The Oil Drum

I always click on the "haven't you heard?..." option. My prediction is correct every time because it's unfalsifiable. On any given day the dollar is either rising or falling. If I cherry pick the events, I can explain the change in oil price every time! :)

I was one of those who was wrong on the last poll after being right on several polls.

The commodities markets have broke down and need to find support. This is not only true of crude oil but also ethanol. Likewise grains confirm the reversal in that corn and soybeans as well as other grains have broken down. While the grains are not like crude oil they are somewhat related in that corn is used for ethanol and soybeans for biodiesel.

The economy is clearly in recession with auto makers in free fall and a local company Winnebago Industries dumping workers and putting many on shorter working hours.

The Rule in speculation, and that is what trend following is mostly, is to go with the trend. And when the trend reverses do not go into denial. Just accept it and follow it until it reverses which it will just as the uptrend reversed. Down is quicker as all the longs panic to get out of their wrong positions.

It may take some time for this downtrend to reverse since a new bottom has to be formed. It seems to me that harvest lows in the grains and the election of Barack Obama as President may put in the low. The Fed is impotent as is the oblivious lame duck President and Congress.

Overextended people who are living hand to mouth are in shock just like the banks and both are in survival mode.

Baring hurricanes and war this downtrend may last awhile.

These were my comments on July 23. I think I called it very well:

"I have been an oil investor since the 1990's. I believe in peak oil. Over 50% of my porfolio was in oil and gas I have been greatly rewarded...

Last week I sold about 20% of my oil investments.

I sold shares in a natural resource fund that I have owned for a long time. Ten years ago I was buying the shares for $7. I sold for $42 I didn't quite get the top of $46. In Febuary, in the middle of the SoGen crisis, I was buying oil and gas mutual funds for $18 a share. I sold for $24. A very nice return for 5 months.

Sometimes you are so far ahead that you just have to take profits.

There is demand destruction out there. We have all sorts of stories about parked cars, increased transit use, etc...Higher interest rates and an economy in long term reccession may push the price of oil even lower. Who needs gas to get to a job, when you have been laid off? Better to spend the money on food, seeds and insulation.

I think I will be able to buy all my shares back with oil at $115. I will buy them back in small lots at a lower price. I think the Saudis will cut production at $100 and definitely at $80. They want to preserve their resources for future generations.

$80 to $115 could be the buying opportunity of a lifetime."

Today on August 11, I think we will see lower prices.

In the short term, the price of oil can be about more than just supply and demand. I can be about interest rates and the strength of the dollar.

When real interest rates are negative, commodites are a great play. You lose if you sit in bonds. When the Fed really starts to raise rates, oil prices often drop.

Recently I saw an interview with a Fed banker. He said the Fed was willing to raise rates, even in the face of declining house prices. That's an amazingly strong statement.

I think things have already changed. Higher interest rates will cause the world economy will decline even further and it will require less oil.

Investors who have been forced into commodities by low interest rates will see new higher interest rates and make the jump to short-term bonds and the dollar.

If a hedge fund made 30% in commodity speculation in the first part of the year, they will be tempted take profits and be happy to sit on short term bonds for rest of the year and end with an easy 35% to 40%.

I also think some American Banks are liquidating commodities and oil stocks because they need the money to stay afloat. The market is being sold all at once.

I think this is happening now. Some of those oil winnings are even making it back into speculation in the U.S stock market.

All those discussions about Chinese and Indian demand, will matter less as those countries have benifited greatly from selling goods to America. Demand from other countries will not make up for the decline in demand from America. The American consumer is tapped out from the housing crisis.

In the short term, think oil will go lower. Let's see if the Saudi's cut production at $100. I will not buy back in until $95. I am going to lighten up in other areas and have lots of money ready incase we get $80 or less in panic selling.

Long-term, I love secure, dependable Canadian oil companies as an investment, but I want to buy them at bargin prices when the newest speculators are scared silly by all the selling.

Of course, Israel or Iran could change everything in an instant. That's why only sold 20% of my oil holdings back when prices were so high.

Gold just dropped another $20+ to just a hair over $800/oz.

That's about 7% in less than a day. Commodities don't look like they're ready to turn around.

Keep in mind ...

All markets fluctuate. It is hard to determine a trading range for crude since it has never traded in the dollar amounts that we have seen over the past year ... ever! With the volatility of all markets, a range of 15 - 20% might be reasonable.

China has pretty much shut itself down for the Olympics ... s kind of 'Clear Skies' initiative. Chinese storage is miniscule; refining in China is driven by the government price controls on petroleum fuels, it is unprofitable for refineries to process fuel. There is no reason for Chinese refiners to hold fuel they will lose money on.

http://washingtonbureau.typepad.com/china/2008/06/paying-more-at.html

By waiting, they have allowed prices to decline, that is helpful for them. By the end of the month, the Chinese will be buying again. I suspect prices will rise again.

There are many factors at play. Price instability is a key indicator that the tipping point of fear and panic is not far way.

Fundamentals of supply and demand will be clear in a year. By this time next year depletion rates and increasing domestic use in exporters will clearly indicate that demand destruction (economic destruction) or efficiency gains of 8% (rough guess) per year will be required just to maintain economic break even.

Fundamentals of supply and demand can be trumped (negative only) in so many ways: war, terrorism, storms, politics, stupidity (redunant), hoarding and other above ground factors. These instant actions will create supply shock.

Forecasting based on traditional supply and demand may work in the short term but ignores the whopper events. There are so many whopper events likely that it makes sense to ark-up, build an economic lifeboat for your economic community.

We have a small group putting together a list of supply shock contingency plans. So far the only two worth mentioning are Utah's and the IEA's. Both deal with temporary disruptions of less than 10%. I will try to create a post at TOD for people to list known and published contingency plans that can aid communities.

Elasticity of demand in the US is roughly - 0.045 for oil. Lower for gasoline, higher for kerosene and heating oil.

Here's a recent meta-review from Bank of England (6/2008) on oil price demand elasticity:

According to BoE price elasticity is close to nil in short term, but naturally increases as a function of time, while still remaining comparatively low. Income elasticity is much higher in developing Asia compared to OECD countries.

Anecdotally I offer two observations which support reduced driving levels at least in the West: the commuter freeway load is appreciatively off in Santa Cruz CA., with shorter backups during "rush-hour" and quicker cross-town drive-times. Secondly, I just road-tripped to Gillette WY and noted a much lower volume of RV traffic compared with the same trip five years ago. This should be high season for traveling campers and motor homes, but it seemed starkly quieter on the major highways.

This says nothing about Detroit, but around me at least there is less driving going on. Of course sales and inventory numbers trump casual conjecture, but we're looking at this as possibly our last "road trip" of any length--and appropriately so--I have a big footprint this year...

Murray, you "eyeball" model seems as good a model as any I've seen anywhere else. And While Spaceman says he has seen no drop in driving, I have to say that I have seen some cutting back in our area, especially in vacation and "recreational" driving. Where used to for a long drive trip involving two or three people in the vehicle folks would say "let's take the truck" referring to the SUV, they now say "let's take the car (in this area often a Honda Accord or Toyota Camry, sometimes a little domestic). I know of several people with motor homes or RV's who have parked them at a popular destination only a few hundred miles away and drive back and forth to them now instead of driving them back and forth.
And with each passing month, the population of newer smaller vehicles and little hybrids has been climbing as a percent of the total road population. It doesn't have much effect yet, but the impact is increasing. Oil consumption in the U.S., Japan, and Europe has probably already peaked, and should continue to decline. It is Asia and the developing nations that are the driving forces now.

I have taken the unpopular view that we really need a floor price at around $95 to $100 per barrel. Anything below that is more destructive than constructive and would only set off another round of wasteful use and money export from the developed economies and kill the momentum efficiency improvements and of the revolutionary alternatives yet to come, in particular the plug hybrid option and advanced haulage trucks that are in development now, and logistical changings using our rail system. The developed economies can weather $100 oil if they continue the trend of declining oil consumption.

$100 dollar oil for the rest of my natural life would suit me fine, I think those dreaming of $40 or $50 oil are living in a fantasy world.

RC

no choice for a doom3r

“You've got to ask yourself one question: 'Do I feel lucky?' Well, do ya punk?”

What could be more perfect for a doomer?

cfm in Gray, ME

Comparing absolute changes is not really meaningful since the prices themselves are higher now. Better to talk about percentage changes when looking at volatility.

I think your analysis is largely correct. Supply hasn't changed much, and is probably down a little when net energy & net exports are taken into account. So I think the decline must be demand based. This is confirmed by the broad-based decline in commodities.

Coal and natural gas have declined more than oil, and their decline preceded oil's by a few days. The abruptness of the decline in demand points to a something fairly specific. I don't see anything in the OECD that would account for it. OECD demand is down, but it is down by about the same amount as net energy/net exports.

A freeze of sorts by the Chinese seems to be the best explanation for a sudden, broad-based decline in demand. Is it on account of the Olympics? Probably, at least in part. What will happen when the Olympics are over? I suspect demand will go back up, but I don't think it will go back up to where it was before. Some of that pre-Olympics demand was caused by Olympic preparations and some was caused by post-earthquake emergency power generation and reconstruction. The former will be gone, while the latter will continue to decline.

As for predictions, I have generally been a bit on the conservative side. I failed to predict the run-up to $147 (voting "trading range" for those polls). I was correct in voting for the decline to $114. I suspect oil still has some down side, but I rather think it won't quite get as low as $102. After the Olympics, the price should go back up some, but not to where it was before (near term, of course; long term it will go up a lot more). Anyway, I say 126 before 102, but it will be a near thing.

No proof, but I suspect the US election also comes into play. How does an incumbent executive branch in the US manage oil prices so voters are (somewhat) happier at the polling booths? Currency values, interest rates, timed to squeeze even the $20 the speculators have in the price out just as voters are deciding.

I'd say any floor's possible until Nov 8, then watch the spike.

Hi Joao and Vanessa.

I's great you guys are building a sustainable lifestyle in such a beautiful location.

I appreciate your offer of joining your community and I have thought about it.

I have a Plan B based on my available resources and assets. Plan B is sketched out in 3 phases; B1 and B2 are essentially knowledge and resource ( money ) gathering enabling the B3 self sufficiency stage at no later than 2010.

Altering The Plan and moving to Portugal would increase the required resources at least twofold. This is energy inefficient and would extend the B1/B2 gathering phases probably pushing the B3 phase into a negative time frame; TSHF before I build Sanctuary.

I hope you will post some of your insights here or on your own blog.

Fare Thee Well

I've had three votes so far on this poll.

Chris

Volatility makes sense right now, given your supply/demand curves crossing back and forth. But why won't price shoot up highly later this year as the demand increases again? Aren't we at the supply max/demand minimum right about now?

A continued floor-crawl at $120 to me signals price is still based on marginal production costs. Toggling back up to $150 would imply that it is based on marginal consumption costs instead, with a few of the highest elasticity users falling off the cliff in between.

Do you concur? Do you see an opportunity for a significant step-up by 2009?