Sophisse

Confirmatory Bias and Oil Investing

I love this article! You encounter the concept of confirmation bias, and you immediately fall in love with it because it confirms your bias that oil bulls are misled. LOL!

I completely agree with your thought that all investors need to be concerned with confirmation bias, and I highly recommend The Black Swan for that concept and others. However it is a risk and pitfall that every investor needs to struggle against (with the possible exception of index investors).

I agree with you about the peak oil crowd, but the same applies to the oil bubble crowd.

Dollar Hurt by Geopolitical Concerns and High Oil

It does seem like question of which is the cause, which is the effect, is worthy of some comment.

Crude Oil Seeks Iranian Black Swan

I definitely agree that black swan thinking applies to oil pricing. With spare supply capacity at an extreme low, oil is very vulnerable to negative swans (black or grey). And unfortunately, it is very easy to imagine a variety of negative events, so easy that when you put them all together there is a material chance of at least one of them happening.

On the flip side, it is definitely possible to imagine a large positive black swan like a huge oil discovery somewhere. But the asymmetry is, the negative events can stop oil flowing overnight, whereas the positive ones start oil flowing after 3-6 years.

Oil: Time for Caution

Pickens may speculate but he is not just a speculator. He placed the largest order for wind turbines that GE has ever received. He is going to build and operate them. That is not a speculative act - he is going to be stuck with those things for their 30 (50?) year operating life.

IEA's Oil Market Outlook: Off the Mark

It's tough to make predictions, especially about the future. (Thanks Yogi!)

Yes they have revised their demand numbers down, based on higher oil prices which they didn't predict - but very very few predicted them to go as high as they did as quickly as they did, even energy bulls. Those that did can't post here because they are on a beach in Tahiti enjoying their fortunes.

"The IEA doesn't correctly take into account speculative demand."

But you and the Senate do?

"The IEA has, by the way, only an incomplete view about what is going on in global oil inventories"

But you and the Senate do. OK.

What China's Stock Market Implosion Means for Oil

I don't think the wealth effect is going to have too much of an effect on the average chinese citizen. Most people don't own any shares at all. What matters to them is economic growth, which is still strong in china. As long as their economy grows, they will burn more oil. That will be true even if the government ends their subsidies, though I'm sure that would cause a slowdown in oil usage growth and very likely a short-term contraction of usage.

Economics of Oil Futures Trading, Part I

I read the report. I couldn't get past all the inter alia's though.

Oil Swings Go Beyond Fundamentals

I think people expect prices to go up in some proportion to demand going up. And maybe they are right.

But consider this thought: what if, up till now, supply has basically been sufficient to satisfy every mile that anyone wanted to drive. I.e. there's extra capacity that could be ramped up. In that world, prices are a function of costs, plus some decent profit to suppliers. If suppliers want more profit, they have to organize a cartel, i.e. OPEC.

Now imagine that we have just crossed the line to a world where there are a few more miles people want to drive than there is gas to power them. Now, the prices have to rise to the point where some people who want to drive some miles, decide not to. I.e. prices are determined by value to the customer.

Cost + profit is a totally different number than utility value to the customer. Flipping from one to the other could involve a small amount of oil but a huge swing in prices. Like we're seen.

Analogy: if 10 guys come in from the desert dying of thirst and there's a whole costco full of water there, they are going to get their water for a buck a bottle like anyone else. But if 10 guys come in from the desert and there are only 9 bottles of water for sale, whoever sells those bottles is gonna get their whole wallets and credit cards because someone is going thirsty.

Read the IEA report. People are going thirsty. The big question to me is, will new production get us back into the lovely world we have been so used to for all these years? Or are we in a world where every extra gallon burned in BRIC has to be balanced by a gallon less burned in US/Europe?

Course, maybe it's just a bubble /shrug

The Oil Shortage, and Other Fairy Tales

A lot of people disagree about this I guess. I don't doubt that there are speculators in the market. But are they really speculating on oil? No - oil futures and companies. There's a big difference. The hunt brothers bought up all the silver - that's the actual silver - and put it in a warehouse. Who is buying up the actual oil? Who is manipulating the actual spot price of real oil today in Cushing? If that's a free and liquid market, which I believe it is (does anyone disagree?) then who's manipulating that?

Because if real spot oil prices today are the true unmanipulated price, then futures prices all make sense. Doesn't mean they are right in their bets, perhaps those futures will lose money - but they aren't ridiculous.

I know I sound like I'm on one side, but I'd love for someone to show me how the actual spot price today is manipulated.

Recent Oil Spike: 'Irrational Exuberance'?

Your comment about fundamentals and India and China implies that an x percent increase in demand should bring about a linear rise in prices - x percent, or 2x percent, something nice and manageable.

But basic supply/demand theory says otherwise. When demand exceeds supply, prices don't necessarily rise in smooth proportion to demand. Prices are set at the margin, the last willing buyer, which means the price rises until just enough people say "nah, I don't want it at that price."

The real question is, has demand finally exceeded supply? If so then prices can spike in an econ 101 textbook manner, without any irrational exuberance. Nobody knows for sure, but we have 3 years of flat supply + growing demand, plus a price spike consistent with this situation. Why invoke irrationality when there is a simple rational explanation consistent with the facts?