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Oil (CLZ07) settles above $93...and in the next month...?
Posted by Prof. Goose on October 29, 2007 - 11:45pm
Topic: Supply/Production
Tags: oil, oil prices, peak oil, poll [list all tags]
Here's an new open thread and a poll for you to discuss the fact that oil went through $93/bbl today. (and if you haven't seen Drudge this evening, he has the now ubiquitous grasshopper in the sunset picture up...)
(By the way, the 45ish% of you in the old poll who said 93 before 79, you were correct.)
The five options in the new poll are, "in the next month, CLZ07/CLF08 will..."
1. hit 100 before it hits 86
2. hit 86 before it hits 100
3. stay in a trading range between 86 and 100
4. it's still all geopolitics, what does a price signal mean anyway?
5. haven't you heard? it's all about the declining dollar. it has nothing to do with growing demand and a current lack of supply.
Enjoy. :) A link to the actual poll can be found here. The discussion/comment thread for oil price and the poll choices is below.
http://business.reddit.com/info/5zdnw/comments/
thanks for your support.
Still too many variables in play to safely pick a threshold. We could see Iran attacked, which would shoot the price well over $100, as Venezuela has said they would stop exporting to the US under such a scenario.
Increases could also come from Turkey invading Iraq, Russian muscle-flexing with its neighbors, Nigerian unrest, an attack on a ME exporter, continued dollar devaluation, etc.
The market can also feed upon its own fears (or realization of the seriousness of PO), with speculation based upon speculation-fueled increases becoming more evident as the price gets higher.
The big question: where should the price of light sweet crude be at this time, and what 'fundamentals' should be used as the basis for such an estimate?
Hmmm... how about the demand for a commodity with a finite supply finally exceeding available supply?
I'm glad that the sun is finally shining on reality. $100 and beyond is almost here.
Got burned last time. I voted it would stay in the trading range. This time I voted it would hit $100 first.
I vote it will touch 86 before jumping up through 100. Gotta have that volatility to make the traders money. However I do think 100 before the year end is still a distinct possibility.
I vote for volatility. If it hits $100, it could easily crash back down to $70, since big round numbers have at least as much impact on markets as real data. After that, fundamentals will push the price back up within a few weeks or months.
I am with you on both counts.
I pick 1 again.
4 and 5 are like the salt and pepper on the steak.
#1, well hit $100 pretty fast if:
a. Mexico continues to shut in production this week
b. The Fed lower rates this week
c. This Week In Petroleum shows another large draw down this week.
Oh, and that's $100 this week or early next week with all three happening...
Just a guess.
Yes...my vote is for $100 this week.
I would have voted for another wording as well.
3 (Triple) YERGIN ($114) before 2 (double) YERGIN($76).
We'll be watching on Wednesday
http://www.youtube.com/watch?v=3u2qRXb4xCU
Great video
I picked 2, I think the recent price run up is not sustainable. Everything depends on the implementation of the production increase promised by OPEC and the stock level situation.
For oil trader types, the following is probably a short term sell signal, although we have never tested the "Yergin Indicator" as an indicator of lower oil prices, so we are in unexplored territory here. One could, in the alternative, argue that we may be looking at $200 oil with "one or two events." As I said--unexplored territory.
In any event, Yergin's comment is about as useful as saying "The oil market may be only six or seven dollars away from $100-plus oil."
LMAO westexas, I love your "Yergin Indicator". That guy certainly deserves to be ridiculed and marginalized (in a tasteful manner of course), especially if he continues the fantasy that we don't need to worry about our oil usage.
I picked the trading range for the next month, hoping for the price to build support before it shoots higher.
Clint
Guys,
Haven't you heard, the "invisible hand" is in our pant's pocket!!!
Bob Ebersole
Come on you guys, Bernanke votes #5. Watch the Fed news come wednesday.
Oil and gold are moving together. That tells you that it's the dollar.
Is it as much a "run up" in oil price as a "run down" in the value of the dollar? Gold is also "running up".
It looks to me like over a one year (or more) period it has been largely a dollar story, although i think oil is still up in a trade weighted basket of currencies.
Over a four year period, it is certainly an oil story. The price is way up in every currency.
That has been generally true. However, as of two weeks ago, even against the €, the price of oil has moved into new territory.
Even more interesting is what is happening on the spot market. When the market contract expires there is a bit of a difference between the spot market and the new front month contract (and it seems the contract price drives the spot price), but in the past week contract prices have been lagging behind spot prices.
I also vote for te declining dollar.
I'm not saying that there aren't supply (or demand?) problems, but that most of current changes are due to currency adjustments.
I pick 3. Tight supplies insure at least the 86-100 range.
ok real head above parapet question
what's the lowest price(range) oil will ever drop back too?
if we really are on the peak/plateau there is a fairly decent argument that depletion may outrun demand destruction or at least impact its effect.
for instance what circumstances could produce $50 oil?
Boris
London
Re: for instance what circumstances could produce $50 oil?
An economic recession.
Not in USD as the dollar would be falling like a rock (it's only falling like a feather now...).
$70 would be my guess on a price floor in USD.
If that feather is attached to a dead pigeon, then your statement is correct.
Think of demand destruction this way: for oil prices to fall back to $50, then we have to have the same spare capacity as we did three years ago, before Katrina. That means taking away 5 to 8% of worldwide demand, or about 4 to 7 mmbbl/day. The US alone cannot contribute that-- we would have to drop from 22mmbbl to 18mmbbl or below, which would mean a crushing contraction in the economy.
China is almost to the point where she can use internal demand to keep her factories running, if exports to the US dip. Chinese kids needs toys and laptops as well, though halloween costumes might be a tougher sell.
The oil producers can cut back production for a while, without feeling any cash pinch--OPEC can contract production, keep the price north of $70/bbl, and still take in more cash than before. The crunch to open the taps only comes when the nation needs additional revenue from its NOC.
Unlike past recessions, we do not have Alaska or the North Sea to compete with NOC production.
And in a recession, Bernanke is going to have to open the taps all the way to save the banks, given their leverage situation. That means inflation, in dollar terms, no matter what.
I just can't talk myself into a severe price decline in a recessionary environment right now.
That's because things are way more inflationary then recessionary. Housing Sales are at 1991 levels. The banks are laying off people. And yet Oil is still pushing new highs. Why? Emerging Markets demand and a weak dollar.
When mortgage debt is defaulted on, does it really take money out of the system? With fractional banking system used to create the debt at a 10-1 ratio, it should only destroy 10% too, right? How much does the average US citizen lose when he defaults on a zero down interest only loan?
And then there are the untold trillions in government liabilities with Bernanke at the Fed. The only option is inflation. If you look at the reconstructed M3 numbers at shadowstats.org it's glaringly obvious what the fed is doing. They're inflating! After all, this is why they did away with the M3 reporting in the first place.
The scarcity in liquid hydrocarbons via Peak Oil will only add to the inflationary bias.
JMO.
Garth
shadowstats.org doesn't link up ---
http://www.shadowstats.com/cgi-bin/sgs?
Sorry about that - I didn't double check the link...
Garth
Yeah, I'm in on the "what's a price signal anyway" option. Work requires energy. Shifting the types of work we do will require rebuilding infrastructure - more work than we can produce. Can't happen. It's the Law of Receeding Horizons applied to everything.
Toxic planet, resource depletion, climate change, overpopulation, economic inequality: prosperity is just around the corner - the one we passed.
shiva in Gray, ME
A major U.S. recession or of course a global recession could produce $50 oil.
Except that its likely to be associated with such rampant inflation/currency revaluation that a resolutely dollar based assessment will not be able to drive down that far.
If it were a basket of currencies maybe, but dollar based I don't think will reach below $65 ever again.
That dollar might be equivalent to 50c Canadian though...
I believe it would have to be global... even in a considerable US recession, we would not shed 4Mbbl/day consumption.
China, India, or someone else would gobble up the excess capacity anyways...
It would have to be a global recession / depression
Not so sure. If the U.S. went into recession, China would follow quickly - they depend on us to buy the cheap plastic crap that they crank out by the ton.
Speaking of plastic, I expect that the price of anything made of plastic ought to be influenced by the price of oil.
Been to China a couple times this year for work. They are not as nearly dependant on the US as everyone likes to think, nor are they making only plastic crap anymore.
China also has a middle class that is growing in leaps and bounds and wants all the stuff they see on TV shows; the cars, clothes, houses, dishwashers, etc.
Think about where China is now, and where the United States was in the 40's-50's timeframe from the standpoint of urbanization, manufacturing, and growing middle class.
They don't need us nearly as bad as we need them to keep taking dollars as payment.
On the plus side, they should be a service oriented economy in about 50-60 years.
What conditions? A sufficiently large recession resulting in enough demand destruction to put that much excess oil on the market. How much is that? I'm not sure anyone has a reliable way to calculate that number.
Last year and early this year I asked a question that no one has been able to answer clearly - how much demand destruction does a $1 increase in oil's price cause? We don't know. But very clearly in the rest of the world it has caused serious demand destruction (and riots and other effects). People in the US who say that these prices are not high are smoking dope. These prices are sky high for the rest of the world. It's only because the US has (or had) the richest economy on the planet that we've been able to somewhat ignore these increases. But Indonesia hasn't. Iran hasn't. Taiwan hasn't. Nicaragua hasn't. All of those nations and many more have been hit by various effects due to inability to buy enough oil. The effects have ranged from outright riots in Indonesia to rationing in Iran to changing business patterns in Taiwan to loss of electrical power in parts of Nicaragua. And now even in the US we are seeing a slow flattening of demand so these prices are starting to hammer home even here.
But back to your question - what conditions? I don't think we have a way to accurately calculate that value.
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone
odd though.. these flattening out effects have some sort of lag.
I have a gut feeling it ain't coming back down recession or not.
I think the arguments in favour of geopolitical/psychological premiums (turkey etc.) have some validity.. and one would expect the price to fall if these tensions eased... but the realisation the whole shooting match is underwritten by the black stuff is starting to sink in.
I think the market may start exhibiting strange split personality behaviour.
hoarding may be a new "end use"
Boris
London
These prices are causing demand destruction/recession somewhere in the world ... you can be sure of that, but that's about all you can be sure of!
Don't believe anybody who thinks they know what the future will be in any detail, especially several years ahead.
On the other hand, we do know one thing the future won't be ... BAU!
Xeroid.
My thoughts too.
You have to factor in the human condition.
World governments are not stupid.
The price I feel, is going up because everyone is scrambling for their share "before it's all gone or not enough".
Demand destruction won't make one iota of difference any more. The game has changed forever.
Just like we did with whales and fish stocks, just like the North American Bison and Passenger Pigeon.
The realization that oil is disappearing will drive governments into a frenzy as they try to secure their share.
No government will stand by and watch another country secure all they want while they make do, they will all try to buy as much as they can, when they can.
Just like we'll do when supply is short at the bowser.
Basically we are screwed.
It is best to dig the well before you are thirsty.
It is more complex than just a simple $1 increase. An increase from $40 to $41 has no impact. While an increase from $200 to $201 will probably have a measurable impact. We need to reach the threshold where it starts to be more expensive to drive to work than your wages. Let's take someone making minimum wage that has a long commute (60 miles each way). With an average car (22 mpg) they are burning (60x2x20)/22=109 gallons per month which cost $327. Earning $1120 - rent (500) - food (300) - taxes (200) leaves $120 per month. Once we cross into negative territory, you will see people reacting. The next question will be to figure out the commute distance of low wage workers. That will determine how many people will move to save on gas money. According to my calculations, that would be $4.10 per gallon (Crude $140). With a 40 mile commute it increases to $6.20 per gallon (Crude $230).
Hang on everyone, we are in for a very wild ride.
Can someone point me to a correlation of crude and gasoline? my numbers are based on $1 crude = 2c gasoline and probably don't hold up when we pass $150.
These are interesting numbers. I am really curious about gas and diesel at spring planting time.
My guess is that shock is more lethal than price. What is the jump at planting that will prevent farmers from getting loans to plant? My unfounded wild guess is 12% of price.
My unfounded wild guess for harvest is 8% of price. Harvest is a better bet than planting.
You do not die because you have a bad heart. You die because you have a heart attack. There is a distinct difference between stress and shock.
Does anyone know how to measure that difference?
Gasoline prices are currently severely decoupled from oil prices even as low as gasoline stocks happen to be. After a long period of coupled prices, they decoupled (initially) in 2004, closed back to more nominal relationships (especially earlier this year) and then decoupled again. The price curves for 2004 and 2007 look very similar (though more expensive in 2007), but what is evident from the most recent data for 2007 is "resistance" to the $3/gallon (gasoline) as the curve spreads out of a nonsensical pattern (gasoline prices go down as oil prices go up)
A historical equation from 1992 has been:
Gasoline (cents/gallon)= 82.547 * e^(.0181 * $/barrel)
(R-squared of .9284)
where the $/barrel is the weekly average of WTI spot-market FOB price before the Monday release of average weighted gasoline prices (all area areas, all-grades) by the EIA. Note this is not the value of "regular gasoline" that is shown on the gasoline price "entry page."
For the period from 2002 to today, the curve is defined by a similar equation (with similar decoupling as noted above):
Gasoline (cents/gallon) = 98.128 * e^(0.0151 * $/barrel)
(R-squared of 0.9229)
For the period of 2004 to present (which includes 6-months of the tradional coupled prices in 2004 and the decoupling that occurred in July in 2004 and the "new" relationship to gas /oil prices), the equation is:
Gasoline (cents/gallon) = 109.78 * e^(0.0133 * $/barrel)
(r-squared of 0.8284)
If you plug-in last week's average FOB spot market price for WTI of $89.89 into the 2004-present equation you would find that gasoline prices "should be" $3.629/gallon. They were not ($2.921/gallon, weighted all-grades all regions). The long-term historical equation (stretching back to 1992) tells you that gasoline should be selling at $4.20 gallon (and if you use a straight multiplication ratio between the cost at some base period that was pretty stable, like 1992, you get a value close to $5/gallon) and the intermediate term equation (2002-present) suggests $3.813/gallon.
But the simple fact that the FOB spot price of WTI has matched and exceeded the the wholesale price of gasoline (in $/gallon) should indicate that something is very much amiss. Gasoline has been treated more like a waste by-product throughout the autumn by the current pricing structure that seeks to "dispose of" gasoline through the market. Again, this is not supported by the low-stock levels, so the pricing structure must be one of (intentional) avoidance of high gasoline costs and the psychology associated with gasoline prices well-above $3/gallon.
Consider it evidence of the "Iron Triangle" at work.
Thanks for the formula. Have you tried adding a delay between crude and gasoline price to see if there is a better fit? One would assume that an increase in oil today takes at least a week or more to impact the gasoline price. How long does it take to move a drop of oil from the tanker to the refinery and on to the gas pump?