Oil to $200? Fundamentals Don't Support It 37 comments
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Here is why Oil shouldn't go to $200 a barrel. Notice I didn't say won't go to $200, as betting against a commodity in this market is tantamount to financial suicide.
- The fundamentals don't support an accelerating price for Oil. While the U.S is not officially in a recession, growth has slowed down here as well as in the rest of the world. Less economic growth means less demand for Energy. Has supply changed in the last month? Only in the minds of those bulls who believe any time a gun is fired in an oil exporting nation, supply is threatened.
- The elasticity of demand for Oil may not be linear - that is to say, each 1% increase in the price reduces demand to a different extent. Is it possible that the higher the price, the more demand impact occurs? It is not inconceivable that demand for oil worldwide could flatten out for several years - it has happened before.
- Many countries subsidize the price of refined products to their citizens to promote social stability. As the price of Oil moves up, the cost of these subsidies increases to the point where it is no longer economically feasible to do so. Once these subsidies are reduced or eliminated, the impact on demand may be tangible. Turkmenistan recently ended subsidized gasoline for its citizens, and others will follow suit as the price of Oil goes higher. While demand from Turkmenistan is negligible in the world market, many countries use subsidies, including China. China is, in effect, hurting itself by shielding its people from increasing prices. Since demand doesn't fall internally as prices rise, this leads to even higher prices.
- Although demand for Oil is inelastic in the short term due to a lack of substitution, there is a "crowding out effect"; as consumers pay up more for gasoline, they will cut back on purchases of consumer items and other discretionary purchases. This will cause a further decrease in demand for Oil since many products use Oil in the manufacturing process. Many of these products and items are made in China, which still relies heavily on exports. So won't this "crowding out effect" eventually reach the end of the supply chain, and cut demand for Oil?
- The price of Oil is firmly in the hands of speculators and financial players as everyone knows. This is difficult to prove, but it is clear that technical reasons and momentum are keeping the price elevated. As a trader on the floor said this morning on Bloomberg, the market wants to go up. And we all know that what the market wants, the market gets, at least in the short term. When this momentum ends, the impact will be staggering.
- Much is made of the growth in demand for Energy from emerging economies, but the United States still uses 30% of the world's oil, and lack of growth here will eventually have an important effect on the market. In other words, a 5% growth in demand in the U.S. is worth 1.1 million barrels a day, while China's much-hyped growth of 7% was only worth 600,000 barrels a day. What if demand in the U.S declined 5%? Could China make that up?
- Another important reason is less analytical - take a look at the people who are telling you that everything will be OK with Oil in particular, but also with Commodities in general. That prices will stay high. Do they look familiar? They should, as they are the same ones who told you that everything would be OK in the housing market and the Homebuilders. Remember that crap? They didn't buy land any more, they "optioned" the land. They had access to capital, etc. None of these reasons stopped Homebuilders from going down 75% from the peak. Consider your source.
- Another non analytical reason is this - eventually someone in OPEC will stand up at a closed-door meeting and say this: Is it really wise for us to have oil so high for so long? Won't this eventually lead to permanent long term changes to demand as countries adjust their economies? Won't it stimulate the growth of alternative fuel sources? Or might it cause so much inflation that it will crash the world economy?
What could end the momentum play? Here are a few scenarios:
- A Democrat in the White House releases oil from the Strategic Petroleum Reserve to bring prices down. The government has twice as much Oil in its inventory as the entire commercial market does. Sure, OPEC might cut production to balance the market, but then there goes the spare capacity argument.
- A Democrat in the White House pushes a Windfall profit tax through during the first 100 days. This tax is not on Oil companies but on commodity traders and speculators. Or they could push up margin requirements for futures trading on certain commodities.
For those of you who don't remember, TheGlobe.com was the poster child for the start of the Internet boom in the late 1990's. It soared way above its true value as money piled into a speculative play. The company [not to be confused with the Boston Globe] is now long gone, and I am not saying that Oil will one day be "long gone," but might there be some lessons we can learn from our past mistakes.
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1. Increased spare capacity: Up from a little over 1 million b/day to 2.3 million.
2. Iran situation: The dopehead traders on the NYMEX apparently didn't get the memo that Iran has 28 million barrels of oil sitting in tankers off of their coast that they can't sell. They've paid oil tankers to basically idle daily with the oil. In any business, when you have unsold excess inventory that you want to unload, the first thing you need to do is cut production to tighten the supply line. This further demonstrates that the market has too much oil, not too little. And oh btw...guess what happens when the shutter the 500,000 barrels of oil production capacity? MORE SPARE OIL.
www.guardian.co.uk/bus...
I know this concept is so outlandish to the perma oil bulls that there would actually be an oil surplus, so I gave you guys a link from a credible news source, just so you guys don't think I'm blowing smoke.
3. Oil price subsidies are coming down in Indonesia and eventually may happen elsewhere.
4. Demand growth has basically been cut in half from the original forecast for the year according to the IEA (and they tend to be on the aggressive side of demand forecasts). The call on OPEC crude for the year is now 300,000 to 500,000 LESS than what is actually being produced.
So what is fueling the oil market you may ask?
1. Cheap money from the major economies. Even the ECB is too accomodative with their interest rates right now. The Fed is a joke with their liquidity injections to the investment banks that got us in the mess were are in right now.
2. Securitization of commodities.
3. Rampant speculation in the oil market. This is not created by any one party, but rather a herd mentality. The investment community PR machine is in and has been in full gear about how the impending oil shortage for the past 3 years to the point where everyone just accepts it as fact.
JREwing- If the price goes down in the future, oil companies may not shutter their expensive fields. When a market contracts, companies are forced to do whatever they can wherever they can to generate cash. And that means pumping oil from unprofitable fields. This is why low prices don't always cure low prices. Why do you think GM puts Hummers on sale?
My analysis- This oil market will crash horribly once the credit mess alleviates and the fed can raise interest rates.
JREwing: Excellent post. You communicate with rare clarity and understanding.
WE NEED regulations on the commodity markets...35% margins & higher taxes on non-supplier/producers would help -BTW, Goldman Sachs even owns a refinery...Hmmm
Oil should be $75- at present
It has nothing to do with fundamentals, buddy boy, it has everything to do with the coming military strikes on the Iranian regime and its terrorists-
Wait until Hormuz strait is mined or bombed, and I will tell you if $200 is a bargain then or not.
You novice writers take one face out of a hundred faces of a cut diamond and claim to "have the truth"??! Puaaah!
It's Iran stupid!
Iran has sitting tankers full of crude sitting off their coast, because it is the height of asian maintenance season. Iran, which has very low quality crude is dependent on the asian market (most of all Japan), because there are a lot of refineries in asia capable of processing that sort of crude. Once the maintenance season there is over those tankers will sail eastward. BTW Iran is losing production for decades, since they peaked in the 70s. they are not cutting back, they get cut back.(Another perfect example of underinvestment.)
Once again you make the mistake of poring all sorts of oil into one barrel. NYMEX LIGHT SWEET CRUDE is a basket of low gravity low sulfur crudes. These sorts of crude are rare.(North America, North Sea, Nigeria)
When You'd take a look, not only at he overall inventory, but especially at Cushing, OK (the bellwether for NYMEX LIGHT SWEET CRUDE) inventories are a lot lower, than last year.( last year this time: 27.7 million, this year: 20.2 million barrels)
And, yes in cases, where there is too much of a sort of crude, yes they cut prices. Like the Saudis for their bad stuff.(But there aren't a lot of refineries in the US, that can process the 'Bad Stuff')
Or in other words, there could be a sea of crude out there, if it is the wrong kind of crude, no one gives a hoot in hell.
HINT: If you get your information from the communist parties very own 'The Guardian', you devalue your arguments before you even made it.
And a little business 101:
There is not a whole lot of cash generated by an unprofitable field. Just a thought.
You are obviously one of those people, who are franticly looking for the passage in the bible, where it says that gas ought to be for free. Oh I found it:
Gasjunkie 13,1: Gas should be for free, because the archangel 'of last century V8 engine technology' said so.
Hope I could help.
One cannot compare a stock to oil or any commodity for that matter. Simply impossible.
While I agree, that things are a bit crazy in the pits, I stick to my opinion, that a long term uptrend in oil is justified.
I think one reason oil is so resilient is, that one has to have a lot of guts to short oil. Every time a shot is fired in the Straits of Hormuz, Chavez hooking up with the chinese, someone gets killed in Lebanon oil goes through the roof. You gotta be kamikaze to go short, even if you thought the fundamentals would justify a decline in price.
May be that's one reason Nat Gas underperformed oil since Katrina. The only risk to Nat Gas is the Hurricane season.
Guess we're a little bit closer to 200$ a barrel.
pcull, you are so stupid. Worse, I imagine perpetuating this lie is intentional.
As for geopolitical risk, look where we're getting our oil from:
11% Venezuela
12% Nigeria
7% Iraq
5% Angola
2% Columbia
3% Algeria
1% Congo
1% Chad
All countries with major geopolitical risk, and I've ignored Kuwait and the Saudi's.
www.econ.ucdavis.edu/f...
pcull, I am not a fan of the Hussein Obama man, but this isn't the right way to do it.
You should have said "one thing I am definitely sure of is that putting a MARXIST with an extreme SOCIALIST IDEALOGY in the white house is surely not the solution"
Obama's dad's muslim roots don't scare me. The color of his skin doesn't scare me. His pastor, he scares me but for other reasons. Obama's promises, his legislative record in the Senate, his proposed programs, etc...now those SCARE THE CRAP OUT OF ME. He is basically just left of Lenin and will drive taxes on working/producing Americans through the roof, will royally screw up our medical care and will screw the US energy industry. If you liked the old USSR, you'll love the Obama vision for the US. PS, Hillary and McCain aren't much better. But if my choice is a cruise missile up the rear end, a rifle to the head, or a 12-inch knife to the chest, I'll take McCain the knife.
Iraq could have largest oil reserves in the world.
"Iraq dramatically increased the official size of its oil reserves yesterday after new data suggested that they could exceed Saudi Arabia’s and be the largest in the world. The Iraqi Deputy Prime Minister told The Times that new exploration showed that his country has the world’s largest proven oil reserves, with as much as 350 billion barrels. The figure is triple the country’s present proven reserves and exceeds that of Saudi Arabia’s estimated 264 billion barrels of oil. Barham Salih said that the new estimate had been based on recent geological surveys and seismic data compiled by “reputable, international oil companies . . . This is a serious figure from credible sources.”