253 comments on Why are gasoline (and oil) prices so low -- and where are they headed?
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253 comments on Why are gasoline (and oil) prices so low -- and where are they headed?
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Exactly, the current chart for oil is not that unusual for those who follow charts. Many stocks looked about the same after the dot.com bubble. Having followed the corn/soybean market for many years, it is not that rare to have soybean prices go to about $15 in a blow off and then in a relatively short time fall back down to under $5.
When 500,000 people lose there jobs in a month and most of them drive to work there is a large reduction in oil demand. If they each used 2 gallons/day for commuting, that's a reduction of 1 million gals/day in demand.
Add in the observation that many have parked their low mileage vehicles and switched to smaller cars and demand is reduced further. Since prices are set at the margin in a free market, one extra gallon of gas causes the price to fall until a buyer is found. The same thing is true for an extra bushel of corn.
Commodity collapses such as this can take years to stabalize and form a base before retesting the old highs. After the collapse of 1980 it took 28 years for crude oil prices to again match the inflation adjusted price of 1980 during the July 2008 spike.
I tend to disagree with your premise that it will take a long time.
If you look at Figure 2, I think at 85 MMBPD we are near the upper limit on Q. P is moving violently. A little delta Q plus or minus gives a lot of delta P. It will be a roller coaster ride of epic proportion....
I don't know how else the peak in Q would manifest itself.... is it not the only way???
Regards
FF
FF and x, I haven't seen that a 1 mbpd change means a $100 price change. So far a 15% price change for a 1% change in supply or demand seems to continue on the mark.
Did you see the comment the other day from the TODer in the shipping biz? He was pointing out that the drop in price meant that ships were moving faster, because costs of crew, etc. were outweighing costs of fuel. And he said that this shortening of the pipeline had, in effect, put an extra 2 mbpd on the market.
Plus, diesel has been controlling the price for some time, and we've had a sharp drop in diesel consumption in the U.S. over a very short time.
Add in the extra production reported for October and the normal 15% for 1% model gives you the makings of a slide to something like $zero.
OPEC will cut on the 17th. And contango is now at a record. We are looking at a bottom forming, and that's a very good thing.
A bottom forming? Well, prices blipped up today, but this global recession is barely out of the crib. Remember 1998? Oil hit $10 a barrel. Remember 1980? Oil demand fell by 11 percent in three years (globally).
I hate to say it, I try to be optimistic, but this global recession looks much worse. Where is refuge from this downturn? Europe? Asia? North America? South America? Manufacturing? Retailing? Real Estate?
Nada, nada, nada. Oil demand could easily fall by 10 percent (maybe more), while supplies rise by 2-3 mbd in nex couple of years.
I see honking gluts of crude to the moon for years and years.
Oiil may hit $10 a barrel again. Increases in crude oil demand will be long and slow in coming, if we are lucky to get any increases at all within three years.
Oil is deader than yesterday's newspaper.
We might want to re-think hytseria about supply. Price seems to moderate demand, especially above $100 a barrel, while stimulating supply. Add in recession, and you get glut-a-rooni.
One thing is clear, production is inflexible, not demand.
The oil industry has become much more concentrated, with the great bulk of production in the hands of a few dozen national producers. An oil minister's worst nightmare is for his country to cut production - for any reason - and watch prices rise as a result, with his adversarial neighbor reaping a windfall. Meanwhile, his own country becomes more and more vulnerable, because its income has been reduced because of low production.
As a result, the countries pump as much and as fast as possible. 85 million barrels every single day is a lot of oil. That oil has to be sold and however low the price must go to clear that day's market, it will be cleared. If the production does not leave the country, the outcome is the same as a cut in production, so sales strategy and promotion are a part of the production process as well.
Of course, there are unintended consequences, some of which are well known. The low price reduces investment in new production, repairs and maintainence or petro infrastructure and the production of alternative energy sources. A less well considered outcome is the loss of income to our suppliers; these countries are the source of much of US stimulus and bailout funding, as well as customers for USA- made goods and services. The highly valued dollar becomes an additional difficulty. The possibility that declining revenues might result in domestic unrest - and Al Qaeda attacks on oil infrastructure - also increases.
What is infuriating is the deleterious effects could be avoided by the government placing a floor under oil prices or, at least gasoline prices. $4 dollar per gallon gas would give the government policy leverage with our suppliers and encourage conservation and help finance alternatives. It would demonstrate someone in Washington knows what they are doing and that hard choices can be made, rather than have the choices made for us by circumstance.
SfromV-- from your lips to G-d's ears. A gasoline tax to dampen demand and build infrastructure. I recommend incresiong the federal gasoline tax by 50 cents a gallon for next eight years, while cutting taxes on middle class.
I am not so sure production is inflexible -- just slow. And subject to lunatic thug-state politics.
A good reason for USA to go it alone, energy-wise.
Refuge is so last century, so very very over.
Not only is refuge for wealth over, but also for people. Even the top GM executives have no place to run, no place to hide! And now, in the cruelest cut of all, no jet to take them there.
Ah, well. "We will always have Paris." But of course Bogie - uh, Rick - really meant, "We will always have Paris, in our memories."
Hmm bottom forming ?
I don't think so at least with the way I read the charts. I think oil will have to go to 30 before a bottom forms. Now that its blown through the support level at 50 the next one is at 30. It could turn now but thats pretty doubtful.
And to be clear I continue to assert oil could readily hit 150 or more in a matter of weeks just depends on when the market wakes up and what the real demand supply situation is.
But I'm pretty sure that in the interim we should see 30 first. It will be interesting to see it turn before it at least touches 30.
Now if the market blows through 30 god knows what the floor price would be I don't think we have any other fundamental base for a floor forming.
However I think that if we do hit 30 like I suspect we will see some serious cuts in supply that are probably unwarranted. We have a little resistance at 40 but I suspect the current bear market rally in the stock market will falter and this will work to allow oil to bust this temporary support level at 40 sending it on down to 30.
I don't think this bear market rally in the stock market will really take off until we see the bond market bubble collapse so I think we will see a number of still born bear rallies.
Whats worse however is if oil does punch through and head for 30 its going to send North American NG to 4 which is going to devastate the US UNG plays.
Now if this is the "real" bear market rally then oil could turn now and stocks turn first and that takes out the bond market. In any case we are certain to see yields turn around on the bond market eventually it get very volatile as the interest rates drop so I can't see the bond bubble lasting much longer.
Also although I think the current oil market is dysfunctional it is betting that KSA can do nothing to control the slide in oil prices and I really think that prices will continue to decline at least to 30 now until it becomes obvious that we do or don't have enough oil. So once the market answers this question it will become functional again.
It as three low price equilibrium points 50, 30 and say 15 although I've got no idea where the last one is. If we have plenty of oil it will settle on one of these three. If not then we don't have any long term stable points until we hit 200.
Really sticking my neck out I think we will smash below 40 before the end of the week and potentially see 30 in the next two weeks.
Your technicals are all technically correct. I think there's a whole different explanation for the bottom falling out of the market. KSA is run by a royal family who don't need to maximize short term oil revenue as much as they need to do maximize their influence on energy markets and prop up diversified investments in US securities.
It's just naked monopoly power. Destroy the energy competition, get back any money lost on mortgages (Allah be vindicated), and help orchestrate another spike. I wonder how their US managers have been redeploying KSA assets during this bloodbath? My suggestion is "follow the money". Easier now that there's so little left.
Can you imagine if KSA was run by the Taliban? They would have no hesitation in stopping oil sales -- they'd probably consider it a virtuous move.
No wonder the U.S. will do anything to support the current rulers.
It could only be a brief burst of extra supply, or extra congestion at the receiving dock. In the long run, ships only transport what buyers buy.
Faster ships mean fewer ships can supply the same demand, which means fewer cargoes are on the high seas at any one time, which means a reduction in on-the-seas storage, and more competition for cargoes, so shipping rates should decline.
It depend also to the fact that the price is dependent on the last buyer's price and the prices converge to this price level very fast.
As soon as there was a reduction in demand of oil, the price would collapse.
As the major market and the richest one was hit by a crisis, the acceptable price dropped for many people. So the unsold oil needed to be sold off at lower prices.
Also, a big part of the high price levels of oil were the gut of money made available from the FED and other Central Bank via the Real Estate bubble. People with money in hand looked for place where put the money in investment outside the real estate and many invested in oil contracts.