Karl Francis

Analyst: Oil Prices Inflated by 50%

The first name is Fadel, not Fidel.

Fadel is of course right. Oil prices will most likely fall much further. Financial speculators probably still hold more than 80B $ speculative long postions in various oil futures markets. If, under the next Administration, the CFTC has to get serious in observing position limits for financial speculators, there will be a blood bath.

Oil: Time for Caution

You cannot deduct fundamental facts from Boone Pickens' talk. He is a speculator, following trends and arguing in favor of those trends. After he has decided to go short, he will appear in the media and telling you that the world is drowning in oil.

How Big a Contribution Comes from Oil Speculation?

James Hamilton: I doubt that your income elasticity considerations are helpful. Too many other variables are interfering.

Recent news from credit card companies suggests that US gasoline demand, on a comparable level, is down by about 5%. I guess that is twice as much as the IEA, which seems always behind the curve in its demand projections, is taking into account – price elasticity wise. European consumption has apparently fallen by a similar percentage. That dwarfs the projected demand increase from the Chinese for this year.

So we can assume that oil consumption growth in 2008 is probably below the IEA’s current forecasts.
On the other side, global oil production is inching upwards, even with the much publicised Nigerian problems. Spare capacity today is double that of 2005 and, following the IEA, will further increase towards year end, probably reaching 3.4 Mb/day. The IEA doesn’t distinguish between real demand (consumption) and speculative demand. For the IEA, the latter doesn’t seem to exist. It simply says that all demand is satisfied. Some independent experts believe that average consumption is currently more than 1 Mb/day below production.

There is enough refinery capacity in the world able to handle the sour crude of the Saudis and the Iranians. Nevertheless, the Iranians have apparently problems finding buyers for their oil. (Reliance, btw, is in the process of opening Jamnagar 2, a 500000 b/day refinery specially targeting all those difficult oils)

Global political risks and oil supply risks today are not higher than they have been in the last 3 years.

In light of all those facts, we have to ask: why is the price of oil still rising? The answer is simple: it’s a speculative bubble.

Masters presented a chart (from Goldman Sachs) showing that, by March 2008,
“Commodity Index Investment” had risen to 260 Billion $ (from 13 B, 4 years before). A major part of that seems to be in oil. And that is only part of the total speculation in commodities and in oil.

The energy agencies admit that they don’t have reliable data regarding global oil inventories. Even the numbers for the US rely on voluntary reports not covering the whole sector and having never been verified. Finance investors could in fact control more than 1.5 Billions barrels of oil currently – without much knowledge about that in those agencies.

Someone who believes that the additional demand from finance investors/speculators hasn’t contributed significantly to the oil price increases in recent years should see a brain doctor.

Pay Attention to Oil Decline Rates

The observation, that the production of maturing fields tends to decline is a platitude, true since 1860. The question is, how much new capacity is beeing added.
If you quote Cera or others, you shouldn't quote out of context.
Here is the Cera comment on the peak oil nonsense:

www.cera.com/aspx/cda/...

Net Exports of Major Oil Exporters Likely to Fall

- As the recent BP report stated, Opec cut sales in 2006 and 2007 to prevent a fall of the crude oil pirce below the $50 level. This is the most likely explanation for the above numbers.

- Matt Simmons peak oil theory is essentially based on 3 years of flat conventional crude oil production. We have seen at least 4 such phases in the last 30 years. All caused by production cuts to stabilize prices.

- Oil isn't just conventional crude oil. 14% of global oil consumption today is coming from non conventional sources. That percentage is expected to grow to 30% by 2015. So, the hypothesis that conventional crude production will remain flat doesn't really matter.

- The IEA says that global supply and global demand (speculative demand isn't singled out) is currently in balance at 86.8mb/d.

- Following the IEA, spare capacity is currently 2mb/d - twice as much as in 2005, when the price was much lower. That number is supposed to grow to 3.3 mb/d by the end of 2008 - If global demand growth projection in 2008 remains at 800 kb/d. It could be lower than that in light of the current price of oil. The IEA is recurrently scaling back its demand growth projection, but seems to remain behind the curve.

- Global proven reserves of conventional crude represent 42 years of consumption. That is not counting recent huge deepwater finds (US gulf, Atlantic), which could move the number closer to 50 years. Anyway, that is a record. The 100 year average has been 30-35 years.

- The highest marginal production costs of those reserves are attributed to the recent Brazilian deepwater discoveries. Petrobras says that it can make a profit if it can sell that oil above $30/barrel. Yes: 30, not 130!
In light of those numbers, the crude oil production capacity is only a function of the amount of investments in new capacities, nothing else. Current prices are way above marginal production costs of all the proven crude oil reserves.

- Not counting all the renewable energy opportunities, or the ever increasing potential of electric cars, the cost of producing high quality syncrude from other fossil fuels, available in huge quantities:
GtL (gas to liquid)15$/b-20$/b,
Ctl (coal to liquid): 30$/b (China), 45$/b-60$/b (US, including CO2 sequestration),
Oil sands 30$/b-45$/b
Shale Oil: 30$/b-50$/b

Investments in such technologies will be too profitable to ignore. China is already building and planning CtL capacities at a frightening pace.

By all accounts, neither short term nor long term, the current oil price is justified. Only financial speculators buy long term crude oil futures contracts at current prices.

Crude Inventory Down; Gasoline Inventory Up: Whither Pump Prices?

I fully agree with the article. Speculation is running against fundamentals. The longs are playing the greater fool game.

T. Boone Pickens Remains a Fervent Oil Bull

"T. Boone said it best: 'demand is 87m barrels a day, production is 85m'"
That statement is nonsense. All serious sources say that right now, production is exceeding consumption. So far this year, the IEA has twice cut its demand forecast for 2008 and is estimating that by the end of the year, spare capacity will be the highest of recent years. Oil analyst Alex Bush, for me one the best informed, today said that he thinks the oil production currently exceeds consumption by 1.7M barrels/day. It's a speculation against fundamentals reminiscent of the early 1980'.

T. Boone Pickens Remains a Fervent Oil Bull

T. Boone Pickens is making oil price predictions since more than thirty years. Because he is predominantly bullish, he usually looks bright when prices a rising. But I think he has problems distinguishing between speculative bubbles and fundamentals and has problems calling turning points. I doubt that he always acts the way he talks.

I recall his bullish talk in the 1980’s. People who believed him and invested accordingly lost their savings in the end.