 | What will the total range of front month crude oil prices be in 2008, as a % of Dec 31, 2007 closing price? | The Oil Drum | DrumBeat: December 27, 2007 |  |
A POLL on Oil Price Volatility for 2008
Posted by Nate Hagens on December 26, 2007 - 8:11pm
Topic: Miscellaneous
Tags: leptokeursion, oil futures, volatility [list all tags]
(Note: permissioning issue for poll vote should be fixed) As 2007 draws to a close, not only did we observe a large increase in oil prices (approx 50% over 2006 year end), but we had a large absolute range in prices (approx $50). As mentioned in last weeks (less precise) poll, it is likely that many divergent forces will impact oil prices in 2008 (and in different directions). Oil rallied over $2 today, apparently on news of bombing in Iraq, this time from Turkey. Below the fold is an open thread to discuss upcoming volatility (or lack thereof) on oil prices in 2008. This poll will be followed by an end of year price forecast poll later in the week. But for a holiday appetizer, let's guess the volatility for 2008. Place your vote directly in the poll and put a comment with your vote and brief explanation in the thread - winner (if female) receives a date with highly eligible bachelor Professor Goose. If male, a congratulatory pat on the back...
Price volatility can be measured several ways. The financial markets price options on futures (or stocks) and the buyers and sellers converge on a price for the options, from one which can determine the 'implied volatility' expected by the market. For example, as of this writing one can buy an option for December 2008 struck at $100 for $4.20, which is an 'implied vol' of 23% with dec 08 futures at $90.45.
Another way of measuring volatility is the total movement up and down, in absolute value, over a period (up $1, down $2, up $5, down $1.5) ,ends up having the price up $2.50, but having traversed a total distance of $9.5 -so $2.5/$9.5=26% - the higher this 'trading efficiency ratio', the more a market is trending (in either direction). The closer to zero this figure, the more the market is moving without actually 'moving' in any direction.
Finally, and most simply, we can measure actual volatility, after the fact, by taking the total range during the period, divided by the beginning price. Using last years price on the current front month WTI futures contract, we see that it started 2007 at $67, and traded as low as $57 and as high as $98, for an observed volatility of 61% (98-57)/67. It is this last number, 61%, which we will try and guess in tonights poll:
What will the total range of front month crude oil prices be in 2008, as a % of Dec 31, 2007 closing price ? (of Feb 08 future - we have to use feb because that is front month at year end) Today we closed at $96.
The poll options are:
1)Low volatility: total range less than 10% (implying a range of oil prices under $10)
2)Medium low volatility: total range between 10% and 20% (implying a total range of between $10 and $20)
3)Medium volatility: total range between 20% and 40% (implying a total range between $20 and $40)
4)Medium high volatility: total range between 40% and 60% (implying $ range between $40 and $60)
5)High volatility: total range between 60% and 100% (implying total range between 60-100$)
6)Extremely high volatility (Range over 100% - meaning the high minus low of 2008 prices will be over $100)
Clearly the high and extremely high options will only occur in a bullish year for oil, or at least one that starts out bullish.
Place your guesses below. My personal view is that oil continues to rally but the credit crunch/recession causes demand 'management' to overtake depletion as the year progresses. I see a high of $134 and a low of $79, for a range of $55, which is 60.4% of $96. But the volatility of my volatility guess is high!!
Here is the POLL distribution so far. The poll will close on Jan 1. We'll look back in a year who gets the pat on the back (or the date with PG...;)
I say #4 - medium high.
My guess is #5, but i do believe 2008 will see an expanding of the disconnect between the price of a barrel on the markets & what importing countries are actually paying in individually negotiated contracts with exporting countries.
Well, that explains the paucity of votes so far.
Voting on chaos is an interesting concept. But I can't make TOO much fun of it since I spent my piggy bank money on variously-dated $100 crude call options. If crude doesn't significantly beat 100 in 2008, my wife's volatility will definitely increase, and she's Italian to start with.
Of course, if I sell the calls for a profit when crude hits $110, and then it goes to $150, she'll want a divorce, so there are real-world implications for me other than, y'know, being poor.
The safe bet is that the convergence of humans vs. the natural world will cause all sorts of collapse. How that projects itself onto the one dimension of oil price isn't knowable, but my brain reward systems are now convinced that I've done something.
Judging from my past investments, oil won't crack $100 until after Dec 2010 when the last of my options expires.
And gee, being in Hawaii timezone I've never been this near the top of a comments list. Let me take this opportunity to wish for peace on earth, and remind the al Sabah family (you know who you are) that you still owe me $95 billion for that thing I did for you in '91.
Now THAT is funny! (even more so because I tend to think youre at least partially serious...)
Peace to you greenish, my friend. Perhaps the internet viral community will somehow align to steer us from the current path.
I see a high of $124 and a low of $66, for a range of $55, which is 60.4% of $96.
60.4% is my guess
Hi Nate,
So, you're guessing slightly less volatile than '07? My guess would be it increases in '07.
Unless, of course, we collectively (or individually, with some sum total of results) manage to steer things in a different direction.
Whilst economic depressions have historically caused reduced consumption, oil usage, and hence oil prices. In this case oil and gas appear to be driving economic and financial developments. (more akin to the 1970's oil shocks)
http://inflationdata.com/inflation/images/charts/Oil/Inflation_Adj_Oil_P...
The source of the credit/equity bubbles, can be reasonably attributed to oil dollars being invested back in OECD countires, substituting export goods exchange by debt, and asset buy out, propping up the formerly productive economies of US/UK etc, with equity released consumer spending.
The turning point over the last year has been reached as a result of the worlds energy budget flattening if not falling. Economic production, consumption, profit, can nolonger rise at 2 or 3 % worldwide to maintain the interest payments on the mountains of (significantly petro dollar) debt accumulated in the OECD.
Oil and energy price inflation will continue to rise as the gap, between the required growth to fulfill the percentage returns on assets and the available energy, widens at an increasing rate.
With a 5% gap between growth forecast and actual oil production by the end of 2008, I would see an oil price reaching 150dollars by year end, with a minimum of 85$ a barrel near the start of the year.
But just in case that poll link is only for the results, I'll add my guess: #6, extremely high volatility.
I don't think those voices in GW Bush's head are going away any time soon, and there's still time for some impressive kaboomery before they take his buttons away.
#3 I think it will be another $40 range year next year, only the range will be $80 to $120.
#6.....very high. The inmates have taken over the asylum.....I am packing for a long vacation.
BZ
#4 for me, as well. Hard to say which will hit faster-the oil shortage or the money shortage-either way, most of the volitility will occur in a fairly short time frame (like 3 months, max)...
Of course, I could be wrong... :-P
Franc (penguinzee)
edited for speling
Will have to guess number 5. I believe $140 is going to be pretty achievable, assuming that the entire system manages to hold together for the year.
I think we have a pretty good floor in around $75 for a spread of $65 for the year, just within High Volatility. I have been a bit too conservative lately, this well could continue that trend, sigh.
Happy New Year all!
greenish,
you should do standup comedy. no kidding, i laughed the entire time i was reading your post.
good luck with the wife and those options ;-)
phil
Low of $8o, high of $140, I guess that puts me at the high end of scenario number 4. the volitility will come form specualators and the big hedge funds more than actual supply/demand function. The move up today was trade based on the Turkish bombing of the Kurds. It had little or nothing to do with the supply of oil. I think that will be the situation for the forseeable future. The guys writing here that are in the know are saying that we can look for a plateau for the nest 5 to 8 years in the supply of C plus C. That tells me that most of the price variation will come from rumours more that fact.
Hello Rich,
re: "a plateau for the nest 5 to 8 years in the supply of C plus C."
Another 5 to 8 years of plateau? Are you sure?
Plateau for 5 to 8 years; am I sure. Heavens no. I was just pointing out some of the articles in TOD postulating a plateau extending out to 2012 - 2015. There will certainly be efforts to increase production by the oil companies by various technical means which will be profitable at the present prices and future higher prices.
There has been some dicussion under several articles, none of which I could cite from memory, concerning the possible delay in enchanced recover to take advantage of future higher prices. I think that most companies and management will prefer present value over future value.
Rich: Guys in the know? Check out what WT and Khebab predict for 2015 oil exports.
Hey, there is many different opinions out there. We will just have to see how this unfolds over the next several years, all the time having events nudge the reality one way or the other. Am I wrong? With a 95 percent certainity I can say that I am.
Are you assuming the demand side will stay flat too?
Although the Turkish bombing presents a small risk of an escalation and risk to future oil supply from the region, when supply growth does not keep up with demand growth, the impact of small risks is amplified. In this situation, high prices and volatility come hand in hand.
At these prices, there will be a fairly significant demand destruction taking place. While this will not completely make up for the increase demand from other centers, it will give some relief. I do agree that in a tight supply situation that small events can have major effects, and thats why I went to the high side of the moderate volitility scenerio.
I would say medium volatility. It all depends on the US economy in 2008. It looks like we are heading toward at least a mild recession in which case oil prices may collapse toward $50 and lower.
A collapse down to $50??? Whatever your smokin', I want some....Do you think China and India (and others) are going to to sit on their little tushies while the idiot Americans have their little recession? The world turns, with or without us. Look at what the recent air strike by Turkey bopped the price up to.
BZ
this is the real question isn't it
Does the world economy work with out the USA? I don't think Asian consumption can keep up with Asian production right now, but when it does... kiss your life style good bye
Hi earl,
Well...one question to ask is: what percentage of the US consumption of Asian production is financed by...debt? (i.e., ever-increasing debt at that).
Then, given your guess that Asian consumption can't keep up...the number of logical possibilities includes not only US lifestyle "good bye", but several other economies as well.
yes
It is nearly impossible for a dyslexic to communicate like this, (typing/writing) so thanks for your patience.
Debt is my big concern. When the US$ is no longer the world reserve currency I'm afraid it's lights out for N. America. Have you seen the Death Of The Dollar The guy who puts the piece together is not funny, but the people he interviews are legit. But then again what do I know : - )
Debt is my big concern. When the US$ is no longer the world reserve currency I'm afraid it's lights out for N. America. Have you seen the Death Of The Dollar The guy who puts the piece together is not funny, but the people he interviews are legit. But then again what do I know : - )
hi earl,
I guess the trillion dollar question would be the when this would happen. though, with US supply of coal and the chinese need for coal and their oversupply of dollars that day of reconing may be delayed a bit.
just a thought.
Hey a fellow dyslexic !
Welcome aboard. Do your best they are fairly forgiving.
I think Asian consumption and in particular China esp as the US slows is probably a critical factor for commodity prices across the board. I'd say they are so over heated not that sheer inertia will keep their economies afloat. Also the Chinese imports tend to be cheap stuff so its not clear a recession will even lead to a significant slow down in consumption of chinese goods as people downscale their spending. So for every poor person that scales back a formerly upper middle class person will shop more at Wall Mart.
So we might not see chinese imports drop as rapidly as we think. And I think the Chinese government could if needed spur more internal consumption if needed at least for a while.
I'm not saying that Chinese growth rates won't start to slow but they are at what 10% now even if they slow to 8% this is not seem to be enough to really change the current supply demand equation.
Memmel: Just did some googling and according to my quick number crunching 2007 Chinese exports EXCLUDING THE USA are 80% higher than 2004 Chinese exports INCLUDING THE USA. My conclusion is while the USA is the most important customer, that is obviously not the whole story on China.
HI Brian,
Thanks for this statistic - it's amazing. I'd like to see more on this. Perhaps you could write this up as an article for us to discuss.
Like...more numbers crunching...kind of a list. It would be interesting to see the different years, w. and w/out the US...to be able to see the trends and amounts.
In fact, the more I think about it...this seems like a crucial piece of the puzzle for looking at economic implications.
My guess is #6. It seems new Mega Projects will add to supply. High costs of fuel will hobble military operations that are currently keeping a lid on instability.
Specific events are becoming more unclear while the trend is becoming unstoppable.
IMO, unfortunately Peak Oil is real and we're in it now.
#6 for volatility
Maybe as low as $90 in Jan / 08
Up near $155 by early June / 08
likely be $210 by March / 09
Bakhtiari wrote that extreme volatility was indicator that we were screwed - the market gybing between oversupply and undersupply +/- a barrel or two. That was his "phase II" if I remember?
I can't vote in the poll. I don't know what a dollar is. My standard olive oil has gone from $24 to $44 since the last time I stopped into Miccucci's Market. That's a Greek version of EU. Other olive oils have not gone up so much. I can still purchase Palestinian olive oil at the same price, $12/.75liter, at which I've been able to purchase it for past year. [It's not as OLIVY.]
The range of volatility (there is probably a better term) is more interesting than the actual numbers.
cfm in Gray, ME
No, we are in transition phase T1 between growth and decline, lasting 3-5 years starting with 2006, a phase which shows characteristics of both growing and declining oil production. That is the cause of high volatility. Read here:
Dr. Bakhtiari's presentation to the [Australian] Senate Hearing on oil supplies in Sydney in July 2006
http://www.aph.gov.au/hansard/senate/commttee/S9515.pdf
#5 High volatility
Two reasons: First, 2007 was a year of high volatility, and nothing has changed. Second, I'm an optimist. The only thing that could keep oil trading in a narrow range is a very serious recession, and I don't want that, and only seriously interesting times could trigger "Extremely high volatility" - and I really don't want that either. - J.
I'll go for #6. Above ground factors are likely to coincide with geological factors to make for interesting times. Maybe, maybe not, but that's my guess.
#3 with the price trending down due to demand destruction.
Israel attacking Iran is the wild card. Then #6 would be mild.
I vote #6 the combination of a official recession and probably increased instability in Iraq/Turkey Syria/Lebanon plus probably continued draw downs in OECD inventories will have people unable to "herd". This will go until we have a trigger event either a hurricane or reasonable widespread gasoline shortages or something in the ME which will force a direction.
Without a event the combination of people betting on demand drops because of a slowing economy and real inventory data will keep prices very volatile. I still think we should have been heading down towards 80 and am a bit perplexed that prices are staying high now. My guess was we would start under 90 around March and surge to over 100 by the end of the year.
The one time I agree with Roberts Rapier on the oil markets they seem to misbehave. Maybe people are really waking up to the fact that OPEC is doing everything but producing more oil.
So the big event for 2008 may well be a dawning recognition by the world that we are peak. I figured it would not happen until later but given the internet we might actually see people become informed despite the MSM.
I noticed with the housing bubble once people caught on and started reading the blogs the MSM quickly changed its tune.
We may see the same thing next year if Peak Oil becomes reasonably obvious that it moves quickly into the MSM.
If this does happen then Peak Oil awareness will probably be the defining factor of next year and it will probably remove a lot of the volatility from the prices leading to a clear surge upwards. Otherwise volatile with the chance of a normal trigger event sending them skyward.
hmmmm.............. possibly #5 if mexico's feilds continue death spiral, $150- $160 per barrel by dec '08. thou probably $4-$5 per gallon of gas even if oil holds steady by summer. if mexico holds up production and we go into ressesion probably looking at $70 oil
How much does gasoline demand go down just because the US of A is in a recession. People don't have jobs to drive to? I'm going to take the medium volatility 40% to 60%. People will stop buying SUVs and hybrids gain market share. Does that mean I buy a straddle on the futures market? I'm meeting with my financial adviser in two weeks and I don't know which oil option to buy.
I'm going for no 6.
I think the signs are good that next year will be more
volatile than this year.
Also I count 9 houses for sale in in a 5 minutes drive through esperance, Western australia. And this is in a booming economy. Petrol AUS$1.47 a liter
While Basically we have not hit $100 US this year there are Still a few days left so we might make it.
However and sadly Near misses only count in Australian rules and hand granades, not in betting, so the only reasonable response to failure is to double the bet.
I'm no financial guru.....but my guess would be if you went with a$110 call option and a $90 put option for dec '08 then you would be effectively be hedged tward volitility. i.e. if producion in mexico stays afloat, plus a ramp up in canadian oil sands goes well, plus Iraq oil production continues to improve, AND the us,europe and china go into ressesion (being that we are so linked with globalization) then oil demand fall leading to $70 oil (all of which are possible). thus a $90 put option becomes a moneymaker. equally possible is that Mex production falls further, plus with ill advised rate cuts and co-operation between central bankers avoids world ressesion, then we will definately see over $110 oil and the call option becomes the money maker. Or if we have oil shocks jerking price above/below $90-$110 range then both could be money makers. the downside would be if oil 'bump' between $90-$110 for all of 2008, in which case you'd be screwed both ways.
#5
I think there is a very good chance of real refined product shortages due to infrastructure issues that will cause some panic and contribute to a spike in NYME prices. This will probably be aided by crude supply issues and a continuing decline in US reserves. However the economic chickens are going to roost sometime this year and that will then lead to a crash back to about $70.00. I don't think it will go below that this year as there is a great deal of momentum in the world economy and it will coast down as orders in the stream begin to dry up. The world wide prices will probably hold stronger than WTI. In any event there may be a surplus on the world market with heavy sour becoming hard to sell. The Alberta economy here in Canada will be suffering by years end with the tar sands expansion snapping shut like a clam. The oil majors and the clean up companies will probably keep the expensive off shore operations pumping as the capital has already been spent but exploration will dry up and cheap restartable dry land fields will be mothballed as well as refinery plans of all sorts both here and around the world. Of course, any storm damaged infrastructure in the GOM or elsewhere will be "scheduled for repair as markets dictate".
Up to $130.00 and then down to around $70.00.
#5 as I can't see it being less volatile than 2007. It seems like the world is still in a state of denial about PO. That denial is part of what IMO makes the game more volatile.
On Xmas Eve, I was at a family get together and my brother's inlaws were there. His father-inlaw had deteriorated in health drastically since we last met in the Spring. His health has been on the edge of no return for several years and it now looks like no return to some semblance of normal health is a given. A similar situation to my Father's slow, painful decline several years earlier.
The Medical establishment, just like the Oil establishment has become incredibly skilled at preventing the inevitable death of their respective patients. But the lead up to their deaths will be made more dramatic and volatile by the system's refusal to acknowledge that life just like oil availability will come to an end ultimately.
Best of the season to all,
Nic