The Oil Drum | POLL: CLQ08 went through $140/bbl today..so, in the next 60 days, the front month price of CL will...

113 comments on POLL: CLQ08 went through $140/bbl today..so, in the next 60 days, the front month price of CL will...

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Zadok_the_Priest on June 26, 2008 - 8:46pm

Yes, it is a guessing game right now, but lately, the pessimists (doomers) seem to be out distancing the optimists (cornucopians) on every front.

When in doubt for speculating on crude prices, aim high. Very high. Conversely when dealing with stocks or real estate or your bank account or intelligence from TPTB, then aim low. Very low.

Appears to be the current winning formula. Except that under these gaming rules, who really wants the jackpot??

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Andrius Spokas on June 26, 2008 - 11:32pm

I would have to disagree. Oil prices have been cyclical for years. Why would it be different this time? Yes, they might continue rising in the short run and anything minor such as a hurricane threat could send them above $150 but it is only the matter of time before they are falling back down to $100.

Oil, like any other bubble such as tech or real estate has risen too much and too fast. It will also pop like any other bubble only to come back to its peak, but that won’t happen for years. So anyone putting their money in oil today would be making the same mistake as the people who invested in real estate a year ago. You are more likely to double up by investing in the beaten up airlines, which will sky rocket as oil will fall, than you are investing in oil today or shorting the market which is at its lowest point in two years.

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Jason Bradford on June 27, 2008 - 1:32am

Q. "Why would it be different this time?"

A. Uh, ever heard of peak oil?

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biffvernon on June 27, 2008 - 2:50am

Why would it be different this time?
The turkey gets heavier every day. Why should tomorrow be different?

(Ans: it's coming up Thanksgiving/Christmas)

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islandboy on June 27, 2008 - 9:14am

Ahhhh.. a newbie (<10hrs at the time of this post). Being one myself, I'm not too sympathetic. I found out about PO about 8 or 9 months ago but, I pride myself in having gotten up to speed really quickly. To avoid embarrassing myself, I lurked her for a few months before signing up and posting. Had the OP even taken the time to read Gail's latest PO overview, I doubt he would have posted. If he has read, he obviously disagrees with the whole concept of PO or does not understand it.

Alan from the islands

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macquechoux on June 27, 2008 - 2:59pm

"Q. "Why would it be different this time?"

A. Uh, ever heard of peak oil?"

So, peak oil precludes market corrections, loss of demand due to high prices & deep recessions? It is impossible that high prices cannot moderate demand? Political constraints on production in the US, Mexico, Iraq, Iran, Nigeria, and Venezuela will never change? There can be no market bubbles due to foolish speculators? Oil prices will always move in a never varying line upwards. Gone will be all those little (and sometime large) squiggles that are so common in commodity charts? If you believe that I suggest you put every dollar you can beg borrow, and steal and go long in the future market. You can't loose, right?

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Jason Bradford on June 27, 2008 - 5:18pm

I didn't just fall off a turnip truck.

Did you even read the comment I responded to?

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Dennis Brumm on June 28, 2008 - 1:09am

Ah, a clue to the secret new crop in Willits this year. [heh]

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Grautr on June 27, 2008 - 3:22am

Are you investing in airlines? Good luck with that one :D

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Andrius Spokas on August 11, 2008 - 12:36pm

Dear Grautr,

I would like to take this quick opportunity to say "i told you so" No, it's not all over. Oil prices might still bounce back in the short term, but it's nice to see how my Northwest Airlines have made me a healthy 94% return since the day that I made my comment and was shredded to pieces by all of you oil "experts".

Regards,

Andrius Spokas

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SamuM on June 27, 2008 - 4:28am

How the other side thinks

Andrius Spokas,

thanks for posting. It's not always easy being a lone dissident voice in a group which stands against your opinion. I'll give you credit for that (and a vote up).

However, that doesn't still make your opinions right. You need to back up opinions with data, to build a real argument.

Because I like to play thought games and I can fully admit to not knowing with anywhere near 100% certainty, I will play along.

I'm going to generalize here, and go beyond your argument, but hopefully staying within the boundaries of honest argumentation and not building a straw-man.

Goldman seem to think we're now almost through oil investment phase and will start going to the exploitation phase soon, likely causing a significant and long lasting drop in prices:

_{Source: Goldman/Pernwell, 3/2008}

IF this is true, then the index fund positions on oil futures are likely to take a big hit AND futures price will go into contango (that means, prices of futures contracts will start to drop as their maturity shortens, as the spot price is going lower).

_{Source: Homeland Security Committee hearing on Commodity Markets speculation, 5/2008}

_{Source: AMP Capital, 5/2008}

The same people also believe we are not 'running out of oil' (sic), meaning we are not near production peak yet - something which they are at least acknowledging now as a possibility

_{Source: Deutsche Bank, 5/2008}

Further, even the FED thinks oil is not really that expensive in real terms

_{Source: Dallas FED, 2008}

Lehman seems to somewhat agree:

_{Source: Lehman brothers, 6/2008}

Now, please accept that in order to go simulate this thinking, I have to disregard a lot of data on production, spare capacity, refinery situation, inventory levels and export trends and estimates about upstream projects coming on-line.

However, what seems certain, that the thinking I've outlined above is not something only a few people believe in. It seems - at least on the surface - to be quite prevalent in the big banking industry and amongst politicians.

NB! I do NOT personally believe in the above hypothesis. Further I don't think the fact that they are in powerful position, automatically makes their deductions correct, which unfortunately many people automatically assume.

What the above hypothesis does, is to create confusion and a lot of cognitive dissonance in people. Esp. those who know the production fundamentals or people who try to follow experts of differing opinions.

Taking into account the data disregarded above, I think the above speculation/lots-of-oil-left argument is a very likely a seriously misguided hypothesis.

Now, this doesn't mean that the price of oil cannot fall to, say $100 for a while. Even many peak oil analysts believe this. A big recession world wide could bring down the price. But when will it happen, what will it result in and how long will that price level last - that's where opinions start to differ widely.

And even the people who should know seem to be very inaccurate in regards to predicting the oil prices historically:

_{Source: PRX Capital}

But then again, I can't be sure I'm right, but at least I acknowledge that, unlike many of the bankers/politicians :)

PS I voted for the highest price on crude, just because of this:

Authors@Google: Philip Tetlock

Capsule summary: How do the best 'experts' fare on the aggregate in their predictions? Not any better than simple extrapolation models (+ lots of more stuff in the video, like the hedgehog-fox metaphor @ c. 26:30, that I recommend to everybody)

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Chicken Little on June 27, 2008 - 12:49pm

SamuM,

You've laid out the "oil bubble" argument pretty well, but I would argue that it is not a straight peak v. bubble debate. I have sympathy with the bubble argument, at least to an extent, but also beleive we face a very serious supply problem. What I would argue is happening is that commodity investors (for they are investors rather than speculators this time) are jumping the gun by a couple of years. You might even see this as a rational market repsonse to a looming supply crisis - choke off demand before demand exceeds supply. I argue this for a couple of reasons:

Q1 2008: US crude inventories rose by more than has ever previosly been recorded in any one quarter. Prices rise by 40%. Odd to say the least.

OECD forward days cover (Total crude and products): Currently sitting at 53.7 days. The top of the five year-range.

H2 projections: OK, projections are subject to lots of provisos, but with Khursaniayah now up and running and a mass of new production coming from Brazil, Angola and the GOM the global balance only looks likely to improve. Demand is rapidly slowing due to the high prices (US down 600k b/d!), though Middle East and Asia are still going strong. The higher the price rises though, the more this will affect demand (at least in Asia - amdittedly the elasticity here is probably at lot lower than was previosuly thought).

Iran: 14 VLCCs sitting in the Gulf full of Iranian crude that can't find a buyer.

The traders I speak to in the physical market say they have no trouble sourcing cargoes. The point is that there is a diconnect between what is happening in the market and the price. I can think of a few explanations.

- The data might be wrong. The IEA does frequently revise (usually demand up and supply down), but they'd also need to be wrong on inventories in quite a big way. It's possible, but seems only part of the possible explanation.
- There might be a shortage of light crude. That's not what I'm hearing from traders and the light/heavy spread is actually narrowing - which suggests this isn't the fundamental issue.
- Capital inglows into commodities are amplifying price moves. This seems plausible given the rapid increase in activity (the amount of WTI futures contracts held by non-commercials has increased by 600% since 2003).

I think those investors are buying becuase they fear peak oil. However, by ramping the price up now they are going to contribute to reduced demand, economic stagnation and improved efficiency. The danger is that this is a bigger bubble than we realise, and it pops. If that happens we just set ourselves up for an even worse spike in 2011-13 (looking at Skrebowski's supply projections, which I think are as accurate as you can get). There are feedback effects here.

I can't claim that this view is THE truth about what's happening by any stretch - the oil market is nothing if not opaque, and I accept that in the past price has often been the best clue we have to the underlying fundamentals. What I would say is you can still be concerned about peak oil, and see what's happening now as a bubble. They are not mutually exclusive.

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LevinK on June 28, 2008 - 1:02am

I am on the same opinion. I fear the commodities bubble could come back with a vengeance. Then people will be declaring that "PO is BS" etc... Until one more year or two.
We have so short attention spans.

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SamuM on June 28, 2008 - 3:07am

Thanks for all the additional input, Chicken Little. Nice nick, btw :)

I also agree and outline in my other post, that peak vs bubble is not a either/or situation. I do believe there is some sort of a 'premium' on top of fundamental supply/demand situation. How much it is and what causes it and IF it'll make any difference, well that's another thing.

However, where I strongly disagree with the hard line speculative bubble theorists, is that this premium is in the order of $75/barrel currently (they claim a 'real' price of $65/barrel for oil based on supply/demand).

As for the inventory data.

My reading says:

1. OECD commercial stocks at near normal levels, historically a bit below 1996-2002 figures
2. US combined crude oil stocks at low levels
3. I have no data on Asian commercial stocks, but according to CSIS world was at below five year stock levels by numbers available in March 2008.

As for H2 projections. So far all cuts in OECD demand has been exceeded by extra demand in Asian countries. I'm not sure how the recent subsidy cuts in China will fare, but I'm not sure there'll be a great drop in demand until China's economy slows down. OECD almost has to go there first, like we currently are going. I agree that demand supply cut potential there remains significant in due time, perhaps not yet fully in H2/08.

RE: "Iran tankers"
I was under the impression that the tankers are a temporary storage for the refinery repair phase and that the oil would be unloaded during mid-summer. If that is so, and that the oil can find buyers, and there is a significant amount stored in the VLCCs, then that might offer some relief on the price.

RE: "There might be a shortage of light crude"
The heavy-light spread I calculated from EIA data has been shrinking in relative terms (% price premium) but growing in absolute terms. I'm undecided, but it would make sense if there was a light-heavy crude mismatch in supply/demand (based on geological production profiles alone).

RE: "I think those investors are buying because they fear peak oil"
Perhaps, but I think that only applies to futures. Again, I don't believe stocks show hoarding or pulling oil off the market (US/OECD stocks). This, IF correct, would mean that speculators are unlikely to be driving up the spot price considerably.

I really thank you for all the comments. I've learned again.

Fundamentally what matters is the c.2011 situation ala IEA/Skrebowski. Whatever happens by then might be just a warm up anyway. On that I'm in full agreement.

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72myz on June 28, 2008 - 4:44am

Here is the historic 'record' prices for any crude as recorded at: http://tinyurl.com/2tdb6w ,data from
http://www.upstreamonline.com/market_data/?id=markets_crude

The records go to light crude almost right across the board, since the start of the year. Prices won't 'geologically' ease until heavy crude refinery capacity is in place and Khursaniyah is pumping.

But IMO they won't ease until 2009. 2010, however, will likely be a bastard of a year price-wise.

This is not taking 'above ground factors' into account. And, on history, weather or rebels will cause big spikes in oil price.

January 2 - oil prices - Tapis crude is $US99.60
January 2 - oil prices - Tapis crude is $US103.96, a record high.
February 14 - oil prices - Tapis crude climbs to $US99.14
February 21 - oil prices - Tapis crude briefly climbs to $US102.98
February 29 - oil prices - oil reaches a new historic high of $US103.05
March 01 - oil prices - as the dollar weakens, oil reaches a new historic high of $US104.53 for Louisiana sweet. Other sweet crudes are not too far off. Only heavy blends, for which refinery capacity is limited, remain around the mid nineties.
March 03 - oil prices - light sweet oil reaches a new historic high of $US105.95 for Tapis light. The spread between light and heavy grades continues to widen.
March 04 - oil prices - light sweet oil briefly reaches a new historic high of $US106.59 for Tapis light before falling back to around $US104.
March 09 - oil prices - light sweet oil reaches a new historic high of $US109.21 for Tapis light. Heavy oil such as Dubai and Oman 1M is stuck around the $96-$97 mark.
March 10 - oil prices - light sweet oil reaches a new historic high of US$109.69 for Louisiana Sweet.
March 11 - oil prices - light sweet oil reaches a new historic high of $US110.93 for Tapis light.
March 13 - oil prices - light sweet oil reaches a new historic high of $US111.47 for Tapis light.
March 14 - oil prices - light sweet oil reaches a new historic high of $US113 for Tapis light.
April 8 - oil prices - light sweet oil reaches a new historic high of over $US115 for Tapis light.
April 10 - oil prices - light sweet oil reaches a new historic high of $US116.20 for Tapis light.
April 10 - oil prices - light sweet oil reaches a new historic high of $US116.84 for Tapis light.
April 21- oil prices - after a series of historic highs over the last week, light sweet oil reaches a new historic high of $US123.78 for Tapis light.
April 22 - oil prices - light sweet oil reaches a new historic high of $US124.18 for Tapis light.
April 28 - oil prices - light sweet oil reaches a new historic high of $US126.94 for Tapis light.
May 8 - oil prices - light sweet oil reaches a new historic high of $US128.58 for Tapis light.
May 11 - oil prices - light sweet oil reaches a new historic high of $US131.43 for Tapis light.
May 21 - oil prices - light sweet oil reaches a new historic high of $US134.12 for Tapis light.
May 24 - oil prices - light sweet oil reaches a new historic high of $US139.37 for Tapis light.
June 8 - oil prices - light sweet oil reaches a new historic high of $US141.97 for Louisiana sweet. The American crudes are now expensive, West Texas Intermediate is $138.48, Alaska North Slope is $138.09. Tapis, from Southeast Asia, the previous price leader, is a relatively 'cheap' $135.54.
June 24 - oil prices - light sweet oil reaches a new historic high of $US142.74 for Tapis light.
June 28 - oil prices - light sweet oil reaches a new historic high of $US147.30 for Tapis light.147.30

Cheers,
Lorenzo

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Chicken Little on June 30, 2008 - 7:41am

SamuM,

I think we are pretty much in agreement here - I also don't think that the speculative premium is anything like $70/b. If I had to guess I'd say we're probably more like $25/b over, perhaps a little more.

But the bottom line is I really don't know, and in opening up the discussion I'm trying to improve my own understanding. As I mentioned, I look at the fundamental data on an ongoing basis, and if you showed me the data and asked me to speculate on price, I would have the trend right but the absolute price way off. It's a new market we're seeing, and we need to figure out how it will, and is, behaving.

I think that this blog is good at assessing underlying supply problems and pointing to a systemic shift in the way we consume oil and other energy sources. Where I still have some real questions are on how much we can reduce demand and how quickly, and also how price plays into all this. I do see the peak coming sometime between 2011-13, but if we face a serious global slowdown beforew then, we may delay the shortages by a further two to three years and buy some time.

The biggest concern I have about the current market is that there is a bubble, and it pops (maybe through over aggressive changes by the US government on the futures market). If that happens and the price tumbles in a short space of time, OPEC will say "I told you so", the US government will quit worrying for a while and consumers will happily go out and repurcahse the SUVs they recently sold at knock-down prices. But all that leaves us even more exposed to the real crunch, which is yet to come.

Sustaining this price now may be better for everyone in the long-run - just look at how quickly governments are talking about improving efficiency and seeking out alternatives. It's a very interesting market right now, and very difficult to understand. I appreciate the disicussion!

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Kiashu on June 27, 2008 - 4:29am

Oil prices have been cyclical for years. [...] it is only the matter of time before they are falling back down to $100.

A "cycle" implies that at some point we return to the beginning.

In 1998 crude was $10 a barrel. So your optimistic "fall" is to ten times that price.

Some "cycle".

Perhaps the real "cycle" is a return to not using any oil?

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woodychuck on June 27, 2008 - 6:27am

You found the holy grail - energy independence: If we do not use any oil, we will not be dependent on it.

And, how about that story that there was ice on Mars? It is a wee bit chilly there, but we can solve that with a little global warming.

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memmel on June 27, 2008 - 5:07pm

Given the nature of the futures market and the fact that the bulk of the worlds REAL oil is sold at a discount or premium to the spot price knowing people like you exist warms my heart. It lets me know we have yet another candidate loser for a futures trade. Without people like you willing to lose billions liquidity would dry up.

This reminds me of the knife catchers buying houses on the way down for stupid reasons they set a ever lower market price for homes forcing the market to mark homes to market. A frozen market can stay priced at fantasy for a long time. These buyers will of course be the foreclosure victims of a few years hence but without them you can't get a market to drop.

I often get worried we may be running out of suckers but it seems one is born every minute.

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Keopele on June 28, 2008 - 4:19pm

You must be new here!
Or you wouldn't be making that statement!

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113 comments on POLL: CLQ08 went through $140/bbl today..so, in the next 60 days, the front month price of CL will...

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“The aim of every political constitution is, or ought to be, first to obtain for rulers men who possess most wisdom to discern, and most virtue to pursue, the common good of the society; and in the next place, to take the most effectual precautions for keeping them virtuous whilst they continue to hold their public trust.”

—James Madison, FEDERALIST #57 (1787)