I agree with you and when Hurricane Dolly hits it will be the excuse again by TV's talking heads when the bounce occurs. In Australia they are now saying the bubble is bursting and lower fuel prices are on the slide!! And most will believe them !!

Waterpump,

I also agree with you. Not only millions of Chinese, but also millions of Indians will be buying cars for the first time thie year.

Matthew Simmons has me convinced. Oil-based products, such as the case for my notebook PC that I'm using to type this, fertilizers, pesticides, asphalt, and many more necessities are produced from oil. People are fools if they think that if everyone used electric light rail powered by nuclear energy, demand for oil will fall so dramatically that prices will be $10 per barrel. I cannot see oil ever going back down below $100 per barrel again.

I'm buying my oil stock on the dips. My oil trust stock has a yield of 14.75% rignt now. I haven't bought any stock for several months and I'm happy to see that it dropped 15% lately.

In the long haul, I hope we build nuclear power plants like crazy. We are running out of cheap oil. I think investors are seeing that Bush wants to drill, but the reality is that it will take ten years for the first drop of oil to come from the new digs. This drop in crude oil prices is wishful thinking. The alcohol will wear off and the hangover will take over. oil will certainly go up above $140 again this year. Bye bye $114!

If China is at 10.4 million (and rising fast) and the US down to 12 million from 16 million- then maybe the poll should be on which of the following months has China with a bigger monthly sales figure than the US.

Don't confuse us with the facts. Be like CNBC this morning and use no facts, just that the market says the bubble is bursting. I guess all those people buying new vehicles in China and Russia plan not to drive them. Also ignore the fact that we are adding 70 million people each year to the planet's population.

The problem is that $110 oil seems cheap from $140 but seems like a scary breakthrough coming from $90. My fear is that people are psychologically adjusting to these new prices, especially if they go down.

We need a permanent price floor for oil.

Nate,

I asked you the other night about this whole supply/demand vs. speculators issue. I find it very interesting because this seems to be the new "its all fine" excuse like the "Jack" discovery was touted earlier.

When I first started lurking before I actually logged in to comment it was the strength of the arguments against the deniers that made me keep up with the whole PO thing. And as things started to pass, I started making changes in my life. When you guys used to crush Freddy (who by the way now is in the peak oil camp--HA!) it was the ability to knock down his weak arguments that won me over.

I understand that one doesn't want to tie oneself to a price since they are as fickle as the weather and now that the peak oil idea is gaining credibility in larger circles then if oil goes to $50 and then everybody says HA! what a bunch of Chicken Littles.

I agree wholly that the market only cares about today and sadly does not price long term scarcity so I agree that prices can move up and down based on how the oil stocks are looking right now and traders perceptions. And now that we are in bigger prices, a $10 move today is less than 10% where it used to be 50%. So the nominal $ volatility certainly can be huge.

But I don't understand the other argument. I agree that the amount of credit and dollars created and in existence could buy all the oil trading on a certain day in an instant. I also agree that the price on the futures market is about the supply and demand for those future contracts. And a person can control 1,000 barrels of oil very easily.

I'm trying to understand the mechanics of trading oil futures.

Karl Denniger states that there was about $5 of speculation (trading in the supply and demand of securities) that collapsed on June 27:

http://market-ticker.denninger.net/archives/502-Frightful-Friday.html

He's smarter than me on these issues, but he seems to say that the supply and demand of contracts doesn't seem to matter much with prices.

He goes on to talk about the money supply. I agree the money supply can greatly affect the nominal price of oil, but I think he misses the boat a little along with Mr. Masters. They say the injection of credit to increase the money supply has raised the price of oil.

I agree sort of, but I think they are confusing causation.

In my opinion, the supply/demand issues require a larger portion of the money supply be devoted to oil. For instance, if I had $100 as my total money supply and oil was plentiful to satisfy all bidders then I might only have to devote $10 to buying oil. But if oil was scarce, and I wanted to outbid the other bidders, I might have to devote $30 to buying oil and cut back elsewhere. If my money supply dropped to $50 in the first case the % of money supply would be the same--except oil would be $5 in the first case and $15 in the second case.

Mr. Masters points to the huge growth in money invested in oil related assets and says "look at all that money--its the money pushing the price up!" But I think he has got it backwards and its "look at all the money, all this money needs to flow to oil now since its value has increased because of its scarcity."

Change in money value is simply the effect not the cause. The financial economy's tail does not wag the real economy's dog. It was the change in underwriting standards at banks (real economy) allowing people to borrow like crazy (I know when I talked to the loan officer to buy a house in 2004 I was flabbergasted they would loan out that kind of money on that kind of income with 0% down) that created the boom in housing prices (financial economy). It was the change in oil supply/food price (real economy) in the 1980's & 1990's that allowed a much larger portion of one's income to be dedicated to debt service creating asset inflation and allowing stocks to trade at a higher multiple of earnings than historically (financial economy).

The Fed's injection (and now soon the Treasury's :( ) was to keep stable/allow a controlled drain like in Japan of the money supply since the amount of credit is basically the money supply. This was done to slow the massive destruction of credit from the global housing pop and now that the Fed is exhausted they are digging into the Treasury.

So Karl's kind of right, without the Fed intervention in March we would have quickly went to depression dragging the money supply down and also the oil price. But I don't believe that the Fed's intervention expanded the money supply, only prevented it from quick and severe contraction, and its still declining--but at a more manageable rate--but now they need the Treasury money to keep another quick and severe contraction away. But the intervention did not artificially inflate oil prices, as I believe the money supply is lower today than last year. In other words, without the housing bust I think oil would nominally be much higher right now.

Basically I only see two main factors affecting nominal oil price--the money supply and short term supply/demand. Without increased production, however, the real oil price has only one way to go--UP!

Just my thoughts, I'm only trying to make sense of these events. I think I get my dopamine from better understanding how things work.

Markets care about how much is available this week/month. If the market is oversupplied, prices will drop until supply and demand equal out. If demand drops alot (due to some exogenous event), prices will freefall - there is no correct fundamental price for oil.

I think there are informal floors and ceilings out there. If producers and/or consumers overwhelmingly feel that today's price is too good to pass up, they will lock in the price for months (or years) in advance.

I am hearing rumors that the natural gas selloff this past week is due to some large hedge funds selling large amounts of $10 puts and as we approach $10 they have had to sell futures to hedge.

Some readers may be interested in how/why this is:

Delta Hedge

The markets do a very good job of pricing current supply and demand correctly. (And, contrarily, the markets do a terrible job of pricing in long term scarcity.)

Very true, and everyone needs to be constantly reminded of that fact. Drill, drill, drill (it into their heads). Sad but true.

The interesting thing is that the markets we get are the markets we want (or at least the markets that our politicians want). So sad.