of Total and Chevron) have stated, 85 mbl/day is the plateau in global oil production and it is only downhill from here. Economic crisises have temporarily tumbled oil prices (e.g. 1930's, 1974, 1981, 1991, 2008) and oil prices always rise again as the economy strengthens.
Also in doing the research for my "Crudomania" article I found the following item in "Off the sauce -Gas prices plunge but driving habits stay curbed"written by Jennifer Waters, on MarketWatch dated 12-31-08:
"Even though prices at the pump are now about 45% lower than they were a year ago and significantly below $2 a gallon, 52% of Americans told Gallup that they have not gone back to their old gas-guzzling ways.
Gallup found that middle- to lower-income consumers -- those who earn less than $75,000 a year -- were most likely to consolidate trips and drive less overall, primarily because gas prices at the pump eat up a larger percentage of their incomes.
Of those who made less than $30,000 a year, 69% said they changed their habits while 68% of those in the $30,000 to $74,000 annual income range did. Fifty-six percent of those whose annual paychecks exceeded $75,000 did.
There is not much difference in behaviors among age groups when it comes to young adults and those who are older. Sixty-one percent of consumers 18 years old to 34 years old shifted their driving habits, while 62% of those 55 years and older did.
Of those who are 35 years old to 54 years old, 67% altered how often they got behind the wheel. "Of course, this seems logical because at this stage of the life cycle, as these Americans are more likely to have to commute and to have children involved in many after-school activities," Gallup Chief Economist Dennis Jacobe said."
This was the most elaborate outline I could find explaining the reasons why a majority of American consumers have now permanently changed their driving habits.
Tulip mania was around intangible goods that really didn't play any role in people's life. It is just happen that people decided to make tulips - not rare and not vital for people's survival - an object of obsession. When the bubble burst, there was nothing. People don't really need tulips. Also people can grow their own tulips. Not so good looking, not so colorful, but nonetheless they will be tulips.
Comparing that to oil is simply ridiculous. This world runs on oil and it is in limited supply. There is no substitution for oil, not in the foreseeable future. Unlike tulips, which can be removed fully from Dutch's lives without any noticeable effect on them, removal of oil will mean collapse of civilization. Also, unlike tulips, you cannot grow your own oil on your backyard.
The article is sheer nonsense.
You are correct, I meant no new sweet crude elephants.
Oil has suffered demand destruction in the last 6 months, but we are at the beginning of perfect storm as far as oil invetsments are concerned.
1) Peak oil did not go away because of the current economic crisis, it just got postponed.
2) The current economic crisis has severly restricted investment in E & P, thereby making us even less prepared for future renewed oil demand growth. When the economy rebounds the oil prices of July 2008 will seem like the "good old days".
I guess we will look back and say "oh it was only a 150 USD per barrel in 2008!"
I guess we will look back and say "oh it was only a 150 USD per barrel in 2008!"
Human history is littered with countless bubbles.
Tulipmania in Holland in 1640
South Sea in England in 1711
Mississippi Bubble in France in 1720
Florida real estate speculation of the 1920's
Stock crash of 1929
Internet / Tech Bubble of 1999-2000
Even though these events happened in different countries at different times in history, they all share the same common denominators; human greed, lot of disposal income available and failure to realize it was time to get out when things looked too good to be true.
I agree 100% with MeToo, oil is a necessity like food and water and does not belong in the bubble category.
I used the tulip bulb bubble reference due to my Dutch heritage. if the Dutch have learned anything is that history tends to repeat itself. The question is which commodity or investment will be the next darling of the investment community on which to create an specalutive bubble, which is defined by Wikipedia as: "Trade in high volumes at prices that are considerably at variance with intrinsic values”.
1. Much of the run-up was due to highly leveraged "investments" in oil futures that have now gone the other way.
As for that 86 million barrels/day of demand, it never really existed b/c much of that stuff was hidden in oil tankers and floating storage facilities that were recently constructed. I can point you to plenty of articles about how Iran was storing millions of barrels of oil in tankers in June, and how Singapore's floating storage tanks were full, etc. There is a TON of oil out there that no one wants.
2. Oil will not quickly reverse b/c now we have millions of barrels of spare capacity in OPEC countries (almost 5 million of spare capacity-- 1.5 million before the OPEC cuts +4.2 million of supply cuts). Demand has collapsed dramatically and is not likely to just come back on a whim. Dramatic changes are occuring globally in terms of how we use energy that will permanently affect demand (just as in the 1980s).
3. As more oil equipment gets built, the cost of developing new oil fields will go down. Much of the rise in the cost of finding new oil was due to the fact that oil rig prices tripled in 2 years. These rigs suddenly didnt become more valuable or hard to put together. Oil service companies will adjust to that economic reality and construct new oil equipment at a breakneck speed.
4. Alternative energy investments while curtailed are still ongoing due to climate change and other political agendas. As second generation biofuels come into play that aren't corn/sugar and are more sustainable, this will create supply side pressure on oil (even by historical standards, $50 oil is still really really expensive).
Whenever people start talking about the long term outlook for oil (greater than 5-10 years), remember that investments in other forms of energy will become commercialized during this period too as Obama and the democrats are not going to let this go
On Jan 06 10:30 AM 1977°C wrote:
> I agree only with 10-20$ Oil as 40-75$ that you project seems weird
> long term.You all forgot that in 1997 Oil was 10-15$ and nobody cared,
> then in 2008 many WORLD'S TOP ANALYST were predicting 250$ in a matter
> of days and we all witnessed where it all finished, sorry, it is
> not over yet.
> I promise all of you, that till 2015 we will hit 9$ a barrell. <br/>Yeah,
> Oil is now 50$ and I make money both buying/selling it day by day,
> but I would never buy December 2017 Crude Oil at 80$, the market
> traders of all kind predict such a price for 2017 and I have no idea
> how they come into this 60% above now price call, but may I remind
> you that in 1999 longest dated futures then for December 2008 were
> tading, well at around 20-25$.
at what price will you stop buying it?
that's the price we are going to have.
soon ....