Why Is Oil Creeping Back Up? 66 comments
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by Alex Parets
Gas prices have increased by 20% over the last month (and jumped 90 cents since January), and the price of a barrel of oil has more than doubled since February closing at $66.31 at the end of trading on the NYMEX on Friday afternoon.
With the daily news cycle fixated on the appointment of Sonia Sotomayor to the U.S. Supreme Court, the erratic (but, not really) actions of the DPRK and their recent nuclear test, Susan Boyle coming in second on Britain's Got Talent, and of course, Prince Harry visiting New York City on his first official U.S. visit, the talk of increasing oil prices has been relegated to the back pages barely getting attention from policymakers and the media.
This increase comes at a pretty bad time for most Americans. With the unemployment rate hovering at about 9% and the much anticipated summer driving season getting underway, a steep rise in the pump price of gasoline may put a dent in summer vacation plans and family budgets. Granted, oil prices are still half of what they were last summer when they peaked somewhere in the $140-150 a barrel range. But with American families feeling the pinch, a 20% increase in gas prices, especially in only 31 days with future increases expected throughout the summer, may cause Americans to cut spending even more than they already have.
Analysts were expecting the low cost of gas to provide an incentive for families to hit the road this summer, thereby providing businesses with a stimulus of sorts. The expected increase in spending may not happen, at least not to the level that was expected, which may threaten the slim hope for a recovery beginning in the third quarter. Francisco Blanch, energy strategist at Merrill Lynch, said crude prices are nearing levels where "they could put the embryonic economic recovery at risk."
"There's way too much optimism about a driving season lift," said Tom Kloza, chief oil analyst for the Oil Price Information Service, who believes that higher prices, in conjunction with the recession, will dampen the typical summer travel surge. Kloza said the impact will be especially painful in economic "sore spots" like California, Florida, Arizona and the rural South.
So, why have prices jumped so much lately? Well, OPEC announced further output cuts a few weeks ago but decided not to touch production at its most recent meeting, although not all member countries are complying with the aforementioned cuts. These cuts are having an impact on oil prices, although the impact may be less than most expect because of the cheating going on. US supplies have dwindled recently, a sign that demand may slowly be increasing. (We know how this supply-demand function affects the price of oil.)
There is also talk from analysts and politicians of increased speculation in the oil market as of late. Bernie Sanders of Vermont is calling for federal regulators at the Commodity Futures Trading Commission to crack down on speculators arguing that "rising oil prices during a global recession, while demand has eased, is a very unusual moment. There is more oil sitting around than ever before, so there is no supply problem. US demand is the lowest it's been in at least a decade. What we are looking at now is not the fundamentals of the economy. What we are looking at is speculation on Wall Street."
The flip-side to this argument is that these ups and downs in the oil market are simply market reactions to future expectations. Expectations of increased future demand may be driving the increases in oil prices, which is to be expected if you believe the recent words of Summers and Bernanke and the talk of the beginning of a recovery in the third and fourth quarters of 2009. (Although I will point out that the definition of a recovery varies across academia and the policy world.) Most see recovery as merely the return of economic growth even if growth is painstakingly slow (somewhere in the .1-.2% of GDP region). This slow positive growth may not justify such a dramatic increase in oil prices.
As always, the best explanation combines all of these factors and describes the rise in oil prices as a function of creeping demand, dwindling supply, market expectations, some speculation, OPEC output cuts and even the political environment in oil-producing states.
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This article has 66 comments:
BTW, oil's up significantly from its lows, but natural gas is still cheap. Get it while you can.
Then, we'll have price controls, long lines, and eventually rationing.
> jack
But, even more, add the scooters, roto-tillers, generators, tractors and other fuel systems billions of people want and a second wave appears.
Existing oil fields are in decline and producers are reluctant to export the last drops cheaply. New oil, because it's offshore or embedded in sands is going to be much more expensive.
Quietly, (as a search in SA will tell you) uranium is appearing as the energy source to help fill the void. New reactors are being proposed everywhere. If France can generate 80% of its electricity from nuclear so can the rest of the world.
I know it's a trade and not a buy-and-hold, but I suck at timing. Either this summer is gonna be great for DXO or Bernanke will crash the markets again to shove money into Treasuries. One remaining question is to what extent China is able to internalize its consumer economy. If they can, then the rest of the world becomes a giant commodity depot and industrial / infrastructure equipment source for greater Asia.
www.cnn.com/2009/WORLD...
On this one I will join forces with George Soros and others who believe the recent bounce in oil prices is a result of speculators anticipating an economic recovery nothwithstanding the falling dollar, reduced oil shipments and stockpiling by China.
Within the US, we are at a 25-year high in petroleum storage and have 139M barrels more in storage than last year - an average increase of nearly 3M barrels a week despite OPEC’s 29Mb/week production cut. And the same is true in Rotterdam, where oil storage is reaching record levels, and in England where tankers brimming with oil float off the south shore.
Even Iraqi Oil Minister said last week: "We don’t think it’s a wise economic decision to produce oil from secure underground fields and then pay to store it in floating tankers. Future generations can benefit from it better than we can, if we don’t need it."
To the extent that speculators are betting upon an economic recovery and attending increases in energy prices, it's somewhat ironical that the recent runup of over 50% could easily choke-off the very recovery they are betting on.
Personally, I'm expecting a drop (both in oil and the markets) but other than some long exposure to a couple drillers I am mostly avoiding this game right now.
MM
On May 31 01:00 PM CautiousInvestor wrote:
> A provocative article and many thoughtful comments.
>
> On this one I will join forces with George Soros and others who believe
> the recent bounce in oil prices is a result of speculators anticipating
> an economic recovery nothwithstanding the falling dollar, reduced
> oil shipments and stockpiling by China.
>
> Within the US, we are at a 25-year high in petroleum storage and
> have 139M barrels more in storage than last year - an average increase
> of nearly 3M barrels a week despite OPEC’s 29Mb/week production cut.
> And the same is true in Rotterdam, where oil storage is reaching
> record levels, and in England where tankers brimming with oil float
> off the south shore.
>
> Even Iraqi Oil Minister said last week: "We don’t think it’s a wise
> economic decision to produce oil from secure underground fields and
> then pay to store it in floating tankers. Future generations can
> benefit from it better than we can, if we don’t need it."
>
> To the extent that speculators are betting upon an economic recovery
> and attending increases in energy prices, it's somewhat ironical
> that the recent runup of over 50% could easily choke-off the very
> recovery they are betting on.
>
>
Then somebody started that daft rumor that emerging nations would be worst hit and that the dollar was a safe haven.
Now that lie has been debunked we in for a re-run, only this time US dollar has nowhere to hide.
On May 31 10:38 AM Audio Tactics wrote:
> Actually, It's all about the dollar...
seekingalpha.com/artic...
seekingalpha.com/user/...
HardToLove
On May 31 11:29 AM Artistes wrote:
> Right now, given the price and HUGE volume over the past two trading
> days, UNG is the way to go. If oil keeps going up, at some point,
> natural gas has to catch up. Thoughts?
I think you're partially correct in suggesting avoiding the majors. I'd amend your suggestion to "US based majors". The foreign ones present a somewhat different picture. I'm not a huge fan of BP, based on their exposure in Russia (with the vagaries in gov. policy under Putin such exposure entails). RDSA might be a better bet, although there's some politcal risk there, as well, given Nigerian unrest.
I'd say the "picks of the litter" would be TOT and STO, although one might debate calling STO a "major". Looking ahead, I suspect the foreign majors will have better luck in accessing new fields/discoveries, given they're not saddled with burden of the animosity with which US firms are often regarded.
Further more, investments in the foreign firms will benefit from the declining dollar.
On May 31 10:17 AM Freya wrote:
> Mr. Zack, if your time frame is on the Short side and you want leverage,
> go with Double or Triple long ETF/ETNs or even, Dare I say it, options
> on futures.
>
> I think they exist, YH? do you know?
>
> I would avoid the Majors. Risks are too great (Obama taxing the hell
> out of them for one).
>
> Hmmm LINE great dividend too.
On May 31 12:48 PM Michael Jay Perlman wrote:
> Y'all spend your first six paragraphs getting to the point of your
> rhetorical question and then in your final paragraphs say absolutely
> nothing about answering your question. Y'all need to go back to bonehead
> English class and learn some writing skill sets. What a waste. And
> to answer your question which you failed to do: How about the fact
> that there are millions of barrels sitting offshore in tankers waiting
> for spot prices to exceed certain contango price points. It's called
> supply and demand and in the case of oil it ain't about Adam Smith's
> invisible hand of the economy, this is about the powerful fist of
> oil producers who want more money for delivery of the black gold.
> It's nothin' but an old fashioned squeeze play and the marketeers
> know it, the spot traders know it and OPEC and all upstream oil producers
> know it. So how come y'all don't?
Long term maybe there's economic recovery and demand increases, driving oil prices up. Short term, storing excess inventory - including in tankers parked offshore - is expensive, too expensive to wait for the green shoots to blossom.
So, it's a market squeeze with the costs of storage offset by (i) gains in trades against those who've been shorting against the current price AND (ii) by taking future short positions for the time when all that inventory has to be released.
On May 31 10:41 AM SW Richmond wrote:
> Currently sitting on 500 shares of DXO at an average cost of $4.54;
> made small early purchases way too soon (started buying on the way
> down) but have since bought much more at $3.58 and $3.08.
>
> I know it's a trade and not a buy-and-hold, but I suck at timing.
> Either this summer is gonna be great for DXO or Bernanke will crash
> the markets again to shove money into Treasuries. One remaining question
> is to what extent China is able to internalize its consumer economy.
> If they can, then the rest of the world becomes a giant commodity
> depot and industrial / infrastructure equipment source for greater
> Asia.
Who cares? Seem like you should be CDs, insured of course, unless you're a masochist.
But then I saw the price of oil going in the opposite direction to that predicted by most analysts. My conclusion is that speculators are still in control with politics a close second.
When reason directs the commodities markets then everyone will be rich, or else socialists, but until that day arrives, only lucky traders and insiders will make money.
@Vuke,
Ah that it were so. Unfortunately, it's not, unless you go with Plutonium breeders or Thorium. There just isn't enough U-235 in the outer crust to get much more than 50 to 70 years' production of electricity assuming only replacement of current aging reactors.
A worldwide increase to 80% would use it up before all the reactors were completed.
Successful Thorium reactors would last a lot longer as would of course PU breeders.
But the truth is that the only way for human beings to maintain a technological society is complete conversion to gravitational (tidal) and solar (direct, wind and perhaps space-based direct if one can avoid cooking all life under the transmission receivers) energy. It's the ONLY way; there is no other option.
All other options will run out quickly at a human population of 6 to 10 billion or more slowly with fewer. But run out they will. Hello; they all depend on resources which are mined from the Earth. The Earth is not growing larger, nor are radionuclides, hydrocarbons, or coal being created at any rate other than one over some huge power of 10 percent of that being consumed.
I have a hard time understanding why so many otherwise intelligent human beings simply are unable to see this incontrovertible fact.
The more quickly we decide to make the transition -- e.g. lower our current consumption in trade for a decent future for humans yet to come -- the more opportunity those in the future will have to use a little of the Earth's amazing treasure trove of biological and stellar riches. The more of it we use, the poorer ALL future human civilizations are condemned to be.
And for you hard-core supply-siders, No, I'm not saying that we should not develop new technologies or "go back to the stone ages" (a favorite canard about "leftists"). I'm saying that each human being alive today should use those technologies which consume non-renewable resources less today and each tomorrow she or he lives.
On May 31 10:16 AM Vuke wrote:
> Freya has it right. Car sales in China now surpass those in the
> U.S.. Add the rush to autos in India, Africa, Indonesia and you've
> got a tsunami of new oil consumption.
>
> But, even more, add the scooters, roto-tillers, generators, tractors
> and other fuel systems billions of people want and a second wave
> appears.
>
> Existing oil fields are in decline and producers are reluctant to
> export the last drops cheaply. New oil, because it's offshore or
> embedded in sands is going to be much more expensive.
>
> Quietly, (as a search in SA will tell you) uranium is appearing as
> the energy source to help fill the void. New reactors are being
> proposed everywhere. If France can generate 80% of its electricity
> from nuclear so can the rest of the world.
Refiners are at 80 percent utilization levels which is really very low.
There is no spare gas around unless you want to buy it from outside the country.
On May 31 10:58 AM The Geoffster wrote:
> Don't discount Black Swans.
> www.cnn.com/2009/WORLD...
Once again we have investors killing their own investment. In anticipation of future (not present) demand increases, investors drive up the price of oil. Of course this will have the unfortunate effect (for the investors) of killing the very demand increases they expected. It will also increase production. Both of which, in turn, will (eventually) kill the price of oil.
Oh well, no matter. I rather enjoy the thought of idiotic investors losing their shirts on stupid bets.
On week ends, Big RV's all over the freeways.
Don't tell me you didn't notice that.
The sad truth is that capital can't see past its nose, with notable exceptions. The rest of the heard will follow the squeals of the neo-Malthusian environmental left, that seem anti technological by their pig headed nature. And then their is the accumulation of institutional inertia by big government, that will act as a break to progress and enterprise.
The short answer is, will get to it (maybe) when we have no choice !
On May 31 08:26 PM Anandakos wrote:
> But the truth is that the only way for human beings to maintain a
> technological society is complete conversion to gravitational (tidal)
> and solar (direct, wind and perhaps space-based direct if one can
> avoid cooking all life under the transmission receivers) energy.
> It's the ONLY way; there is no other option.
a relief rally ... revert to mean
the background story of netenyahoo (SPELLING!) COMING TO d.c. .... THE IRAN nuclear fear trade is creeping back in .....
drilling outlook .... new drilling / rig counts are have adjusted much more/faster than some would anticipate. the market is looking OUT on that issue and sees issues.
usage move 3-6 % either way but sentiment goes wild.
On May 31 08:55 AM john s. gordon wrote:
> as usual bernie sanders is one of the few voices of sanity.
On May 31 10:40 PM OilFinder wrote:
> "The flip-side to this argument is that these ups and downs in the
> oil market are simply market reactions to future expectations. Expectations
> of increased future demand may be driving the increases in oil prices
> . . ."
>
> Once again we have investors killing their own investment. In anticipation
> of future (not present) demand increases, investors drive up the
> price of oil. Of course this will have the unfortunate effect (for
> the investors) of killing the very demand increases they expected.
> It will also increase production. Both of which, in turn, will (eventually)
> kill the price of oil.
>
> Oh well, no matter. I rather enjoy the thought of idiotic investors
> losing their shirts on stupid bets.
"oil prices up ...dollar going down...simple" (34 thumbs up...)
it actually isn't that simple. since march, oil is up over 50% and yet the dollar is only down what, 9% or so? the reason oil is going up is not only a falling dollar, but supply and demand fundamentals and traders' understanding that despite near 20 year high US inventories, a functioning world economy will burn that off very quickly (a few months). china just set a record for monthly car sales. india is selling cars and motorcycles as well. meanwhile, on the supply side, not only is OPEC cutting production but oil company E&P budgets around the world have been cut back due to the economic contraction. this sets up the next oil price spike. now, i am not saying oil prices won't retreat in the short term - i would not be surprised. that said, if the world economy begins to function "normally" again, you'll continue to see higher and higher oil prices. if the US (which consumes about 25% of total world oil supplies and imports 65% of that) continues to bank on gasoline for its main transportation fuel (instead of domestic natural gas, to my dismay...), the long term picture holds points to ever rising oil prices, an ever declining US dollar, and a declining standard of living for US citizens.
IMAGINE THAT.
On Jun 01 06:43 AM PeteK wrote:
> People are driving more lately.
> On week ends, Big RV's all over the freeways.
> Don't tell me you didn't notice that.
In the middle east, social unrest comes when the government can no longer pay for services wanted by citizens. (applies domestically also).
Considering the declared policies of this administration and Congress, there is a huge risk in owning any U.S. based oil stock. Payback and punitive measures are now policy in the U.S. For risk aversive folks (moi) companies outside U.S. look more attractive.
if you havent realized yet, US could dessapear(no, dont worry, i dont wish that) from the map, and oil would still keep going up, you see, mr. writer, oil is going up, because there are other nations consuming, and emerging, and building, that are not necessarly america.
just like galileo realized centuries ago, the earth wasnt the center of the universe, and for that, he suffered immense retaliations, i feel sorry to let you know that, america, is not the center of the world, not anymore, now, mr writer, I give you a chance to, open your eyes, look beyond, or keep your (church) mentality and condemn those who say oil going up is irrational. its your call pal.
now, dont be dessapointed, US will still play a huge role in the world, that wont just be gone, it will just have to adapt, to a new reality, like the church did (or didnt) they are not, the center of the "all" anymore.
cheers.
> jack
you mean the once and future republic of vermont.
sort of like the one & future republic of texas, the once & future republic of california, the once & future republic of hawaii... are there any more?
> jack
hardly a communist. under communism the party boss calls the shots & all dissent is squashed.
vermont is the home base of the town meeting, the last bastion of democracy in action.
> jack
The markets are going up as if we are in a bull market as one of the biggest corporation in the WORLD (GM) just filed for bankruptcy to the courtesy of the Tax payers paying another 30 billion.
The stock market could go up only if there is an anticipation of the dollar is crashing...have you check the Gold prices lately!
There should be no surprise if oil goes higher when the S&P 500 and Dow are climbing for no good economic reason...buckle up for the scary ride of the market!
On Jun 01 01:29 PM Michael Fitzsimmons wrote:
> "creeping" up? i say more like galloping higher. to the comment above:
>
>
> "oil prices up ...dollar going down...simple" (34 thumbs up...)<br/>
>
> it actually isn't that simple. since march, oil is up over 50% and
> yet the dollar is only down what, 9% or so? the reason oil is going
> up is not only a falling dollar, but supply and demand fundamentals
> and traders' understanding that despite near 20 year high US inventories,
> a functioning world economy will burn that off very quickly (a few
> months). china just set a record for monthly car sales. india is
> selling cars and motorcycles as well. meanwhile, on the supply side,
> not only is OPEC cutting production but oil company E&P budgets
Sorry Fitz, OPEC is not cutting back production anymore:
www.bloomberg.com/apps...
And oil production/exploration budgets are making a comeback.
In Canada:
www.bloomberg.com/apps...
And OPEC:
www.bloomberg.com/apps...
> oil prices up ...dollar going down...simple
Better put this way:
Dollar going down -> oil prices up... simple.
Yes, SWF are big, but not THAT big...they may be a part of the answer, but not the whole thing.
On Jun 01 03:29 PM Loup-Garou wrote:
> Just a guess, but it is conceivable there are some Sovereign Wealth
> Funds doing all they can to drive up oil prices.This includes taling
> large positions in futures markets.
>
> In the middle east, social unrest comes when the government can no
> longer pay for services wanted by citizens. (applies domestically
> also).
>
> Considering the declared policies of this administration and Congress,
> there is a huge risk in owning any U.S. based oil stock. Payback
> and punitive measures are now policy in the U.S. For risk aversive
> folks (moi) companies outside U.S. look more attractive.
Get WRES while its cheap.
good luck.
seekingalpha.com/artic...
As the USD drops prices go Up, be it the DOW, OIL, etc.
All else being equal a 10%, 15% Loss in the Dollar translates to an equal Gain/Rise in the Price Quotes we see
If you consider that the USD is heading substantially Lower, if you knew that the USD was heading Lower, than you could go Long on the Indexes we have all witnessed Rising for over 2 months, with no Fundamental reason obvious.......only if you look at it as I just tried to explain would this Rally make sense.
I have little doubt that a select "few" know things that the Average Investor does not.....this "thought" of mine is the one that could best explain what is going on. Another way to look at it is by viewing the DOW, OIL, etc., in other currencies. The Gains we see here in the US are not seen in other countries/currencies, so I say its the Currency, its a much Lower Dollar that's in play
> Don't discount Black Swans.
> www.cnn.com/2009/WORLD...
You can't discount Black Swans, because you can't discount (or count on something) that you cannot foresee. The very fact that you are calling something a "Black Swan" will forever make it impossible for it to become a Black Swan. Black Swans are unforeseeable events.
Your misuse of the term will deaden its true meaning, making the word functionally useless.
On Jun 01 05:56 PM john s. gordon wrote:
> yank -
>
> you mean the once and future republic of vermont.
>
> sort of like the one & future republic of texas, the once &
> future republic of california, the once & future republic of
> hawaii... are there any more?
On Jun 01 10:04 AM TurtleTrader72 wrote:
> Some good ideas here but the bottom line is that price of oil is
> rising because the real buying power of the U.S. dollar is decreasing.
> Try overlaying charts of oil and the U.S. dollar and you can actually
> see the inverse correlation. If the U.S. dollar keeps losing value,
> the cost of oil will ultimately rise. However, if the U.S. dollar
> starts to gain some strength, you will see oil pull back. I have
> said this before, this is a U.S. currency issue more than anything
> else.
It is a bet which may or may not pay off. Don't worry, they are not investing their own money.
On May 31 10:17 AM Freya wrote:
>
> I would avoid the Majors. Risks are too great (Obama taxing the hell
> out of them for one).
>
> Hmmm LINE great dividend too.
A barrel of oil is mainly valued for it's conversion to gasoline and diesel. So many gallons of gas and so many gallons of diesel (depending on your cracking ratio). So the price of a barrel of oil is really the sum of the prices of it's two main products.
Naturally, if the dollar crashes and loses 90% of its value, then oil prices would rise by a factor of 10. Therefore, The prices quoted below assume the dollar stays about the same.
At the right price, oil has competition from synthetic oil. Coal is nearly unlimited and is a superb feedstock to create oil equivalents. A barrel of synthetic oil (Syn Diesel) is made using Coal-to-Gas then GTL conversion). If oil prices stayed high long enough, then a whole crop of Syn Diesel plants would spring up. Could oil (or oil equivalent) go to $200/bbl ? Doubtful, as so many marginal producers would come on line (shale oil, tar sands) and demand would drop. Synthetic diesel (made from coal) would be very profitable with oil prices at a sustained $200/bbl. Even the Saudis wouldn't want $200/bbl because it would encourage other sources to come on line.
Could oil be $20/bbl (in 2009 dollars)? Not likely, as that exceeds most of the worlds cost of production. If there were a global collapse in demand, brought on by a much more severe global depression, and Saudi Arabia ran into serious cash flow problems. Perhaps the Saudis with their $5/bbl cost of production would be tempted to run the spigots full blast.
The Saudi's made it through the recent tough spell. They have the finances, a fat bankroll to last them thru lean times so they can reduce production when the price is low. They got this bankroll from us.
Therefore oil has many natural and political forces keeping it within a range.
The oil will run out, yes. Sure, in the distant future, the price for natural oil could go to $1000/bbl. That's when oil will be useful only for it's rare complex hydrocarbons. The markets for natural, crude oil would be meaningless. They would have been supplanted by barrels of synthetic oil equivalents.
They are an estimated 10 million Americans out of a job today, Americans are driving less then they have since the 1950's.
Fluctuations and hyperactive are words being used for manipulation and control in the oil industry. Plenty of crude today, around a 19 year high, and yet the price of gas is on the rise.
We can all thank Phil Graham for that.
So how about something original lets regulate the futures energy commodities market? Or better yet, free us from the use of oil altogether? The oil industry as a whole made around $476 Billion in net profit over the last 6 years, the pulse of the worlds economy is under the thumb of 13 OPEC nations and 5 major oil companies. Is this the legacy we want to leave our children and grand children?
synthetic oil.
coal-to-gas & then GTL is the long inefficient way around (and produces lots of excess CO2 along the way).
we have better, higher yield processes (2-stage hydroliquefaction as practiced @ wilsonville AL during 1981-85).
> jack