Crude Oil Prices: Bears Will Soon Win Out 45 comments
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Next week, I plan to start lightening up on some of my energy holdings. There are both bullish and bearish arguments on future crude oil prices, but I think the bearish case may soon start to win out. Some of the recent price appreciation is merely a reflection of the weak US dollar, but a lot of the move is also due to speculative sentiment. There have also been erratic price moves as many crude oil forward months have moved from backwardation to contango back to backwardation again.
Let's start with some of the bullish arguments-
- "The trend is your friend." There is no question that most momentum-based trading models are long crude oil and will stay long unless there is a sharp correction.
- A Goldman Sachs analyst has forecast higher prices.
- There are periodic stories about long term supply problems.
- Long only commodity funds are causing a lot of the move, which may not be over yet.
But here are some very strong potential bearish arguments, some of which can have a sharp negative impact on the crude oil price:
- Raising the margin requirements. It is easy to make the case that the margin requirement for the crude oil futures contract has simply not kept up with the price increases. Each crude oil contract represents 1,000 barrels. At around $132/barrel, one contract is worth $132,000. But the maintenance margin is only $7,250. That’s over 17 to 1 leverage. The commodity exchanges are sensitive to pressure from Congress, and will most likely raise the margin requirements in the near future. This could have a dramatic downward effect on prices. (Remember silver and the Hunt Brothers in 1980.)
- Lower limits on the number of contracts any single institution can buy.
- Pass legislation to limit commodity swaps that bypass commodity futures contract limits.
- I'm starting to read that more countries are reducing subsidies of crude oil prices. This will soon lead to a decreased demand from parts of the world where consumers have been shielded from the higher prices. Many of these countries have huge populations (e.g. India, Indonesia etc.).
- The US dollar has been weak because of the previous interest rate cuts. But the cuts seem all but over now. The rest of the world will soon need to cut interest rates to catch up with the US. This will lead to a stronger US dollar and weaker crude oil prices in dollar terms.
By the way, a good free web site for following crude oil and other commodity prices is http://www.ino.com/
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This article has 45 comments:
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Pete
Yes I think oil could fall to $60. But you are betting against some very powerful forces.
Don't forget the White House, two oil men from Texas who brought us Enron. Check the links ,see how Goldman Sach controls Washington.
www.davidosler.com/200...
wakeupfromyourslumber....
www.commondreams.org/a.../
Anyone who trades on Goldman's public announcements is not long for this world.
Increasing margin will happen, and probably will be done at the beginning of the correction in order to amplify it. But it will be just that...a correction.
LOL @ bullish argument number 2. That's a bearish point imo. If that's one of the only straw men you can find for the bull case, I suggest you reexamine your bearish prejudices and biases and come back to us when you are market neutral and clear headed.
The best bear argument I've seen is the fact that oil is infinite and renewable.
In fact, it may not be much more than $10-15 because if it happens, I would not be surprised if OPEC announces a CUT in production, and just that announcement will stop the correction.
Jack
Unless some supply MIRACLE occurs (eg. increased production, lower demand, economically successful substitution) oil prices will continue to trend higher. Indeed, there may even be a greater probability of some sort of meaningful supply disruption!
The only wild card in all this is OUR government. Sooner or later consumers will revolt against higher and higher prices at the pump and the resulting disruptions to our economy. Unfortunately, there's little sign of that as yet, however.
So, Congress knows the cause now - We must call them and e-mail them and fax them constantly to close the "Swaps Loophole' and get these funds out of commodities - OR, the commodity prices will keep on soaring regardless of tue suppl/demadn - PLEASE HOUND THEM TO ACT ASAP - everything is truly at stake - read the testimonies!
Greg
Consider the following, grasshopper:
1. As long as there are buyers willing (and able) to pay the price - the price stays or goes UP. Car dealers always raise prices when they sell more cars - right ???
2. As long as there are speculators that are willing to gamble a small amount of money (margin) to make a lot of money the price will go UP .
Those that CONTROL supply/demand certainly affect prices but only to the extent of 1 & 2 above.
Think 1929 and the 70's and the old history adage.
Long on Canroys (thanks to Jack Y.) but getting edgy.
I like Joe Lieberman, but even if he and the Congress were serious about trying to restict oil price speculation (...which I don't believe they are) it's highly unlikely they'd be successful.
It's only our American energy producers who aren't allowed to take their business offshore, as 85% of our coastal waters are CLOSED to domestic oil and gas exploration (...except to CUBA and CHINA, who are drilling off Florida as we speak!)
The last time the Senate voted to change that was week before last, and the proponents of expanding our domestic production got 42 votes (...out of 60 needed!) to alter our present policies.
That's why I say I don't believe we're serious yet about doing anything to forestall the runup in oil prices, which can only be accomplished by increasing our nation's energy supplies. (And by the way, ol' Joe voted against it.)
Capitalism is about smart people making a lot of money by dedicating most of their energy to money making while other people, who are either less smart and energetic or who think they should dedicate themselves to other things, stand by and get poorer and poorer.
It's pretty obvious to those getting poorer and poorer that markets are not only about supply and demand but also about fear, greed and when all else is said and done, getting rich at their expense.
You can read a moral statement into the above if you want to but at least the Iraq war should make it clear that the price of oil is about more than free markets.
Speaking about free markets, the last I saw, a giant blue fin tuna was "worth" about $350,000 on the open market while pregnant women are being advised by doctors not to eat it. The mercury level of these giant tuna is so high that everyone else is advised to eat it no more than once a week.
Two horns from the Black Rhinoceros were valued at $50,000 in 1990 because the Chinese think they produce strong erections. This has caused the Black Rhinoceros to be hunted to near extinction -- There are fewer than 2.500 left in the world.
Is mass transit a) a communist plot to bring down the price of oil, b) an attack on the free market, c) neither of the above or d) both? (Question on a recent Economics GRE exam.)
www.bloomberg.com/apps...
Summer, Hurricanes
U.S. gasoline demand typically peaks from Memorial Day on May 28 through Labor Day in September as summer holiday travel puts on cars on the road. Monthly fuel sales were the highest during August in five of the last six years, according to data from the Department of Energy.
``Demand for gasoline will definitely pick up in the summer,'' Victor Shum, senior principal at consultant Purvin & Gertz Inc. in Singapore, said in a television interview with Bloomberg. ``We've also got the hurricane season coming up and we could be facing a confluence of bullish factors.''
The North Atlantic hurricane season, which can disrupt oil production, shipments and processing along the Gulf of Mexico coast, runs June through November, with September being the busiest month and accounts for a third of all storms formed annually, according to National Hurricane Center records.
Fuel Subsidies
Subsidies in China, India and oil-producing countries will combine with strong economic growth in those areas to support demand even with rising prices, Fatih Birol, chief economist at the IEA, told a panel at the energy industry's Offshore Technology Conference in Houston. That runs counter to history, which saw demand fall 2 percent during the high prices of 1973 to 1974, and 7 percent from 1979 to 1981, he said.
``We shouldn't expect too much from the price, in terms of bringing demand down,'' he said. ``China and India are transforming the energy markets by the sheer size of their populations.''
Chinese oil consumption will climb 4.7 percent to 7.89 million barrels a day this year, the IEA said on April 11. Global demand will rise 1.5 percent to 87.23 million barrels a day, the IEA said. The Paris-based agency is an adviser to 27 industrialized nations.
OPEC Output
OPEC pumped an average 32.105 million barrels of crude oil a day last month, down 320,000 barrels from March, according to a Bloomberg News survey of oil companies, producers and analysts.
Nigerian output declined 160,000 barrels to 1.88 million barrels a day, the lowest since August 1999, the survey showed.
About 164,000 barrels a day of production attributable to Shell are off line in Nigeria, Shell spokesman Rainer Winzenried said. The company lost 156,000 barrels a day of Nigerian output in the first quarter, it reported last week.
The Movement for the Emancipation of the Niger Delta, or MEND, which claimed responsibility for the assault, has forced the company to cut exports of Bonny Light crude by at least 170,000 barrels a day.
I would add that margin requirements are not "cast in stone"--they have been changed in past years to meet a variety of circumstances (for example, do the excesses of 1929 ring a bell?), and will likely be changed again. As for moving trades to London, if the USA and England were to move in concert, London trades would offer no advantage.
How can so many people believe that, all of a sudden, China and India are grabbing up all the oil in the world, causing prices per barrel to rise 50% over a few months?
China doesn't even report how much oil it buys, uses, or stores. The best we can guesstimate is that over the last five years China has gone from 4.9 million bpd to a little over 6.8 million bpd. The US uses about 20 million bpd.
How can so many people believe that, all of a sudden, there is a shortage of oil? That refiners can't refine enough oil?
Does no one remember the 1970s?
Known reserves (fairly easily retrievable oil) in 1970 were about 560 billion barrels. By 2000 they were over 1 trillion. Eight years later they are about 1.6 trillion. (see PS below)
The world uses somewhere between 75 million bpd and 86 million bpd.
What's the problem? Where's the shortage?
The telling sign that the first major downturn is about to come is that after Goldman Sachs and T. Boone and nearly everyone else you can imagine came on the tube pumping the ppb at $150 & $200, the price has not moved even 5% since then (from $127).
Pickens has been an oil bull since the 70s, and GS always piles on late to get the public in after the momentum players are fully invested.
If the ppb continues to stall, the momentum players will know the public is finally fully invested. There will then be no more money to go in.
So when they've depleted the public's pockets, they'll start dumping and the public (suckers that WSt. uses them as), which is now buying oil and energy stocks as never before, will get killed—per usual.
That's a view from someone who bought his first stock in 1967 and has been watching the NY crowd run these scams on the public for the last 35 years.
They're greedy and heartless, too. They won't stop. Soon after the "we're running out of oil" and "China and India are using up all the world's oil" and "refineries can't refine enough oil" scam is over, they'll move to another sector and within a few months the financial media and the Big NY Houses will begin pumping it. And, guess what? The public will go for it again.
Rebeldog
PS: Iraq has just announced that its latest survey shows that they have another 225 billion barrels in reserve. Thus, add another 225 billion barrels to the World's reserves.
I do think supply/demand is the CORE ISSUE, today and looking forward.
I also think there are a number of other issues and influences--including, but not limited to: U.S. dollar, speculation, shortage of refining capacity, strikes, terriorism, threat of terriorism, greedy OPEC manipulators (including Iraq and Vennesula), peak oil theory, depletion of large oil fields, Saudia Arabia may have far few reserves than claimed, exponential demand curve in Chindia, greatly increased costs for ultra-deep drilling, etc., that add both fear and complexities to oil pricing.
Thus we have a temporary price bubble...this temporary bubble can last until demand declines (because it will be a very long time before supply increases significantly.
Assuming these are controlled by oil producers who want to greatly increase the price of oil and at the same time bring the US economy to its knees, I think they have this new way to spend their money but make a huge profit- just keep buying up the oil futures contracts to who knows what level? I do hope my theory is wrong!
Yes, it is true. But as long as
- US foreign and domestic deficits keep growing
- US Treasury and Fed are printing US$ as if there is no tomorrow
There is no way US$ will stop falling in a long-run.
This would cut our oil over-dependance dramatically and would cause the price of gas to drop enough such that all that there would be enough for everyone.
Instead we have all the automaker lobbyists pushing for their high margin SUVs and VANs and no development at all on more economical autos. Detroit will go down the tubes unless they now make this huge paradigm shift to economy cares.
Americans are beginning to "get it" now, I just sold my 92 Honda Accord and had about 15 people look at it, most were driving huge SUVs and VANs, they are all looking to save money but don't have a lot to spend since no one wants to buy their old VAN or SUV.
OPEC and the oil producers will see demand continue to drop the longer oil prices remain high and then people like me and those who looked at my care will be encouraged to buy smaller economical cars if we don't have some madman driving an SUV tailgating us all the time.
By the way, I bought a Pontiac Vibe, great car, has the Toyota Corolla engine and transmission, pretty reliable and it gets 34 mpg if you drive 60 mph.
Just imagine if enough people did that.
Consumers in the driver's seat for a change...(excuss the pun).
if you would read something besides socialist propaganda, you would know, that for example china's diesel imports jumped 17-fold.
You are not just a socialist, but also a nationalist, who cannot believe, that once savage nations catch up to the US.
1. Shut down all crude oil Futures activities and make them illegal
2. Price control all crude to sell at $60 per barrel
And that should do it.
The govt will change tax code and all the profits made from oil will be back in govt hands. Thats capitalism with excellent govt tax code.
Get your money out of USA accounts NOW!
You make a good point asking why crude oil prices should weaken right now as opposed to several months ago or some time in the future. Here are three reasons I used-
1) I like to follow relative strength sector momentum models. When a sector is in the 70th or 80th percentile, an upward move can last for quite sometime. But when a sector reaches the >95% percentile, stays there for several months and starts trading very volatile, it is usually near the end of the move. That happened in 2007 with China funds. High yield bond funds on the other hand have been strong lately, but with low volatility, so the move is more sustainable.
2) Look back six months. The Fed lowered rates six months ago by 125 basis points in less than two weeks. Fed rate cuts generally have a time delay of six to nine months before the economy sees the positive benefits which willl kick in over the next three months. The stimulus package willl add more fuel to the fire. Once the economy strengthens, we may even see a rate increase by the end of the summer which will lead to a stronger dollar and lower crude oil prices.
3) Look ahead six months and what do you see- Elections! Markets likes to look six months ahead, and will start reflecting future Congressional actions to bring down crude oil prices one way or the other.
Until the dollar really firms, nothing is going to change dramatically. Gold has held up very well, and so has nat gas, coal, heating oil, and so will oil. Don't forget that Mexico's supply is dropping, Nigeria's is dropping, and Chavez is no longer peddling much light sweet crude, it is sticky, thick, and heavy stuff, and he won't be able to get it out of the ground himself, because he needs technology and equipment he doesn't have. Buy some puts or DUG to hedge, but stay long oil for the long-term, that is my strategy. Same for gold and silver...I just love PBR!
I remember just two short years ago, the Saudi oil minister saying oil price should "stabilize" at around $45/barrel. I'm sure OPEC won't
settle for less than $100 now, even if they have to start another war with Israel to get it. They got a lot of skyscrapers to pay for!