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POLL: Oil Breaks $127, Now What?
Posted by Prof. Goose on May 18, 2008 - 9:59am
Topic: Miscellaneous
Tags: cera, poll [list all tags]
In our last poll on 16 APR (and here's the old accompanying comment thread), 42% of you predicted that CL would hit $127 in the front month before it hit $103. Yep, we've passed it today, though we closed below it. Oil has risen from $115 to $127 (~10%) in a month.
This is the comment thread for the poll, offer your conjecture and reasoning here...the actual poll itself is at this link.
I selected that it hits $114 based on the expectation a recession and increased production would lower prices in the near term. However, I've been wrong on the last 2-3 polls because I selected the lower price for the same reasons. Good thing I'm not a day trader.
In the last poll I chose the higher number based on the opinion that so-called free market capitalism, to function at all, must continue the game as it exists: borrow in order to buy and then sell to the next sucker... until it kills 'em.
Pretty hard to make big money anywhere else (except drugs and guns) so the new bubbles have just got to be food and oil.
Expensive gasoline, the unraveling mortgage/construction fiasco (national equivalent of a heart attack) and now food have not been enough to scare them into righteousness. Therefore nothing is.
I'm betting that the number of serious players who suddenly find religion and quit their low-down ways voluntarily will be ZERO. Wannabe capitalists will continue to borrow-buy-sell at ever more stratospheric prices until the protracted suicide they have embarked upon is consummated by the terminal collapse of credit.
$140 here we come, I hope, because the alternative would be the signal that hell has finally broken loose for keeps.
So, another question to discus might be: will the price of oil or grain become a bubble that breaks the bank?
err, didn't mean "day trader". I meant short-term-trend investor or something like that.
In my opinion, and this is just my opinion, the primary driver of oil price is developing country demand, mainly China and India but other economies as well. There are signs that China's economy may be facing problems soon but they are not strong signs and some of those signs have been there before. I am specifically looking for those signals because at that point I would begin to consider shorting oil rather than playing long. But so far I don't see enough strength to those few signals to warrant a change in outlook.
Oil demand in the Middle East is growing rapidly as well, and tends to spike up during the summer months.
There are certainly plenty of flaws and instabilities in the Chinese system. They have no shortage of environmental, social and infrastructure problems. And relying on exports to the USA will not be sustainable for much longer.
The Party knows it is trying to ride and steer a bucking bull, and it is not a stable situation. At the moment they are trying to rein in speculation and inflation (yes, their money supply is growing thanks to the trade surplus) to relieve dangerous overheating.
However, as exports to the USA slow I believe they will be forced to take stimulatory action to stop their economy slowing to the point where unemployment grows. This may include letting their currency appreciate against the dollar in order to make food and fuel cheaper locally, and embarking on public works & infrastructure projects to provide employment.
Thus their likely reaction to a recession would increase demand for food and fuel in the long term as they give their population more buying power in global terms.
Once our government get those pesky speculators in line...all will be right with the world. I think we will be near or at where we are right now.
In the April 16th poll I picked oil would stay in the range of 103-127, and in fact it just breached 127, so I was just a tad bit too conservative on that poll. So on this one I've selected it will breach 140.
Also, after the rocky plateau of crude extraction, which first occurred in May of 05, the price of oil over the next 2 years doubled, then doubled again in just 1 year, so one might be bold enough to predict oil would double again in 6 months, which would occur in November of this year. Of course the higher the price the more drag it will put on the economy, so there probably is some point where price balances with economic activity. However, there still appears to be room for an increase in price. I was out today and there appeared to be just as many vehicles out and about as ever. Guys with huge black trucks guzzling diesel, which here in Calif. is 470-490 a gallon. Guess people have no end of funds at these prices for the energetic liquid.
Although it might be up to $127~ its probably safe to say that $17 of that is pure market speculation. How far that trends I can't really say but I imagine it will pull back to $110 - $115 when the market gets the news it wants to hear.
Oh you know and can quantify exactly how much is speculation? Do pray tell your scientific method for this assessment, sir.
I would love an explanation of how speculators run up the forward month contract. Before the end of the month they would have to sell the contract or take delivery. Without a way to store it I don't see how the speculators drive the price as the month ends. I see how there could be a bubble in something permanent like real estate or stocks or storeable like silver but the key feature of futures contracts is that they expire and both parties have to sell out of their positions or go ahead with physical delivery.
we have a post around here on how the futures markets work, and Jeff Vail has a post coming next week on backwardation.
The term "speculator" is probably too broad when used by the media - they should use "investor" instead. A lot of investment banks like Morgan Stanley are big players in the physical oil market (they own Transmontaigne). They are the real speculators when they take physical delivery and then store it in the hopes of selling it at a higher price in the future.
Exactly - speculator driven price increases have to be accompanied by increased holdings of the physical goods associated with the contract. Stocks are not building significantly QED no speculative bubble.
I'm stunned that so many OD'ers are buying the spin being put out by CERA and OPEC that speculators are driving this price run up. Normally around here we're a bit more skeptical than that. But because this line is 'easy' and 'convienient' it's been picked widely by the media and other commentators.
Hi Jaymax,
Have you a source for your statement: Stocks are not building significantly. Thanks.
From Paul Krugman in the NY Times
I understand that is not a primary source, so take it for what it is worth. I think, however, that a lot of people are putting too much emphasis on what is essentially noise in the US inventory numbers or (worse) reading US gasoline inventories as proxies for oil inventories.
Edit: On a personal note, I made a trip last fall to visit my parents in FL. We took peak oil videos and literature with us and spent the week talking about the coming rise in oil prices. They are Fox News Republicans, and I wanted to get to them before Fox propaganda turned to peak oil.
Well, they came to visit us this week. Instead of "Gee! You sure were right about oil prices!," my father last night said, "It is all speculation. If they reign in speculation, the price of oil will be cut in half." *sigh* I think my mother gets it, but I'm afraid my father is lost to iron triangle propaganda.
I can't understand why so many people don't "get" supply & demand. Unless you can affect either supply or demand, you're not going to have a significant effect on prices. Unless there is hoarding, speculators have no effect on supply, and the only effect they have on demand is opposite to the direction of their speculation.
Thanks shargash,
That NY times article may not be primary but it sounds as if they are reading from primary sources ... maybe:)
(Actually though my question to Jaymax and a similar question to yartrebo (below)sprang more from amusement that the two diametrically opposed views came so close together on the thread without blows being struck).
Here's a link to the EIA web page where each week they report the stocks of crude oil being stored at major facilities. You'll notice there's not an excessive amount for this time of year. I suppose there could be some stocks that aren't being accounted for, but you'd have to find them.
Well the largest inventory is probably floating around or in transit in tankers. It is possible to change where ships go and how long it takes to get there to manipulate prices. Here's an interesting article.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aQZcc1kgLb8k&refer=h...
By the way, I'm with Smith(above) all the way to $140. Woohoo! What a rush.
At least we get to fight al'Cia in Iraq, now that they finally got a foothold. Hopefully, McSame will steer us on a clear path to victory, or something.
I'm working on a chart that shows the history of actual storage of oil in the U.S. and it's relation to oil price. It sheds some light on this "speculation" thing. Rising inventories are billed as meaning nobody wants any oil and any price increase is pure speculation . But history shows that oil storage goes up when there's a shortage and everyone wants it. This happened big time in the 70s. It is hardly happening at all now when we have the mother of all shortages setting in. The difference between price run up and storage patterns between the 70s, the Gulf War, and now is ridiculous.
I too am baffled to understand how futures traders could significantly alter the market price of a commodity -- aside from moving it around in some kind of range based on fundamentals of supply and demand.
That's why I've been thinking there must be some actual physical hoarding going on now. Increasing inventory of this raw material seems very logical for a company whose business depends on having absolutely reliable sources of petroleum products, including companies who use petroleum products as feedstocks for plastics and chemicals.
Storing some spare quantity of the stuff is exactly what I would do if I were in that position, and was starting to worry about supply interruptions.
If there is in fact hoarding going on, I don't think it is being done for the purpose of turning a profit. It is usually only possible to profit from commodity price changes by trading contracts rather than the physical material. That's because the net profit for buying actual product low and selling it high would likely be quite small compared with the expense of doing so. Consider that one would have to acquire (or more likely, build) storage facilities, ship the product to the storage location, and then staff and maintain and protect that location, and finally ship the product on to its ultimate purchaser. In the face of such expenses, even a comparatively large increase in price would not be enough to gain much direct monetary profit from physical storage.
In summary, I think we are seeing some panic buying and hoarding, not for speculative profit but rather in pursuit of supply security. With the world market for oil as tight as it is now, even a very small increment of geographically widespread hoarding might move prices sharply higher.
Of course if supply later loosens up, such hoarding would contribute to increased volatility on the down side, too, since companies might then draw down their stored supplies for a while, rather than buying new product.
Or we are simply seeing importers bidding for declining net oil exports.
I'm guessing that it will reach $114/bbl before $140 and within the next 60 days. It's my opinion that in the short term, oil is way overbought. Current oil prices are causing substantial demand destruction and as a result inventories have been rising rapidly. I expect a sharp correction in the short term, though undoubtedly oil will breach $140 and head much higher in the coming years as a result of widespread monetary inflation and oil depletion.
Hi yartrebo,
Have you a source for your statement: ... inventories have been rising rapidly. Thanks.
My guesses in the polls have turned out to be right, so I'll stay with the trend and vote for 140 before 114. The oil chart appears to be in an accelerating upward trend. These sometimes lead to a blow off type top with very wild gyrations in price. I don't think we've see that yet.
Fundamental wise, peak oil per capita happened in 1971. In that sense we are 37 years past peak. Each year we each have less oil even if total oil extraction should increase some modest amount to make a new high. The dollar continues to be weak. Exporting countries continue to subsidize oil consumption. While car sales are weak in the U.S., they are still booming in Russia, China and the Middle East.
Locally Winnebago Industries is practically shut down, but the roads are filled with heavy truck traffic due to the construction of a very large wind farm. Planting the corn and bean crop is sucking up diesel like there was no end to it. While there seems to be some reduction in car traffic, it is modest IMO. People seem to get use to the higher prices.
Dante at PO.com posted this bit, from an article that doesn't have a public link yet:
Production is dropping, and Asia is taking a bigger share.
As I rode the electric motorcycle to work today, I smiled as I passed the gas station with the $3.75 sign for unleaded. Diesel was 4.50
When I got to work, I followed a new H3 Hummer into the parking lot. It still had the paper temporary tag in the back window.
I parked the bike and counted the number of full size SUV's and 4 door 4 wheel drive pickup trucks in the parking lot. Came up with 75 monsters. Counted 1 Prius and 1 electric vehicle (mine).
The price of oil is going to go a lot higher.
Cheers,
Kyle
http://www.evalbum.com/1414
Nice Conversion, how long have you been riding it now? (June '07?) Do you like the controller?
Bob
The Alltrax controller works good. It is just the 300 amp version and they do make a 500 amp version if you want more performance.
The performance right now is pretty good as is. When I do the next conversion, I want to try and do a 96 volt system to see if it will do freeway speed.
The bike has 2500 miles on it now and I have never been stranded yet. A good way to get to work and back for low cost and zero air pollution.
Kyle
Here's a fun game. As the price of gasoline and diesel move higher you could track how many of these big trucks you see in the parking lot. Kind of like a reverse tanker count that's done in the Persian Gulf.
I voted for the 114 - 140 trading range, last time I went for the top range.
I see oil heading steadily upwards. Todays $127 is already 6 months early and so it'll be above $150 for Christmas. That won't please the hauliers and there'll be calls to cut fuel duty ( there is already talk that the 2p increase deferred in April may be deferred again ).
Here is a copy of my email to a Wall St Journal article published on May 16 titled "Refiners Tilt to Diesel Over Gasoline" by Ana Campoy . Does anyone know where I can find data on freight traveling by truck vs rail?
Dear Ana,
Great story!
Your article got me thinking about the reduction in gasoline usage. Could it be more efficient cars? If so, the VMT is probably increasing which leads to more congestion and higher diesel burn rates in trucks. Do you know if there are more goods being shipped by truck this year? it seems unlikely, given the massive increase in rail freight. Perhaps the trains are the reason for the increased diesel consumption but you would hope they are more efficient than trucks.
Anyway this would be a great follow up story. It is refreshing to read an article that looks at the mechanics of the industry rather than the usual banal repackaged mindless drivel. My only solace is watching the used SUV market collapse and buying oil futures.
Hi realist,
re: "Does anyone know where I can find data on freight traveling by truck vs rail?"
AlanfromBigEasy can steer you in the right direction.
In all the hand wringing about ME oil production and price increases, I see very little discussed about:
A: Bush Baby going to grovel in front of the Saudis and having his ass essentially kicked in public, (in private he and Cheney the Dick and their Texas oil buddies Love higher prices)
B: Cheney the Dick and his Sock Puppet Bush Baby have done everything in their powers to keep Iran from selling oil on the open market, there by helping to drive price up.
Iran went from about 1.6 million to 4.2 million bbs from 1980 to present.
This looks like the real 'swing' producer in the ME, not the Saudis.
Taking Iran's production off market via sanctions Plus screwing up Iraq's production via Gross Negligence is Very convenient for anyone in a position to profit from sky high prices.
Between Iran and Iraq's combined oil production that is not arriving in the market place, they are essentially the fulcrum for world oil prices. (The Saudis also benefit Royally from this 'arrangement')
Goldman Sachs is lovin' it, their oil speculation profits are making up for their Gross Negligence in the rest of their bankrupt business model.
Every American who voted for Bush in 2004 is reaping the results of their ignorant or malicious vote. Anyone that is not buying oil futures is missing out on a chance profit from this collective lack of responsibility.
I agree, absolutely. I'm still to this day blown away by the fact that Bush got voted in for a 2nd term. There didn't seem to be any extent of information regarding his Administration's incompetence, arrogance or corruption to dissuade enough people from putting him right back in the Oval office. People just kept saying, "I like this guy - I'd like to have a beer with him". Boggles the mind how deciding on a president could in any way get connected to the experience of sharing a frosty mug. It boggles the mind!
You know, you may be antiBush (which is easy), but you didn't pick up on something funny last week. Bush didn't just go to Saudi Arabia, he first stopped in Israel to celebrate the 60the aniversary of Israel's ethnic cleansing of half the native population and subsequent apartheid economy for the other half.
It's like he was trying to offend the Saudis as much as he possibly could.
So why did he go to both instead of just one or the other?
"People just kept saying, "I like this guy - I'd like to have a beer with him". Boggles the mind how deciding on a president could in any way get connected to the experience of sharing a frosty mug. It boggles the mind!"
This shouldn't be so shocking- if you lived in a small (50-150 ppl) tribal group, that's exactly how you would decide who to support as a leader, AND it would be a good idea- if you like him, then he probably likes you too. (Which helps in maintaining social standing, and personal survival.)
This fascinating modern age has allowed us to watch t.v. and pretend we "know" people who don't know us. Our bodies are hard-wired to use emotion as a gauge for social and survival decisions. Rational choices come in way, way, way down the line. (You could make a strong argument that the best modern leaders could be chosen double-blind, based only on qualifications and proposed policy agendas and leave out age, race, beauty, charm, etc. etc.)
Unfortunately, the sort of superficial charm that Bush seems to adept at mimicking is also one of the signs of Psychopathy. The question Americans should be asking themselves is how they ended up electing someone who is by definition a monster.
I think the price of oil will not sink substantially until after the Olympics and $150/barrel oil.
The Chinese are not going to allow anything to get in the way of the party until then, but prices of oil and commodities will be hitting hard by that time, and I think that by October they will cut back heavily.
The price of the oil should have fed through to the price of gas by that stage, and a downturn in China should lead to a re-assessment of economic prospects in the States.
I can see a falling back of both oil and other commodities over the winter, but no-one will be able to afford it anyway, so recession should bite hard.
The question I am asking myself is whether the inelasticity of demand is sticky for oil on the way down now, as well as on the way up?
It seems to me that many of those who have already been knocked out of the market, essentially the poorer nations, won't be able to afford to increase their consumption much even if the price fell quite a way, particularly in difficult world trading conditions.
When the penny drops in the west that prices are a real problem, not a temporary annoyance, it seems to me the demand could drop a long way, with second cars being sold, and trips forgone.
In a recessionary environment it seems to me that even if oil prices drop a fair bit then demand might stay low.
This would have knock on effects on the oil producing countries, as their takings might go down, although from a high level, whilst demand is still restrained.
That would not be a real problem for most, but projecting forward their finance ministers should see that finances when exports decrease should drop rapidly.
Much though I respect West Texas's model's, I wonder if levels of $800/barrel will ever be reached, as it seems possible that something will have broken before this, and that at levels beyond maybe $3-500/barrel however desperately it is wanted, there may be no demand in the technical economic sense.
DaveMart,
I agree. The first time I voted on this I voted for it to "stay in the trading range," but the last two times I've voted for the increase.
It seems to me that the current rate of oil inflation will continue until a recession breaks demand. Since demand is worldwide, that would have to include Chinese demand. I don't see that happening until after the Olympics.
At the beginning of the year, the annual inflation rate of WTI was about 70%; by March 12, it was 87% greater than it had been on the same day in 2007. This is a bit arbitrary, since both this year's and last year's price fluctuated from week to week, but calculating the annual inflation since March 12, the inflation rate got as low as 59% on April 2 and as high as 104% on May 9.
At 80% inflation, the price would be $140 by July 31, and $150 by September 21; at 100%, it would be $140 by June 29 and $150 by July 18. The Olympics end on August 24.
Keith
How about a poll about whether you believe the Saudis will deliver on the purposed production increase this June? My opinion, they made the promise to BushCo to give them some kind of feather in their hat and try to impart some breathing room for a new plan to hatch.
We need to revisit the production numbers in July/Aug. to see what truly happened.