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58 comments on I think Katrina and Rita got some folks attention

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louGrinzo on October 5, 2005 - 9:46pm Permalink | Subthread | Parent | Comments top
My guess is that the reduced demand is only a tiny part of the price drop, and that it's mostly due to traders perceiving that the damage to the Gulf energy infrastructure will be repaired quickly enough not to cause shortages.

I'm not convinced that we know enough yet to say that the production capacity will or won't be back that quickly, but it seems that the traders are betting heavily on the "will" scenario.

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Dave Cohen on October 5, 2005 - 11:38pm Permalink | Subthread | Parent | Comments top
Re: "betting heavily on the [capacity] will scenario"

To anyone who believes this, I've got some excellent (swamp)land in Florida I can sell you cheap...

I have never seen one iota of evidence on TOD that oil traders have any idea at all about realistic oil supply and demand issues and are able to see past the end of their noses... myopic would seem to be the word I'm looking for, meaning "lack of discernment or long-range perspective in thinking or planning". Generally speaking, those few that make money seem to be slightly anticipating the herd. And then, once and a while, the s*** hits the fan and they all say "whoops", times have changed. Then they go on playing the same shortsighted game.

One thing that we can be absolutely sure of is this: peak oil will never get solved through the markets. Any new energy sources would have to be heavily subsidized and there is no such thing as a trader's energy market "correction" until it's too late....
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jhm on October 6, 2005 - 5:09am Permalink | Subthread | Parent | Comments top
The only news, aside from this site, that I hear about crude prices is the 30-day future.  My question: does anybody actually pay this?  It doesn't seem to make sense to buy a 30 day future (assuming you really want to buy the commodity and aren't simply speculating) if you think the price will be higher, so futures would seem to have a built in lowball tendency; how well does the spot market track with the future price of thirty days before?
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pbrewer on October 6, 2005 - 10:50am Permalink | Subthread | Parent | Comments top
The fact is that "futures" prices have almost nothing to do with expectations of future prices.  They are almost entirely determined by interest rates.

Imagine you're a wealthy institution (or individual) with some cash you want to invest.  You could put it into 3-month treasury bills and make 3.5% (annual rate).  Or, you could buy oil on the spot market and (at the same moment) sell a future contract for the same oil 3 months out.  If the three-month future oil price is enough higher than the current price to cover the transaction and storage costs and still return more than the 3.5% annual rate of return, then obviously you want to buy the spot oil and sell the oil future.

Observe that it makes no difference what the price of oil actually is three months from now.  You've locked in your rate of return right at the start.

In practice there are some extra costs and risks.  For example, a hurricane might make it impossible for you to actually deliver the oil you've got sitting in your storage tank.  Then your tank is tied up longer than the 3 months you'd planned (raising your costs) and you're in danger of defaulting on your delivery (if the market doesn't declare force majeure and say you can deliver later).  But that just means that threshold where you make the trade is higher than 3.5%.

You can make the same trade the other direction--you have oil now and you need oil in 3 months.  You can just store your oil for three months, or you can sell it now and invest the cash in treasury bills, while simultaneously buying a futures contract for oil for delivery in three months.  As long as the future price is not so much more than current price that the interest on the treasury bill can't make up the difference, then the trade makes sense.  If you would otherwise have to pay for storage, that's another plus to the trade.

The actual future price of oil has almost nothing to do with it.  It's all a matter of interest rates.

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viget on October 6, 2005 - 11:13am Permalink | Subthread | Parent | Comments top
So then, the real number we should be concentrating on  is the spot price, no?
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pbrewer on October 6, 2005 - 1:44pm Permalink | Subthread | Parent | Comments top
I think the main reason that people track futures is that the market is very liquid compared to the spot market, so it shows up price changes very quickly.

And there is some information in the futures prices.  When they DO move out of line with what you'd expect based on interest rates, it means something significant is happening in the physical markets, such as a risk of physical shortages severe enough that contracts for delivery can't be met.

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BaSE on October 6, 2005 - 1:26am Permalink | Subthread | Parent | Comments top
I am not so sure that they are betting.  The front end future contract is likely to be swamped by excess oil with Nato sending aid and Bush opening the reserves.  I expect they may even drop below $60 for a time.  I think that there is a great pressure to hold off crisis until after the Christmas holidays if possible.  ASPO just moved peak oil out 3 years to 2010 based on deepwater extraction numbers, but I think the two hurricanes may have a greater effect and as yet an unknown effect.  So much money is being promised for wars and reconstruction both at home and abroad, the IOB this march 2006 is likely to be the focal of most of our foreign policy in the coming months.
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louGrinzo on October 6, 2005 - 10:59am Permalink | Subthread | Parent | Comments top
Of course they're betting--unless they have 100% reliable crystal balls.  (The creepy thing is that many of them do think they have a lock on Knowing The Future, but that's a topic for another time.)

I think you're right on the mark about short-term price moves.  We're seeing an energy market that's warped beyond description by manipulation (the SPR/IEA flows, political pressure, as you mentioned) and exogenous events (hurricanes, wars).  We shouldn't be surprised if the market is even less adept than normal at reflecting the underlying reality of supply and demand in the short run.

Oil in the low $50's for a while seems very likely, although I'm less sure about the outlook for gasoline prices.  That's a critical detail, since stable, "high" gasoline prices will do more to promote conservaton and start the long process of reshaping mainstream attitudes and behavior than anything else could, particularly in the US.

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spooky on October 6, 2005 - 10:12am Permalink | Subthread | Parent | Comments top
Those oil PLATFORMS that were lost each contained from 10 to 50 wells each. They are lost forever, and thus will not be brought back into production. The remediation cost will far outweigh any production remaining. Diving companies will literally make millions in profits just from surveying and removing the toppled platforms. Remember, PLATFORMS are structures that contain producing wells and RIGS are MODU's (mobile offshore drilling units). Losing a rig affects future exploration costs and plans. Losing a oplatform means permanent loss of production.
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louGrinzo on October 6, 2005 - 10:36am Permalink | Subthread | Parent | Comments top
"They are lost forever"?  "Losing a oplatform means permanent loss of production."?  Really?  Even once oil is $200 or $300 or more per barrel?  We'll literally NEVER go back to those locations for the oil we know is there?

I can't prove we'll go back, but saying we'll never do it seems like a pretty tough assertion to defend.

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Glenn on October 6, 2005 - 9:33pm Permalink | Subthread | Parent | Comments top
Lost forever might be an overstatement, but consider this: A. Drilling equipment is very scarce
B. Most of these wells were only producing relatively small amounts

It will take a long time to make re-drilling these wells profitable. So until A gets resolved through more rig production or B that small amount becomes important, they are a straight up loss to us for the foreseeable future.

Geologically, I'm not sure what happens when you disrupt a well like that. Does it eventually lose pressure?

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Stuart Staniford on October 7, 2005 - 12:40am Permalink | Subthread | Parent | Comments top
J (long time TOD oil insider) wishes to respond:

Fact: the environmental and disposal costs will heavily impact bottom line numbers. If the fields had been new, then a possibility might exist that the platforms could turn around their economics. But in an aged and depleting field, you cut your losses when you have total structural wipeout because your economics are completely different.

After a platform is toppled, you have to stop any pollution, provide remediation (with the EPA and Louisiana DEQ, this in itself could be more than the cost of a platform), cut off all wells at the mudline and re-enter them to plug them back, then remove the scrapped platform itself. If you have 20-30 wells, this is 20-30 million dollars at a minimum, just to plug the wells! Most of these platforms were only economical because they had been built in a cheaper era and paid out by the primary production before being purchased by a new owner at an adjusted (much reduced) price.

Even at $200 bbl oil, the economics do not work out because of the limited amount of oil left and the new, higher cost of extraction and facilities. Combine the additional plugging and environmental costs, and you have a nice loss to carry forward though...

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