insideoil

Oil, Stock, and Housing Declines

Seems people have forgotten when oil was 10-12$/bbl - it was not THAT long ago.
Fundamentals now support $80/bbl (based on marginal new production costs) - even with declining demand, and new increased Saudi production on line in the last few months. My simple view is that the OPEC members also keep their eye on return of capital, rather than just return on capital - so we will see production line out to demand by just cutting back to quota levels after the Sep 9 meeting. The loudest OPEC members in favour of production cuts will be those without investment portfolios - they need the cash to run their countries, and they are seriously struggling with $ induced import inflation.
The worst that can happen if the USA does not get its house in order is a bail out from the US$ by OPEC members, in favour of a currency basket for these oil producers.
My simple view is that the dominant OPEC decision will be taken one by one based on return of capital i.e a fear based defensive action looking at investment portfolios, rather than pure income only. We will see a dip to the $80/bbl level short term, but as soon as as any strength in demand returns, prices will jack up again as greed returns. That strength in demand can come from East or West, or from hurricanes or politics - it matters not from which cause, only when, as supply does not exceed demand by any comfortable margin.
The lower the price falls and the more jawboning on green alternatives, nuclear, drilling USA or whatever, the more real oil/product projects will be slowed - leading us closer to that supply/demand balance problem again.
I'm betting the energy sector will fall just as everything does during this downturn, but its pick up on the next cycle upwards will be faster and even more furious than the last rise from $10/bbl to $140/bbl.
Aaahh - but the only problem is the timing !!!

How Much Worse Can It Get For Oil?

You all loved it when it went your way - all ups and no risk. Bitching is not going to solve the present mess - only concerted action to get demand down and supply up, and will get the present fuel price to level out (assuming the $ stays constant). To the extent that none of the easy solutions are still available - sorry - you are going to wind up paying the price. Now please someone tell me the investment strategy that allows me just to hold value - never mind lose my shirt !!!
Oh - and by the way - just watch out for that Iran war thing. Ever since time began it is the big wild card that really makes the difference. Hezbollah making coup in Lebanon is just getting a bit too close to absolute mayhem for financial comfort.

Toward a U.S. Energy Policy

Perhaps you should start throwing some rocks at your local Nimbies, both on LNG import facilities as well as new refineries. As long as it costs a fortune to get approvals in place to build - never mind the actual cost of building - refining capacity, imported energy, conversion of coal, and even new nuclear plants just will not happen in the time frame required to meet demand. The US Joe is now the victim of his own foolishness, simply as a minority was allowed to dictate the price to be paid by the majority. There is no one else to blame but your own past silence.

Record High Crude: Free Markets Meet the Cartel

Would that include the fact that in the USA less tax is paid on oil products - are you suggesting you would like to pay what they pay at the pump in Europe ?

Two Explanations for Surging Oil Prices

Slowly the light dawns - how long does it take to recognise a negative trend - it seems forever - until it hits you hard enough.
3 sets of analysis are still missing for me.
a) total liquid hydrocarbons - supply & demand
b) total energy supply/demand - with an estimate at what price, switching will occur and in what applications/energy supply media, and
c) countries listed by demand level that subsidise oil prices - with an estimate of own supply.
The first will give an idea of what can be used short term to fill growth gaps, the second the longer term position, and the third to identify where ongoing growth will not be impacted by price change -so determining the completely inelastic high growth part of the demand.
I/m not smart enough - or do not have time enough - to do this work, but I think the results ( if actually obtainable) will tell the scary tale.
I personally believe there is plenty of energy available - the only variable being the cost of investment, extraction and delivery - with the cost not always being in money. Non-money factors are attitides to CO2 emmission generally, environmental managment of nuclear waste, and "clean" processing of "dirty" coal. Wind and solar can never make up the gap (time, availability of resources, and lack of scale make this impossible) - but will still help. Even if OPEC can encourage its memebers to increase demand - face it - there is little incentive for them to do anything else but manage their resources for the longer term.
The lack of certainty over the "elasticity" of demand in the first world is only an excuse for delaying investment - as it is always taken as the first cure to the problem. For a start - much of these savings on demand have been made already, and for seconds - its not where the growth problem exists.
The article above - in my view- has started to capture the rapidly growing collective wisdom that the energy problem has shifted, both in cause and in cure. Let us see the real bankers step up to the plate to get the real investing done in real projects for a real demand for real people.

Deutsche Bank’s $150 Call: Peak Oil Light

1. The use of energy model seems to be shifting towards oil at price where its only use will be where there is no other easy alternative - largely automotive. For the rest substitution will happen - largely by electricity generated from other sources, be it coal, nuclear, or via green renewables.
2. I agree that "hoarding" is a negative, and not a correct view - oil producers are looking to the long term, as opposed to providing immediate gratification at lower prices to lower value users.
The producers are quite capable of doing their own economic assesments to maximise their returns - at present the prices of products versus ever higher costs of extraction, coupled with the risk that demand does indeed slow, makes for poor investment.
3. The issue is what price level will supply meet demand - and then to ask what marginal supply, and what marginal demand. As reflected this could provide a wide range - as low as $30/bbl - to as high as the Hugo Chavez $200/bbl. Quite a level of uncertainty - and substantial risk.
4. If you have all the petropesos you need for your local needs, if you find investment doors in the USA and Europe being difficult to enter, what possible sense is their for oil producers to invest high, with an expectation of low returns both on the added revenue and what you can do with the revenue?
5. My bet - $150/bbl oil is very possible - and mostly because investment will not happen in advance to make the outcome any different. Demand for oil is robust and has not even flinched at $100/bbl, but the risk of the downside remains a wild card that has to be played through. Take pity on poor countries without oil.

Stuart Staniford: Two Mysteries of Oil Supply Data

It seems using the tag of "hoarding" is very negative and inappropriate - the producers are being smart in managing their resources over the long term - and are not willing to damage production prospects for high short term and speculator driven demand. Why should they - they do not need any more petropeso US$'s , and the cost of bringing in new capacity is extremely high at present. Furthermore their customers have threatened to do all they can to undermine the long term value of any new capacity investments, through any alternative energy sourcing they can find. Using the negative of "hoarding" - seems a remarkable accusation, telling more about the accusors than the accused. It seems greed shows no boundaries - and even those that show common sense in way of such greed - get smeared for being inconvenient. Get over it - cheap oil is history. The message of peak oil is not that there is no oil - it is just that it is not going to be easy or cheap until demand is cooled off, or the alternatives are able to kick in with a meaningful contribution - also not easy or cheap.

Look to the Markets to Assess Inflation

Simply add the thought that oil at $100/bbl today is the same value arguably as oil at $60/bbl, based on old exchange rates US$/Euro. The conclusion then is that it will be US equities that have a problem, not the rest of the world- as it is only the US (and US peg countries) really seeing the inflation.
Maybe you could do the same analysis, but from the perspective of the Euro ? I for one would be most intrigued to the outcome.
Perhaps also add to this the inflationary impact all those extra petrodollars will have - unless GCC/Opec players switch to Euro's or a basket of currencies.
So many options - so little time !!!