The Oil Drum

72 comments on A Closer Look at Oil Futures

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kjmclark on September 5, 2006 - 10:24am

The standard economist response mostly works here. As food supply falls, prices will rise. Rising prices will encourage more production and demand destruction. Of course, that isn't very reassuring, since much of the crop failures can be pinned on droughts that may be due to climate change, and the oil product inputs to agriculture are destined to get much more expensive.

I doubt we're at peak food yet, since we can always redirect energy to food. However, the price increases for food are likely to cause some real havoc, and "demand destruction" WRT food is not a pretty picture.

WT, your quote at Kunstler's website includes, "Through June, 2006, I estimate that the net exports from the top 10 net oil exporters are falling at an annual rate of 9.2%, since December, 2005." Any guess why that isn't showing up more strongly in the futures pricing?

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jkissing on September 5, 2006 - 11:11am

Overaall production is flat, so so far newer producers are making up for larger producers' lower production. Futures will not go up until spot goes up. Long-term futures will go up sharply only after seeing that current production is declining, and has been for some time because some will say the decline is temporary.

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westexas on September 5, 2006 - 1:46pm

"Any guess why that isn't showing up more strongly in the futures pricing?"

I think that we are going to see a series of bidding cycles for declining net oil exports. Right now, I think that the only substantial reduction in consumption is in poorer areas like Africa.

Of course, a recession here would cause demand, or at least the rate of increase in demand, to fall here in the US.

IMO, the big difference between now and prior cycles is that we are not going to see a (higher) production response from higher prices. I think that we are just going to see a series of auctions for declining available oil.

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kjmclark on September 5, 2006 - 7:22pm

Thanks for the reply. I get all that, and really think you're right about it. But while the futures markets don't seem to agree with the spot market at the moment, they still don't seem to be pricing in the full extent of the problem. I have a lot of respect for the folks working the futures market, so I'm having a hard time believing they're just missing such a large problem. On the other hand, it really looks as though they're missing the extent of the supply problems.

I wonder if they're expecting a significant enough recession to slowly lower demand and keep prices fairly constant (but high). That would fit both your expectations and their prices. Otherwise the prices just seem too low.