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94 comments on DrumBeat: March 18, 2007

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Charles Mackay on March 18, 2007 - 11:31am Permalink | Subthread | Parent | Comments top

I know this may be an unpopular thought, even around here, but how can we be sure that speculators are not driving down prices instead of pushing them up?

While I am not as sophisticated as the poster SAG, the recent trends in the futures market favor selling short contracts later in the year about $7 higher than current prices. This may cause speculators to sell oil they don't own, hoping that the price of oil does not go past $65 later in the year.

Even by the optimistic standards of the EIA, and contrary to the article above stating the supply will exceed demand through 2007 and 2008, all indications are that demand is about 2 million bpd over last year and supply gains are a fraction of that. Therefore it doesn't make sense that oil prices have fallen over the last few months.

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westexas on March 18, 2007 - 2:02pm Permalink | Subthread | Parent | Comments top

Therefore it doesn't make sense that oil prices have fallen over the last few months.

I've begun to wonder about this a little bit myself.

However, we do need to keep recent oil prices in perspective--they are close to two-thirds higher since 5/05 than in the 20 months prior to 5/05 (Brent spot price of $62 on average after 5/05 versus $38 before). I suspect that this price spike was enough to kill off a lot of demand (and some people) in poorer countries, but it was obviously not enough to kill off any meaningful demand in rapidly developing and richer countries.

But we effectively have a supply/demand imbalance in OECD countries, where demand is being met by drawing down inventories. This can't continue indefinitely.

As I have suggested several times, the next round of bidding for declining petroleum exports will be much, much tougher than the last round of bidding.

BTW, the "Export Land" model rolls on. The NYT today, in an article on Venezuela, noted that Venezuelan car sales up up about 50% year over year. In many of the exporting countries like Venezuela we are seeing a lethal (lethal for export capacity) combination of strong cash flow and subsidized petroleum prices.

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Will on March 18, 2007 - 3:07pm Permalink | Subthread | Parent | Comments top

Well WT... maybe the uber-rich folks who've been speculating on oil futures are the same folks who hold scads of repackaged mortgage securities.

Maybe they've figured out that candle burns poorly from both ends .

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andrew on March 18, 2007 - 9:56pm Permalink | Subthread | Parent | Comments top

perhaps a better analogy is that a candle can't support any weight if a blowtorch is applied to the middle :)

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Francois on March 18, 2007 - 2:26pm Permalink | Subthread | Parent | Comments top

The bank of international settlements, (BIS) shows a $5.8 trillion derivative position in oil contracts held by central banks on its books. Since they would not be necessarily trading for a profit motive, you have to allow for this in trying to understand the market movements.

It is likely in my opinion that they are shorting the market at the moment, and that they can use the SPR and other worldwide storage as collateral in case they get called to deliver. There are also hints that the Iraqi oil production has been sold forward even though it is still in the ground with uncertain prospects of coming out in volume.

Francois.

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Charles Mackay on March 18, 2007 - 2:53pm Permalink | Subthread | Parent | Comments top

The above are some good explanations of what may be happening. I'd just like to point out that if the price of oil was being intentionally held below its market clearing value, demand will not only exceed supply but malinvestment in the energy and transportation industry will occur as businesses and individuals make incorrect decisions based on the current price.

In addition, inventories would be run down. I don't think the use of the SPR would be a viable alternative in the long run to stop the inventory decline (within the US) because the oil could not be efficiently distributed through the country in a major emergency.

Less problematic is that if speculators alone were keeping prices down, then eventually market forces over time would cause their trading positions to reverse – and the market would go back near equilibrium.

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elwoodelmore on March 18, 2007 - 6:03pm Permalink | Subthread | Parent | Comments top

i have always assumed that "speculation" can drive the price down as well. the msm all seem to agree oil will stay in the $ 60 range and gas below $ 3 for the coming year(all the new projects coming onstream). once a story gets repeated a few times it becomes fact, not to be questioned. welcome to the world of the gannet rag.

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