you_can_call_me_Al

Toyota's View of the Future

This follows a line of thinking I've had since first hearing about peak oil. Specifically, in 2005 it seemed that any honest-to-God flattening in production would be met with an excess of demand within 12-24 months and with a concurrent spike in price. At some point there would be a reaction, and most of the easy-to-fix wastefulness (mainly in the U.S.) would be eliminated. Hindsight tells us that $147 per barrel was the point of maximum pain, and folks were losing the SUVs, using public transport, not driving to the neighbor next door, etc.... Demand has now fallen below production capacity once again, so we should expect to see a pretty dramatic fall in price to nearly pre-runup prices ($80?). Things probably won't go all the way back down, of course, because some buyers will recognize future scarcity and create support somewhat above that level (higher if there are many, lower if there are few).

Now for the good part, cheap prices will act to increase demand as mentioned above, but to some extent the genie is out of the bottle. Americans are likely to shy away from guzzlers and are less likely to return to the totally profligate attitudes of, well ...the last fifty years. Offsetting this: 1) some people WILL return to those attitudes, and 2) declining global production as new finds fail to offset the weakening giants. The former will happen almost immediately, the latter in the next few years.

Where the right entry points sits boils down to some basic questions:
1) How quickly can auto makers get large numbers of alternative vehicles on the road? Alternative here means anything that doesn't use gasoline (NG, EV, dilithium crystals, ...who cares?).
2) When will the giants start to fall off in earnest? Cantarell is in free fall. If the others follow its example (not likely) then we're in for a very big spike indeed. Most likely, they will fall off more slowly, but it's still a big problem.
3) Finally, at what point will EXPORTS fall? As declining giants become common knowledge, oil producing countries will be less willing to sell their resources than before, and the price per unit demand will rise. This last point is seldom recognized.

There's no doubt that there's some corruption in the commodities markets (duh), but its existence does not negate the underlying forces. It merely exacerbates them. If/when these people are discovered, it would be a mistake to then assume that the oil problem is "solved." Look forward to one more spike in the next few years before alternative vehicles are produced in earnest. That one will probably be worse, but at least the problem will get solved once and for all. Congress, alternative vehicles are the answer, suing OPEC is not.

Should We Listen to Boone Pickens on Oil?

No one with a functioning brain will make long term bets based on the ability to make short term manipulations. He's not lying about expensive oil because he wants wind investments to work. Rather, he's made investments in wind because he believes oil will be high. You've put the cart before the horse. No conflict of interest here. His actions have shown his true beliefs, and they are consistent with what he's saying.

Whether or not he's right will be shown in time, but his track record is pretty good. Let's talk again in 2014.

Will Crude Oil Break $100/Barrel?

Mangolfer, thank you, thank you, thank you.

Why can't CNBC also point out the obvious?

Oil vs. Natural Gas

If the very recent natural gas discoveries are to be believed, then a substitute for oil has been found (too lazy to go get the link, google CNBC's website and look for the vid on the front page). Not nearly as energy dense as gasoline, but abundant (again, if they're to be believed).

If there's a grain of truth to this, then oil must inevitably decline.

Insiders Preparing for Major Drop in Oil Prices

The Hot Stock Confidential team? That's where you lost me.

OPEC's Move to Devalue the Euro

From your mouth to God's ears.

Nasdaq vs. Homebuilders vs. Oil

We have become more of a service economy and less of a manufacturing economy since then. I like your thinking, but without quantifying that aspect then we're missing a big piece of the puzzle.

Oil Swings Go Beyond Fundamentals

Someone correct me if I'm wrong, but if gas inventories are up, and oil inventories are down, doesn't that mean that refiners aren't buying new oil supplies because they aren't selling as much gasoline?

Errr, why on earth would oil rise on this news.

Looks like another bubble to me. My prayers have been answered.

$125 Oil Not Sustainable for the Time Being

While I have been a peak oil supporter for these last three years, I can't help thinking that the current mania has some marks of a bubble. Yes, certainly, oil is a necessary commodity that countries will pay almost anything for rather than do without, but consider that that is only true when demand exceeds supply. I believe that demand did, for a time, exceed supply, and a great deal of the current price run up was the result.

It goes without saying that when (not if) demand destruction takes place, the price fall will be equally dramatic. Intuitively, you might even think it will be MORE dramatic when you consider the high leverage ratios of the players in this market.

The U.S. currently drinks about 25% of the world's oil. Almost all of that is used for transportation in some form, and about half of it goes into our gas tanks (What's in a barrel of oil? ...easy google). Looking at the American driver's habits as recently as last year, how much of that is truly necessary? Put another way, can a significant chunk of that fat be carved away?

I would suggest that it not only COULD be carved away, but that it's being done even now. Data is showing that people are driving less. Fewer people are buying SUV's. More people are taking mass transit. Further, internationally countries are reducing citizen fuel subsidies. Finally, all of these things are happening at the same time. These adjustments will probably bring demand back under global production capacity, and the price of oil should make an imminent pullback (...within the next three months? ...tomorrow???). Again, given the leverage available in this market, the pullback will be painful.

The absolute denial of the current reduction in demand amazes me. All deference due to T. Pickens, his comment that demand is CURRENTLY exceeding supply is self-serving. The price spike happened no later than the instant demand exceeded supply, and probably before. The obvious implication is that any reduction whatsoever will bring us back in line, and the price will react accordingly. He is certainly not ignorant of current demand trends, but don't believe for a second he's going to advertise that fact to you.

Short term: sharp pullback. Long term: one or two years after the pullback demand increases again, but this time there won't be as much fat to trim and it will be a lot harder to bring back down.

Long term oil super bull here, but for God's sake don't buy today.

A Modest Proposal for Rising Oil Prices

Jason,
I see in Michael Greenberger's testimony to Congress that the "One of the fundamental purposes of futures contracts is to provide price discovery in the 'cash' or 'spot' markets. Those selling or buying commodities in the 'spot' markets rely on futures prices to judge amounts to charge or pay for the delivery of a commodity."

Oh my God.

How can this be? It goes against every standard of the free markets. Worse, it simply BEGS the Wall Street bastards to steal money from the public. This is worse than when they made Joe Kennedy the first chief of the SEC (lol, talk about letting the fox guard the henhouse).

So, let me make sure I get this. GS owns a huge minority (27%?) of the futures contracts in oil. The prices in these contracts are used to "discover" how much oil should cost (insert sound of hand hitting head while vomiting here). These contracts are legally traded on UNREGULATED EXCHANGES(!!!!). GS puts out terrifying press releases about $200 oil, and the price jumps ten bucks in one day.

Oh my f***ing God.

Man, if this kind of thing is allowed to fly, then we (the public) are completely screwed. God help us all.

Ass-rape-in-progress,
Al

A Modest Proposal for Rising Oil Prices

Well, so far I've read Philip Davis, and he alludes to collusion between the big oil companies. He also goes on to talk quite a bit about the enormous number of paper barrels in excess of wet barrels delivered. He then argues strongly that this is evidence of manipulation, but, unfortunately, does not demonstrate how this must follow.

I also found the following excerpt from the responses: "Second, his statement regarding open interest in futures markets, contract rollovers, etc, shows either an absolute ignorance of how futures markets work or an intentional attempt to deceive his readers. Actually deliver seldom takes place in most futures markets, whether it be oil, pork bellies, eggs, corn or precious metals. Front month contracts are usually closed in the last day or two of trading (and the open interest therefore declines dramatically) either by the purchase (sale) of offsetting contracts, perhaps with a corresponding sale (purchase) of similar contracts for farther out months. Consider this simple example of a perfectly legitimate hedging transaction, and it is only an example, not my personal situation (wish it was). I am a producer producing a fairly steady level of crude oil volume of 12,000 barrels a month, with such level expected to continue for the next year at a slowly declining rate , but remaining above 10,000 barrels a month even after a year. I wish to insure a steady cash flow over this period.... To hedge the anticipated cash flow, I sell between 12 and 10 contracts a month for each of the next 12 months, based on the forecasted production for each month. As the front month approaches expiration, I close the contract (and if wanting to maintain a rolling 12 month hedge open a new series of contracts in the new 12th month out, perhaps for a lesser number of contracts if my production is expected to decline or for a greater number if production is expected to rise). Note, I am hedging my production values with no intention of making actual deliver (my production may have no access, for example, to the contract delivery point in Cushing, OK for WTI). The price of the futures contracts (paper barrels in the jargon of the market) will close to the price of the physical (wet barrels) in the spot market in the last hours of trading. If the price of wet barrels has risen over the period in question I gain from the rise in price but the cost of closing my futures contracts will result in a loss there (consider it the price of insuring my cash flow). Conversely, if the price of wet barrels has fallen over the hedge period I receive less for my physical oil but make a gain on the paper contracts which offsets, at least partially, the loss. on the physical barrels, which I may be selling to a refiner three states away from Cushing. That's simplistically how futures markets work, no conspiracy, no illegal activity, and never any intention on my part to make actually physical delivery.

Again, how on earth can futures prices drive prices for wet barrels? It would be like buying a bunch of calls to drive up the price of a stock, ...doesn't follow.

A Modest Proposal for Rising Oil Prices

By the way Jason, I'm checking out the links you supplied. Thanks for the info.

A Modest Proposal for Rising Oil Prices

Hi Jason,
The comparison with Enron kind of puts me back where I started. The sons-of-bitches in question were definitely manipulating the market, but they ultimately did it by manipulating actual power supplies. Hard to believe, I know, but my recollections from "The Smartest Guys in the Room" are that they had contacts at various power stations that could actually shut down plants at opportune times for trumped up reasons (maintenance, safety checks, assorted bs...). Ultimately, they worked hard to create the perception of shortage, so that real world prices would jump. I still think futures must have underlying support from real world payments.

Happy to confess my ignorance on this one, and be more happy to understand how actual manipulation mechanics would work. Just bidding something up doesn't seem like a sustainable strategy.

A Modest Proposal for Rising Oil Prices

Hi GH,
Ok, I don't understand the futures market ...guilty ...probably. I certainly don't have any experience with them. Given that you seem to, you're probably the guy to repeat my question to. How can the contracts drive the market prices, rather than the other way around?

Regarding the suggestion to just sell your contracts, you're right. That definitely works as long as the price keeps going up. But isn't the price going up dependent on underlying demand/supply curves? If, at the end of the month, someone tries to get rid of their $138 contract, but real barrels (in response to falling demand) are selling for $120, isn't the contract holder screwed?

Speculation can certainly drive up the price of the contracts, but without real need to pay that much for a barrel, it just seems that someone will be left without a chair when the music stops. Can you please explain what exactly it is that I'm missing on this?

Thanks in advance,
Al

A Modest Proposal for Rising Oil Prices

Dallas,
I agree. Speculation yes, manipulation no. Maybe I'm completely missing the obvious here, but it seems to me that futures players are at the mercy of market prices, rather than the other way around. I think this guy has it backwards.

These so-called manipulators will have their butts handed to them if the market goes the wrong way, and I don't think there's much they can do about it. Bottom line, for awhile there we couldn't pump oil fast enough, so the price skyrocketed because it's not something economies can do without.

At eight-five million barrels per day, the U.S. is drinking about 25% of world production. About half of that goes into our cars, and probably half (??) could easily be cut back (e.g., lose the SUV's, carpool, get more efficient cars, economic slowdown, etc...). Regarding economic slowdown, that could be a worldwide phenomenon, and would have a dramatic effect on demand.

Think about it. All of these examples are happening at the same time (now) in response to the shocking increase in prices. Everyone was shocked at the same time, everyone is reacting at the same time, and the consequent reduction in demand will be startling. All it needs to do is get back below production levels to hack out the legs of this price run up. Am I long USO at these levels? No way.

Being too early is almost as bad as being wrong of course, but if this baby starts to burn, I'll be throwing some logs on the fire.

Luck to all, ...except those betting opposite me.