Commodity Bubble Proponent

Options Trader: Monday Outlook

Nice point on the CNBC bringing in Robert Hirsch to talk about oil market speculation. What a freaking joke that network is.

His comments are about as unbiased/meritless as George Bush saying that Iraq has weapons of mass destruction.

Options Trader: Friday Outlook

Yesterdays fast money is a PERFECT example of CNBC's lack of a balance.

When they decide to actually discuss speculation in the oil market, they brought in Hirsch of the Hirsch report in 2005 that warned of impending peak oil. With all due respect to him, if you look up his bio (former Exxon Mobil guy, now with "Management Information Services", a company that doesn't have any profile whatsoever) you'll realize that he's part of "Dick Cheney oil fraternity", which also happens to include our good friend Matt Simmons (who's wonderful investment bank has never represented an oil major in any transaction in it's 3 decades of existence), Boone Pickens (who was such a shitty oil man that he decided to start his own hedge fund), and the other "Peak oil prognosticators". This clearly detracts from the discussion about what is really going on in the oil market and how the hedge funds are operating (and they never talk about this ever).

Matt "There's no speculation in the oil market" Simmons clearly demonstrates with the following article that he is a complete hypocrite who's opinion should not be trusted.

www.simmonsco-intl.com...

Here's the cliff notes version:

In the late 1990s, the price of oil was tanking with ample supply. Matt Simmons, in his ultimate wisdom, argued that speculators basically were artifically pushing down the price of oil and were more important as price determinants than fundamentals b/c of their large sums of money.

Fast forward to today, there's now ALOT more money from hedge funds, large investors, investment banks trading the physical oil and purchasing tanks to manipulate supply/demand data for futures trading, and at least two new deregulated dark trading platforms in the oil market, but in Mr. Simmons mind there is less speculation now than there was in 1998? I guess he's totally missed the boat on the following energy trading scandals in the last 5 years (and these are the ones we know about:

Enron
El Paso
Amaranth
BP's cornering of the propane market
Two other hedge funds getting busted for manipulating the gasoline market

And while this one wasn't illegal:

Goldman Sachs' rebalancing of it's Commodity Index that tanked the price of gasoline overnight.

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.

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...