oiler1930

Where Will Oil End 2009?

Any prediction for oilprices will be part of a shotgun pattern. ;; Lifting costs have to be exceeded or the marginal producers will drop out, and thereby reduce supply.

The Ghost of Crude Oil Futures (Part 2/2)

Remember that a futures contract is a wonderful two-edged sword. It is not a purchase, and the small margin requirement can be wiped out in a hurry. For a 1,000 bbl contract, a $1 change in price is $1,000; with $5 swings in daily trading, you can get wiped out in a trice if you can't meet a margin call. NYMEX margin is about $8,500 a contract.

The comment about fees for USO is germane, but there is no counterparty to devour your investment, only price action. buying now may be safer.

The Ghost of Crude Oil Futures (Part 1/2)

The runup in oil prices was funded by the big commodity index funds as a part of their portfolios. when the housing bubble broke, they were forced to sell everything to retrieve capital. The effect was comparable to a night club fire; everyone runs to the exit,and get caught. Like clock work, every month the nearby positions were rolled forward to future postions, which explains the contango. some money is flowing back in, where forward contracts nearby jump $2 above its predecessor, before getting less wild in the more distant futures.

I operate a small lease that raises four millionths of our domestic input (0.0004%). My lifting costs run $25/bbl; the new offshore oil is expected to cost $50-75 per bbl. The analysis above that shows lower costs neglects these facts.

Economic Anomalies Explained

natural gas heat content is discounted about 42% to crude, 55% to gasoline, and 50% to diesel, all at the Nymex contract prices. at retail, the discountis higher due to taxes on motor fuels.

congress has the power of the purse, but congress can respond to presidential requests.

How Elastic Is the World's Oil Supply?

I watch the EIA weekly petroleum reports, and have been tracking them for over five years. One key that I use is the number of days' supply, the quotient of crude inventory over daily inputs to refineries. This value ranges from ~.17 to 24 days. In the last year, crude oil prices doubled, while the days dropped from 22 to 19. The reduction in inventory total cost was several billion dollars! Management usually has two discretionary costs, maintenance and inventory. The carrying cost of the current inventories can be tied to whatever return on money you wish, say 4% long bonds, or prime rate; doubled inventory cost carriage can be carried a little more easily by the lowering of inventory quantity by 15%. Reduction of maintenance costs brings piper paying time closer, but is often done to stay our of chapters 11 or 7.

As a corrolary, should prices drop the addition of cheaper inventory quantities lowers the average cost. With a twenty day nominal inventory, turnover is swift, and a larger inventory at a better comfort level is affordable.

Oil Prices, Global GDP, and Net Oil Exports

rbblum

Desert Storm responding to the invasion of Kuwait and the current event in Iraq come to mind as economic wars, not to mention German occupation of Roumania and Japanese seizure of Indonesia, both for sources of oil

Oil Prices, Global GDP, and Net Oil Exports

Speculative booms invariably require some form of cash input. Our cash used to be gold and silver, while today we have fiat money with faith holding it up. When the money supply has a major increase with no offsetting increase in quantity of items of trade, prices are the quotient of money over quantity of goods.

When some folks rant about Arab Oil being the villains, and others say Saudi oil is in fourth of fifth place, with Canada and Mexico being first and second, and Venezuela, Nigeria and Saudi Arabia trailing, the fundamental factor in obtaining imports, for buyers, is to keep transport costs down. Costs on the margin spread to the totality of worldwide production, adjusted for grade of crude, and are pretty much based on landed prices of crude that can be piped to Cushing Oklahoma for delivery against crude contracts. Domestic consumption in producing nations reduces availability for export.

Liquid fuels are ideal for transportation energy, since very little weight is needed to contain the fuel, compared to coal or natural gas. During WW II, German vehicles were fueled with gasified coal or wood in a furnace mounted in the back of the vehicle; our EPA would not permit such a substitute here.

The economics of health care constitute a minefield to discuss. Typical company plans cover the first $2,000,000 net over deductables for the lifetime of employed individuals; I would not care to experience that much misery. Readily available statistics on health care costs are difficult to navigate and I have not taken the time to study same. Adam Smith would be able to make a quantitative assessment of the value added by restoring an individual to good health for the balance of such a one's life; Smith was scornful of the nobility who kept large retinues of servants in totally non-productive status. Trade is necessary to provide what is needed where not domestically available; if trade overall is not reciprocated, some folk have to do without.

Apologies for the parabolic comments.

Insiders Preparing for Major Drop in Oil Prices

The postulate that independent refineries will obtain a better crack spread, the difference between price of products (~10 bbl gasoline/15 bbl oil and ~5 bbl of heating oil/diesel fuel, when crude prices drop faces a structural flaw:
a crude producer gets 15% of sales tax exempt for a depletion allowance, in recognition of the oil pool being finite and not getting reproduced in situ. A converter, ie refinery, is liable for full net profits from production. An independent refiner is at the mercy of the integrated producer who gets 15 % of his sales exempted for production, and full tax liability for as much of the downstream activity that he chooses to own and operate.

The independent producer gets the tail end of the market when prices tumble to his cost or less; the independent refiner gets just enough margin to barely break even. Both activities may use commodity contracts to hedge their activities by selling forward production at a price estimated to guarantee some sort of profit, and for the refiner, buying forward crude and selling gasoline and heating oil contracts to protect a spread.

Direct ownership of production, carefully cost monitored, can pay an oilman a decent income. Direct ownership of an independent refinery seems to lead to bankruptcy.

With all that said, I believe that Valero is also a producer as well as a refiner, and qualifies as an integrated entity. They are not part of the seven sisters, such as the Siamese twins Exxon Mobil was once two of same, but are still a substantial world producer.