The Oil Drum | CFTC Report on High Oil Prices

145 comments on CFTC Report on High Oil Prices - "Speculation My A$$"

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westexas on July 23, 2008 - 12:59pm

As a public service to the oil trader types, I have, from time to time, offered my interpretation of Yerginisms, and I coined the term "The Yergin Indicator," which suggests that oil prices will trade at about twice Yergin's predicted index price, within one to two years of his prediction. For example, about a year ago Yergin said that oil prices in (barring a geopolitical event) would be back down to $60 in 2008 (for more info, do a Google Search for Daniel Yergin Day).

Yergin has been noticeably reticent of late regarding prices, depriving traders of a critically important price trend indicator, so we have to go with secondary sources. Three talking heads were just on CNBC, and in their collective opinion, they agreed that we should be back down to $100 by the end of the year. So, I have designated a new indicator, the CNBC Consensus. While it will probably not be as powerful as the Yergin Indicator, it is probably a decent predictive tool. So, IMO, the CNBC Consensus suggests that oil prices will be closer to $200 than $100 by the end of the year.

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cjwirth on July 23, 2008 - 1:29pm

WT, sometimes you make me laugh so hard my wife wonders.

$100 by the end of the year. That reminds me of the cartoon that you see in offices on the wall next to the photocopy machine with the guy laughing so hard he is holding his gut, saying "you want it finished by when?"

$200 per barrel if all goes well, higher if not. What was that guy Murphy saying about if something can go wrong it will. In this case there are many things that can go wrong.

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Nate Hagens on July 23, 2008 - 1:58pm

We could easily be back at $100, or lower at the end of the year, and it would not invalidate any of the concepts we discuss here. We could also be at $200. Prices, as people must realize by now, have short term elasticity completely separate from long term fundamentals.

(btw, the implied vol in crude oil options suggests that seeing $100 again before year end is more likely to happen than to not happen)

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ccpo on July 23, 2008 - 10:05pm

I agree, Nate. I think it is good to keep in mind that most feel one of the symptoms/results of Peak is/will be extreme price volatility, as you pointed out. We need to keep in mind that demand destruction is occurring, though not yet net globally. Also, these ARE the peak production years according to Megaprojects. In late '07 some (many?) people here, including myself, were expecting some softness in price during the period through '09 or '10, no? (Of course, that was pre-Russian peak when they were responsible for something like 60 or 70% of net yearly gain in non-OPEC production.) Then there is the supposed 12.5 by '11 the KSA is claiming they'll have. Those not on board with the inevitable upward trend will take some of these things very seriously, and prices will be volatile.

Drinking the KoolAid, even if one's own (peakers), is always a bit of Russian Roulette, I think.

Cheers

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Odysseus on July 24, 2008 - 12:39pm

I agree Nate, many of us peak-oiler's get a bit too excited when seeing price trends validate our personal models of PO. In reality, I think we will see an undulating plateau of supply with erratic price swings for several years. I view the whole price/volume system as very chaotic (in the true mathematical sense): it is extremely sensitive to minor changes and is wildly non-linear.

Has anyone considered mapping oil price as a chaotic system? I wonder if there is a strange attractor underneath this?

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Millard Fillmore on July 24, 2008 - 2:09pm

Lemme see.
1. The oil-producing nations would rather have higher than lower prices. 2. The oil-producing nations have huge mountains of money (sovereign funds) and expert financial advisors, and thousands of financial minion-quislings at their disposal. 3. Oil demand is inelastic in the short-run, meaning if speculators game the price up, demand does not wither for several years. 4. Any financial market can be gamed, and they have been gamed many, many times in the past.
But, oh no! No one ever manipulated the NYMEX! Never! Impossible!
Please. If I ran an oil-producing nation -- and our only real source of income was oil -- of course I would try to game the price higher. It would be a violation of fiduciary duty to my fellow citizens to NOT game the price higher.
So, we can assume oil-producing nations are gaming the price higher, through financial quislings. The gaming worked, as demand is inelastic in the short-run, defined as five years or less.
The gaming worked -- but the game has run its course. Demand is withering, in the medium-term, which we are reaching now. Automakers switching over fleets etc. Now, global demand will likely sink for several years. If prices hold long enough, then the long-term, and much greater elasticity begins to set in, bringing huge, decreases in demand.
What is fascinating is the OPEC-killer lurking in the wings. The death-ray for speculators. The GM Volt.
If such a car works commercially, it is game over for the oil boys and their minion-weenies. Who will need oil then? The world will be able to prosper at 40 mbd or less. Cities will be quieter and have cleaner air.
Tell me the downside in this, because I can't see it.

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Odysseus on July 24, 2008 - 4:03pm

I agree that all the money sloshing around in our economic system is contributing to price volatility. But I completely disagree with any notion of a vast conspiracy or some "puppet master" that is pulling strings to consciously run up prices. The whole oil price system has lots of drivers from oil-producing states waking up to the real value of what they have in the ground, to worried investors who are starting to comprehend the house of cards that is the US economy. People in this system are like cellular automata's who are following their own interests. I think the influence by global actors like government, KSA, or even Exon Mobile is quite muted. As in calculus, all the little dx's add up, but you need to understand the underlying trends in order to add them up and make any sense of it.

As I see it, all this energy, fear, and money are racing around trying to find some stability point, yet they can't because it is a chaotic system. It keeps oscillating and chasing any hope for answers and stability... but there are no easy answers or safe havens. Climbing out of this peak oil hole will not happen easily or naturally, unless you are betting on Malthusian outcomes.

You're much more optimistic than I about the impact of the GM-Volt. I sure hope is has an impact, but I see it as too little, too late. By 2010 we're going to be in a vastly different world if we continue on current trend lines.

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Millard Fillmore on July 24, 2008 - 4:30pm

By 2010? Demand is falling now, but global production of liquid fuels is hitting records highs every months. Sellers of sour crude have no markets. Oil is plunging, and it may turn into a rout.
And conservation methors are just getting started.

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Wærmund on July 24, 2008 - 8:16am

Hi all,

Noticed a report in the Independant this morning that Nigerian "freedom fighters" were annoyed that a $6M pay off - sent by the Nigerian government had gone to criminal gangs instead of them. They promised to renew attacks on pipelines within the next 30 days as a result. I also note that the recent Iran / Eu "talks" have produced little of substance and that the US 2 week deadline to "think again" about their (Iranian) negotiating position expires shortly.

I'm sure both issues will exert some influence on fluctuating prices over the coming weeks.

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westexas on July 23, 2008 - 1:53pm

I found my 6/28/07 post on The Yergin Indicator:

http://www.theoildrum.com/node/2725#comment-207062
RED ALERT: DANIEL YERGIN ISSUES STRONG "BUY SIGNAL" FOR OIL

CNBC just quoted Daniel Yergin as saying that, without the "fear premium," oil prices next year should be down to $60.

Most of you probably recall Daniel Yergin's previous predictions for lower oil prices. Based on prior experience, once Yergin issues a prediction for lower prices, one should expect oil prices to be 100% or more higher than his predicted price, within one to two years of his prediction--think $120 or more within one to two years.

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Neven911 on July 23, 2008 - 4:32pm

Jeff

Whilst we are in a creative mood i had a thought (dangerous). I thought we could improve the situation by creating a new acronym, WSD to describe an oil fields reserves, A WSD is "a World Supply Day". This has major advantages.

1/ Its is understandable by anyone, we all know what a day is, 1 billion barrels on the other hand has absolutely no 'meaning' to the general public.

2/ As consumption increases, Reserve Values Drop! 1 Billion barrels is currently 11.8 WSD, should consumption increase to 100mbpd then the reserve is 10 WSD

Imagine the press relese "ANWAR possibly contains 58.8 World Supply Days of crude!"

Its got to be better than POTUS or WOMD (Which I always confused with WOMAD)

Neven

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Joe Average on July 23, 2008 - 6:49pm

Good Morning.

Um, this is for people like me, yes? Doesn't "WSD" sound a bit like "WMD"? But yes, I do like the idea, even though it would probably only appear on page 58 of the local rag, buried beneath the "Touched By The (Road) Toll" figures.

People don't service their washing machine; they just keep using it until it breaks down, curse it when it does and finally phone someone for help. I'm still crossing my fingers and toes that the "energy man" will have some answers for us when the time comes. I think that's the way it'll go.

Regards, Matt B

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ROCKMAN on July 23, 2008 - 2:14pm

WT,

Yep...sometimes stochastics are better than knowledge. I have noticed that when folks are carrying umbrellas it's almost always causes it to rain. Let's hope Y does have a sudden philosophical shift.

I may self have just developed a great fondness for future traders. I've been wanting to buy one particular oil stock for a while but it's been priced high like most oils. Thanks to the pessimism of the future traders all the oil have quickly taker a dip. My target stock is now down 25%...and all the analysts liked it when it was at the top. Even when you're not a wolf it's fun to sit on the hill top and watch the sheeple run this way and then that way.

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ICouldBeWrong on July 23, 2008 - 9:38pm

"the CNBC Consensus [indicator] suggests that oil prices will be closer to $200 than $100 by the end of the year."

You could be right, but currently oil prices are still trending down and I'm glad I sold out. Admittedly I wouldn't short into a rally to $136 any longer.

The speculators can affect the price in the short term, the front month contract doesn't close for another 3 weeks or so. So there's several weeks left for the speculators to squeeze out the overly leveraged longs, before supply/demand considerations come into play.

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Muskie on July 24, 2008 - 9:26am

Question for all of you oil experts out there -- If we were to ramp up ethanol production tomorrow to full capacity, how far would the price of oil drop?

We can't get rid of oil overnight, but if we invest in clean, renewable fuels like ethanol, we can take a big step in solving this energy crisis. Count me in for American-made ethanol.

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Moe_Gamble on July 24, 2008 - 10:38am

If we were to ramp up ethanol production tomorrow to full capacity, how far would the price of oil drop?

Ethanol would have virtually no effect on the price of oil. Diesel is what's driving the price right now.

In recent weeks, we've had a build in diesel inventory in the U.S., despite diesel shortages in China, India, South America, and even Saudi Arabia, in addition to a slew of smaller countries. It's the build in diesel inventory that is driving down oil prices here. (Plus a determination to cut oil inventories to the bare bones minimum.)

Meanwhile, most of the places with diesel shortages continue to refrain from buying due to price controls.

Essentially, much of the rest of the world (the part of the world with the largest demand growth) has started de facto rationing (many to "control inflation") even at the expense of their own economic growth. China, for example, recently organized its aluminum producers to cut production by 10% until after the grain harvest.

I think a huge part of the price volatility in the markets is coming from government interference in the markets, both in the U.S. (the spec witch hunt and threats to start emptying the SPR) and elsewhere (China's price controls, etc.)

The markets are becoming a place where, instead of betting on supply and demand, you're forced to place bets on the whims of politicians. It truly is becoming a poker game rather than a market, so governments are achieving exactly the opposite of what they'd want to achieve if they were smart. There's no way to get accurate price signals when you're betting on the moods of a handful of powerful people.

Without accurate price signals, oil producers can't plan risky production, and consumers can't make rational investments in efficiency.

A number of people around here have predicted that free markets would be an early casualty of the energy crisis. I think they're being proved correct.

I doubt very much that this CFTC report will change anything, since everything they said in this report has already been said in other recent CFTC reports.

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Joe Bogans on July 24, 2008 - 5:20pm

I agree Muskie - ethanol production is a good start to ensure that we don't depend forever on foreign oil - it may not the be sole solution, but investing in biofuels and alternative energies are the way to go in this time of energy uncertainty.

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GreyZone on July 25, 2008 - 4:49pm

Ethanol does not scale to the level necessary. Ethanol may play a very small place in stabilizing our energy future but we will not be able to continue the "happy motoring utopia" in which we have all grown up by using ethanol.

Change is coming whether we like it or not. We can either adapt to that change by choosing from the available paths to us or nature will select one path for us, whether we like it or not.

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