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High Gold Prices: It's the Oil, Stupid

Michael:

Matt Simmons, not a dumb-bunny, is pushing NH3 (Ammonia) as an alternate fuel source for transportation. His claim is that the current fleets can be converted to run on NH3 at a reasonable cost, and that NH3 can be mfg. from clean energy sources (wind, solar, wave, ....).

Have you any thoughts on this?

Three Asset Classes that Can Actually Outpace Coming Inflationary Price Increases

Nice article, thanks.

I'm just going to toss out some random stuff here:

1) Indeed returns on gold do not seem to be well correlated with inflation but perhaps more correlated to periods of "unrest". So even without inflation on the horizon gold is not a bad place to park some cash?

2) Inflation vs. Deflation ... can't we have BOTH?
It seems to me it's not as simple as one or the other...
Certainly some assets/classes will be suffering "deflation" for years to come ... residential and commercial RE seem to have large inventories to work off for example. On the other hand it seems we could be in for shortages of ag. commodities, energy, and other "hard" assets. The stuff that the BRIC needs to build out their countries?

3) oil being held off the market - well I guess that could be the case, but a VLCC holds about 2M bbls, and with worldwide consumption at 80M+ bbls/day could there BE enough tankers willing to sit at anchor to really make a big difference???

Has Crude Turned the Corner?

Don't forget the "supply" side....
Depletion rates are even by conservative estimates 5% or better ...
(Cantarel is dropping by double-digit rates) that's good for cutting production by at least 4M bbl/day off every year...

and it doesn't take a rocket scientist to figure out that with current low prices that capex spending is way down so new sources are not being found and new wells are not getting drilled. Stripper wells are shutting down. All of this activity takes a while to circle around to impact supply due to long lag times ... if may be interesting when we figure it out....

Don't forget that a lot of the oil stored in super tankers and other places is by design - taking advantage of the strong contango pricing of oil... buy now for $35/bbl hold it for 6-month sell it for $65/bbl even after carrying costs... what's not to like?

When Will the Oil Price Pop?

Jim:

Thanks for this review!

I have a couple of random comments:

1) My personal suspicion is that a 4.5% depletion rate is optimistically low. I suspect the current rate is perhaps 5% - 6% and that it will rise in the coming years. Cantarell is, for example, depleting at double-digit rates.

2) Nuclear energy could do a lot for us; but we gotta get moving. I attended a presentation last night by Duke power, Areva, and several other US players in the nuclear field and the time line for building a nuclear plant is as follows: 6 YEARS of paperwork (environmental impact, public comment, NRC, ....) then 6 years to actually build the plant.

3) Nuclear and most alternative energy sources, as we all know do not produce liquid fuels, a real bummer in our current world of liquid fueled transportation.

4) Even if wind and solar COULD become major contributors, and I am skeptical .... we will need additional technology behind these producers to "smooth" out fluctuations in supply -- the winds stops blowing, it is a cloudy rainy day, .....

It's a huge mess ... and I am long energy

Oil: Despite Decline, A 'Must-Have' Profit Play

Demand is one thing... don't forget SUPPLY issues

Demand may be off slightly as a result of the current economic crisis but the emerging world does not all have to buy cars to boost demand ... just imaging say 5% of India and China's population buying an extra gallon of gasoline per week to put in their Moped? In the USA there is 1 car PER PERSON, in China there are roughly 3 cars per 100 people... lots of room to grow.

Now... how about SUPPLY?
I do not believe you will find any reputable source that will tell you that the depletion rate from current oil fields is less than 5%. Many geologists believe it is closer to 9%. Mexico's Canterell field is depleting at double-digit rates. So we have to add say 5M bbl/day just to keep even? With prices < $40/bbl do you think this is happening? I do NOT....

deep water projects are cancelled, oil sands CapEx is being slashed, stripper wells are being capped.... etc.................

When it turns around and as Keith says ... the date is not clear... but when it does... it will get FUGLY fast...

Just my humble opionion.

Will the Price of Oil Sink Much Lower?

Patient:

Can you post source(s) of the 5MBPD cuts rumors?

Inflation on 'Sale' as Deflation Dominates Markets

Deflation AND inflation - why not both...

I would vote that we have both Deflation AND inflation spread across different sectors....

As others have pointed out, I think much RE will continue to DEFLATE, as will lots of luxury goods (Coach handbags, private jets, .....)

On the other hand, the essentials of modest everyday living are likely to respond to all this money printing by going up in price ... Why will the middle east want to continue to sell oil @ $45 USD/bbl when there are twice as many USD in the world as there was just a short time ago?

Why won't the price of food head north?

I suspect that many will not have their cake and not eat it either....

Considering a Position in Oil Again

CLH:

On the tanker situation - I'm not saying it is true, but another explanation for oil tankers sitting around full and not unloading cargo is that whoever owns the oil thinks prices will be higher soon and has the time keep the ship anchored until this comes to pass.

Random:
With regards to new supply coming on line, yes we have new supply scheduled to come on line, but who is excited to hurry these projects along at current $40/bbl let alone $25/bbl? Projects are now, and will continue to be pushed out. Petrobras has all their deep water fields but the cost of brining it to the surface is $50+/bbl... so I can't imagine they are in a hurry to spend billions to loose $10/bbl on the markets?

According to the IEA current producing wells are being depleted (i.e. their maximum production rates are falling) at a rate of 6% - 9% annually.... That means we have to bring more than 5M+ bbl/day on-line just to keep even --- assuming that demand if flat. The latest figures I have seen from sources like the IEA still conclude that world-wide demand is going to be slightly UP in 2009 despite this raging recession we've got going on... i.e. the developing world is picking up the slack...

$25 Oil Could Happen Before a Return to $100

I keep trying to figure out how much of the demand is discretionary and will be extinguished by consumers turning down thermostats and etc...
Offset somewhat by the fact that it now costs only half as much to fill up gas tanks.

Industrial demand for energy is clearly down and will stay down ...

I'm too stupid to figure out the details on that stuff

BUT as Alan points out...

As the price of oil slides the marginal (highest cost) producers have to shut down in the longer term ... yes???

If the cost to produce a barrel of oil from the tar sands is $70 why would I go to the trouble to produce and sell only to loose $20/bbl. Indeed I have some fixed overhead I would like to support etc.. but do I not continue to do what is already being done... stop CapEx for expansion and hunker down

How much SUPPLY gets extinguished incrementally as the price of oil drops and producers throw in the towel and go home?

Further... since it is much easier to take production OFF-line than it is to put it back ON-line ... will we not wake up some day after a cold snap wishing for more oil only to find that it will take producers 3 months to bring some extra production back on line?

My head hurts as bad as my commodity-over-weight portfolio....

Considering a Position in Oil Again

Point #1:
Very interesting, I had not considered reductions in transit time.

See if I have this down:
If we assume that "supply" at the export point is constant then the temporary "oversupply" we are seeing here should diminish over a period equal to about 1x to 3x the elapsed transit time for a tanker to make it from the export point to the USA. Does anybody know how much time it takes?

Point #2:
Yeah what you said ... the US dollar has been the (I think temporary) beneficiary of the flight-to-safety and demand for dollars has been increased as they are the currenty used for settlmeent in the liquidation of much of the leverage in hedge funds and those exotic financial instruments we hear so much about... this is winding down I think ... and we have Mr. B printing paper and digital US dollars as fast as he can....

Point #3:
Yeah... I keep trying to figure out how much of the demand is discressonary and will be extingushed by consumers turning down thermostats and etc...
Offset somewhat by the fact that it now costs only half as much to fill up gas tanks.

Industrial demand for energy is clearly down and will stay down ...

I'm too stupid to figure that out....

New question:
As the price of oil slides the marginal producers have to shut down... ???

If the cost to produce a barrel of oil from the tar sands is $70 why would I go to the trouble to produce and sell only to loose $20/bbl. Indeed I have some fixed overhead I would like to support etc.. but do I not continue to do what is already being done... stop CapEx for expansion and hunker down

How much SUPPLY gets extinguished incrementally as the price of oil drops and producers throw in the towel and go home? Further... since it is much easier to take production OFF-line than it is to put it back ON-line ... will we not wake up some day after a cold snap wishing for more oil only to find that it will take producers 3 months to bring some extra production back on line?

My head hurts as bad as my commodity-over-weight portfolio....

Reality Hits Oil Market, Dollar Could Benefit

The IEA has released its latest report --- It says peak oil won't get here until 2030 ... That's the headline anyway.......

When you read the rest of the article it says we only need to spend $1T+ per year and (unless you're a bank in trouble I don't see anybody getting ready to spend $1T a year on recovering more oil in a declining market...)

Oh yeah, and IEA says we need to go find 64 million barrels of oil equivalent a day of additional gross capacity between now and 2030 --- the equivalent of six times the amount Saudi Arabia produces today!

Piece of cake???? mmmmmmmmm I think not ....
Why invest in rigs and exploration ....

I think we will see declining supply soon -- production coming OFF-line shortly as the marginal cost is above market price this coupled continued yr-over-yr increases in world-wide demand for oil will (yes WW demand is still increasing even in this crappy envronment) ...

This will NOT be pretty ...