<DrumBeat: June 27, 2008 The Oil Drum World Oil Exports [00] Introduction>

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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Chicken Little on June 27, 2008 - 12:49pm Permalink | Subthread | Parent | Comments top

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 Permalink | Subthread | Parent | Comments top

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 Permalink | Subthread | Parent | Comments top

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 Permalink | Subthread | Parent | Comments top

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 Permalink | Subthread | Parent | Comments top

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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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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