Commodity Bubble Proponent

Crudomania Is Over

Nice piece...a couple of comments

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

Oil Won't Stay Down for Long

Davy,

want to talk about your earlier predictions about how oil wasn't a bubble?

Once again, you are wrong.

Readers: If you followed this guy's advice over the past year, you'd be down 65% over the last 6 months, just like Boone Pickens.

This is just another commodity bubble guy who wishes for the good old days of $200 oil and $4 copper.

As Global Demand Rises, Oil Production Remains Flat

Hey genius...your article is statistically inaccurate:

www.eia.doe.gov/emeu/s...

Figure 3a: International Supply and Consumption.

Bodman needs to go read the statistcal informtion produced by his own agency.

Supply is up about 2% year over year from last year. So before you go publishing your bs about how oil production is flat and no new supplies are coming,go get educated smart guy.

Even the Gas Crisis Needs a Culprit

Nice written piece...although I do disagree with you on a couple of points.

1. CFTC data is incomplete and does not include the people that have actually left the NYMEX to go trade on the ICE.
2. Speculation is a problem because there is no incentive for people to actually purchase the oil.

What needs to happen (in order to get rid of this) is 4 things:

1. Have recourse for cancelling or rolling forward all oil contracts. So if you decide to cancel your August contract and move it to september, you lose your margin. Similar rules should be put in on the short side too (I'm not one sided about this).

If this was employed, it would really change the risk/reward ratio of oil investing without taking delivery. So if you're on the long side and your contract comes due and you decide to roll it forward, you just lost your initial investment. If you decide to take delivery, more power to you.

2. Any publicly traded company or pension fund that clears OTC swaps in the US that gets caught on an unregulated exchange faces fines of millions of dollars/day/violation. If the ICE was regulated, its still ok to trade on the ICE.

3. Separate the functions of clearing a transaction from loaning money to an investor to go bet on oil futures. What Goldman and Co. do is lend money to the investor to take the long side, clear the OTC derivative trade, and then take the short side themselves. This enables the i-bank to win b/c they know that these guys can't actually take delivery of the oil.

This can be stopped by requiring that the guys who clear the contract can't loan the investor money. So, I don't have a problem with the above transaction taking place if Goldman was clearing the swap, JP Morgan was lending the investor the money to invest, and Morgan Stanley took the short side of the deal.
But to have the same investment bank do all three things is a tradgedy.

Crude: Where's the Demand Destruction?

The import number is not surprising for two reasons:

1. China is building a very large SPR system like we have here
2. They are trying to increase their forward cover ahead of the Olympics.

I don't think that the Chinese drivers are using 25% more than last month. It has more to do with inventory accumulation and less with increased demand

Oil: This Isn't a Bubble

Your data sucks dude...

omrpublic.iea.org/

IEA said that in the most recent quarter, OECD supplies fell by approximately 8 million barrels with a 53.4 day cover. Inventory levels are ABOVE AVERAGE.

If we had this structural shortage that Wall Street and this guy thinks actually exists (like a 1.7 million barrel/day shortfall), our inventory levels would be down nearly 30-60 million barrels/month. Sorry man, nice try.

The Oil Shortage, and Other Fairy Tales

I love hearing about how we've hit "peak oil" even though nobody can really prove it based on reserves.

User 199286, since you're such a data driven person, I'll be happy to connect the dots for you with evidence, as you so eloquently put it.

Much of the declines in the non-OPEC areas (Norway, US, Mexico) can largely be attributed to a lack of investment in oil infrastructure b/c oil was really really cheap back then. I'm not advocating $10 oil again, but $135 is a HUGE stretch given the fundamentals

1. The US has the Gulf of Mexico, Bakken, ANWAR and the Continental Shelf. While ANWAR and the Continental Shelf are off limits, the other two are certainly not. These fields are currently being developed.

2. Norway: Statoil has made several discoveries in the past couple of years in the North Sea but b/c of a lack of equipment has not been able to develop them. Also, major exploration has begun in the Barents Sea.

3. Mexico: While Cantarell is declining, much of the decline is due to a lack of investment in the field. In addition to that field, Pemex is increasing production at a field called Ku-Maloob-Zeep and they have another gigantic field called Chicanotepec with nearly 139 Billion barrels of oil. Once again, this is an investment issue NOT a reserves issue.

One of the points of evidence that peak oil proponents use to show that Saudi Arabia is in trouble is that they have increased their oil rig count by a third in the last few years. HOWEVER, what these folks forget to mention is that the Saudi's are developing the 500k/day Kurais field and the 1.2 mb/day Kursanyah field RIGHT NOW as well as several other development projects to increase their productivity to 12.5 million/day. Combine those two projects with increased exploration and I think the rig count increase makes complete sense.

As for the 2 million barrel shortfall that doesn't exist...I suggest you go take a look at the IEA's latest production figures that show a total production of 87.3 million barrels/day since Q12008 with demand for the year of 86.8 million. This makes alot more sense given that there are oil tankers sitting around all over the world waiting to unload crude and that there isn't a supply shortage anywhere.

As for the peak oil oracle Boone Pickens, I'd be happy to send you links from major news outlets him claiming that we hit peak oil in 2001, 2002, 2003, 2004, 2005, etc.

And for the other peak oil oracle Matt Simmons and how he doesn't believe that speculators influence the price of oil, I suggest you go take a look at this article he wrote in 1998 talking about how hedge funds in Europe deliberately ran down the price of crude oil and how they were more powerful forces than supply/demand. If you read this, you'll see that he's a complete hypocrite. In his world, when the price falls its speculation and when the price goes up its supply and demand.

www.simmonsco-intl.com...


Mr. Davis- I agree with you and your points about the NYMEX. However, I'm afraid to say that we can't undo opening the Enron loophole in 2000. Dubai and other countries will just set up new exchanges offshore if we try to regulate oil market speculation here. We can't stop the oil bubble unless we stop the underlying reasons for people to speculate in oil futures.

Even given all of this fundamental information that suggest we are not on the precipice of an oil shortage, we have not yet hit the top of the oil bubble yet.

Every other bubble bursting (NASDAQ, housing, the 2006 oil correction) was preceded by a significant increase in the federal funds rate that wiped out the overly cheap money. We don't have that going right now. When you see the Fed Funds rate above 5%, expect a major correction in oil within 3-4 months, but not before then.

Unfortunately, when this bubble bursts, the consequences will not be pretty. Goldman, Merril, and others are counterparties to TRILLIONS of dollars of unfunded commodity derivatives. If any of their hedge/pension fund pals walk away from their highly leveraged bets on crude oil in significant numbers, the collapse of these structured investments will make the subprime/credit bubble explosion look like a cherry bomb in a toilet.

The commodity bubble of the last 6 months has everything to do with the Fed's reckless policy of trying to save the investment banking community at the expense of everyone else. "Peak everything" is too simplistic of an explanation for what is going on right now.

Toiling Over Bubble Troubles

Ok...I can show you leveraged speculation.

www.nymex.com/ewd_marg...

For a 1,000 barrel contract of oil, one needs only to put down between $7,200 and $9,000. That's 7% equity, and 93% leverage.

If oil goes down, you pay the difference between the margin requirement and the price.

The Oil Shortage, and Other Fairy Tales

As I finished my post, I just came across a perfect example of the phony stats that CNBC uses to prop up oil prices.

John Kilduff, of MF Global, is VP of Risk Management for their oil trading team. He is one of CNBC's regular contributors.

In the Australian Herald Sun he is quoted as saying:

"John Kilduff, analyst at MF Global, said the world is consuming 87 million barrels per day of oil while producing only 82.6 million barrels."

www.news.com.au/herald...

Using these stats, if we did this for say, since the beginning of the year, and the US absorbed 25% of this inventory decline since it consumes 25% of the world oil, we should have depleted our oil inventories in the US by 300 million barrels and would have. If you look at the EIA numbers, we didn't do that. The IEA numbers don't confirm this either.

Regardless of the oil fundamentals, these "experts" need to be taken to the woodshed when they "educate" us with flat out inaccurate information.

The Oil Shortage, and Other Fairy Tales

I've seen 4 definitions of peak oil on here and I just want to clarify what exactly it is.

"Peak oil" is a hypothesis that states that oil production will rise until half of the reserves are depleted. Once that happens, production will decline commensurate with the increase. Nothing more, nothing less.

Peak oil has nothing to do with:
1. Speculation in oil futures
2. "Cheap" or easy oil.
3. Oil demand fundamentals.
4. The coming end of the world that Matt Simmons, Hirsch, Boone Pickens, and others state.


Plain and simple this is a gigantic bubble created by the same forces that the tech and housing bubble had:

Three major things clearly have supplied the gasoline for this fire (no pun intended).
1. Negative Real Interest Rates
2. Lax regulation: Regardless of what you think about the fundamentals of oil prices, peak oil, etc., the lack of knowledge that the CFTC has is very clear. They have zero data on ICE trading, and we have had at least 5 major scandals with respect to energy trading in the last 6 years. If these markets were transparent, I would be ok with the rise in prices. But they're not.

If you don't think commodity prices in general have been manipulated, go ask any farmer about their experiences with trying to hedge their food production on the futures markets in the past year. Remember that for the last 80 YEARS until the past 12 months these markets did not have these problems.

3. Creation of new investment products to attract investors into arenas that they weren't in previously.

Since I haven't yet given up CNBC, let me walk you through a typical exchange on oil.

Oil Analyst: "The world is producing 2 million barrels/day less than it is consuming. We are out of oil. Oil will go to $150 and the airlines will go bankrupt."
Greasy Haired CNBC goon: "So how do we play this?"
Oil Analyst: "Well, not to worry, we've just created a new ETF that you as a lucky investor can buy. For every dollar crude goes up, the ETF goes up 10x."
CNBC Goon: "But what if oil goes down?"
Oil Analyst: "It never will, except for a small correction. Any dips are a buying opportunity. There's no end in sight. Oil will sell for $25,000 a barrel in 2015 and the fed will cut the interest rate to 0%."
CNBC Goon: "Wow, I'm convinced that there's no speculation in the market."

Speculation does not mean that the prices are being manipulated by any one person or entity. Rather it is a herd mentality where people chase high returns b/c their friends/neighbors/comp... had them from the same investment.

Sophisse: Did you know that Goldman Sachs,Morgan Stanley, and other hedge funds actually trade/distribute the commodity as well as gamble in the futures markets? See below for details. I'll let you all draw the conclusions.

business.timesonline.c...
online.wsj.com/public/...
online.wsj.com/article...
www.commoditytrader.co...

Crude Oil: Congress Acts, Iran Hoards, RTX Soars

Two comments:

1. This is clearly a bubble.

2. I used to agree with this author on the issue of trying to raise margin requirements, etc. These things aren't going to work.

Goldman Sachs, Morgan Stanley, etc. are commercial hedgers b/c they own oil storage facilities around the world. So, we're stuck with them whether we like it or not.

What is going to change this is if the Federal Reserve decides to turn off the easy money spigot and start tightening up to combat inflation, like they should have been doing for the last year instead of trying to save some dumbasses on Wall Street from feeling pain.

This tightening will cause the recession the world so desperately needs to clear out all of the junk debt, overinflated asset prices, etc. out of the system and return to something that actually is based upon reality

NYMEX: Speculators Aren't Driving Oil Market

Of course the NYMEX is against raising margin requirements....do you all want to know WHY?

They don't give a rats-ass about the price (high or low), all they care about is the volume of these ridiculous paper oil contracts. If margin requirements were doubled, tripled, whatever, that would mean less oil futures trading and less PROFIT for the NYMEX.

It's in NYMEX's interest to have everyone DO NOTHING. That means lower interest rates, more commodity contracts, and more net profits.

Goldman Sachs: Gasoline Not Driving Oil Price

You missed the part in the report where GS said that the increase in money from speculators has actually raised the price and we should be thankful for them because they allow us to discover the true price.

I almost choked on my coffee when I read that

How Much Worse Can It Get For Oil?

This is a bubble that defies any notion of rational behavior. We have plenty of supply, no shortage of oil, no shortage of diesel, and demand is overstated by the government.

This is an unregulated game for Wall Street that will eventually negatively impact the real economy and even Asian demand.

5 Reasons Oil Was Thrown Off Track

Let's look at reality. Nobody knows who in the hell is buying what b/c of the OTC derivative markets. If we had a major supply problem (a big if btw), then please explain to me this.

1. Iran has 20 million barrels of oil sitting in oil tankers they can't sell. www.bloomberg.com/apps...

If demand was truly outstripping supply, do you think this would happen? NO

2. Saudi Arabia just LOWERED the prices on their benchmark crude for delivery to Europe and North America.

www.bloomberg.com/apps...

If demand was truly outstripping supply, do you think this would happen? NO

Oil, gasoline, and distillate inventories are at the upper half of the 5 year average range.

In reality, three things have distorted this market.

1. Negative real interest rates in every major currency around the world. Inflation is hotter than 4% in Euros, contrary to the ECB argument, making even interest rates in that currency negative.

2. Dollar weakness

3. The securitization of commodities: We clearly need more transparency in the market. It'll be interesting to see what happens to these ETFs, commodity speculators once Congress closes the Enron loophole with the next farm bill

OPEC still has between 2-3 mbd of spare capacity according to the EIA and IEA, a big increase from the .5mbd spare capacity in 2004.
A special message for gale: I expect better out of a seeking alpha commet. Even if you're right, you can't stop it and you're just as screwed as the rest of us if society crashes. Maybe you should go hide under a rock on a tropical island with your little Hubbert curve graph instead of annoying people with your alarmist bs. You are really a wuss of the worst kind. Back up your rhetoric with some action.