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Listening to the cacophony and trying to make some sense
Posted by Bubba on December 8, 2005 - 1:34am
Whose prediction is closer to the truth (as we know it today)? What are these people's motivations?
I also suspect (at the risk of being called part of the tinfoil-hat crowd) that a large part of the reason that our Veep Mr. Cheney (and President Bush) is so adamant about the need to stay the course in Iraq is that he wants our army smack-dab in the middle of Oil Country when the price goes through the roof. Keeping the oil flowing west will become a major foreign-policy goal of the US (as if it is not already).
Ultimately you cannot believe what these two CEO's (Browne and Raymond) are saying to the public about the price of oil. They will never tell you what they really think. They have numerous responsibilities, but their main jobs are to make money for their shareholders (and keep themselves in power). No part of their job descriptions involves leveling with the public.
What about the pundits? These guys, for the most part, are a big herd of sheep. It is no coincidence that the average of their predictions is almost identical to what the futures market is saying. These guys are deeply entrenched in the business community, and they sell services for a living. If they come out with radical predictions, businesses who buy their services will steer clear of them.
How about the futures market itself? The futures market is a very good tool for gauging where prices are headed in the near term. Traders are very good at absorbing the near term supply and demand data and translating that into a price. Beyond 6 months (3 months?) however, the predictive power of the futures market is poor, IMHO. The futures market tends to predict a continuation of the status quo, unless a clear reason for a future change is evident. For example, between March and April of 2006 the futures price for natural gas drops from $13/mmbtu to $10.6/mmbtu. This is, of course, because a highly predictable drop in demand for natural gas as warmer weather arrives.
Long term oil contracts are bought and sold by people mainly interested in securing long-term sales contracts or long-term supply contracts at known prices so that price risk in a particular venture is minimized. The people/companies who are engaging in long term hedging are doing this, not because they are trying to predict the future price, but because they can "lock in" the profit of a particular risky venture by locking in a long-term price. If a mid-size independent can lock in a price for a particular deepwater venture at a price that guarantees a 20% rate of return, he will do that because it meets his investment hurdle, not because he thinks the price will be higher or lower than that in the future. It basically allows him to go home and sleep at night and take his family on a vacation to the Bahamas without worrying about whether the price of oil will go up or down, completely out of his control, and cause him to lose his job.
What about OPEC? First of all OPEC is comprised of a consortium of countries that have little in common except that they have oil to sell. Each of these countries has it's own agenda. Clearly Venezuela's agenda is different than Iraq's agenda, is different than Saudi Arabia's agenda. However, all of them are primarily interested in maximizing cash flow to their individual countries. So the main goal of OPEC is to keep the price for oil as high as possible without causing either demand destruction worldwide or causing the US government to get concerned enough that it starts moving its troops from Iraq into the already-established military bases in Saudi Arabia. OPEC, like you and I, can look back over the last couple of years and see that the world can easily absorb $40 to $50/bbl oil without causing either of the two negative reactions above. Consequently, that is their new target price.
Lastly we come to Mr. Simmons prediction. The reason why I post here is that I, like most of you, are believers in the near-term onset of Peak Oil. I must admit I am a little perplexed by what has happened to oil and gasoline prices since Katrina. As a large chunk of the oil (and natural gas) from the GOM is still shut in, and the price was going up even before Katrina, I am wondering why the steep decline of price in the teeth of a significant drop in supply. Presumably, before Katrina there was a very tight supply-demand balance. If you take almost 1 MMBOPD out of the supply chain shouldn't that have the opposite effect. I mean, how much oil was released out of the SPR?
Ultimately, I think Mr. Simmons will be closer than any of these other predictions. Will the price be more than $200 in 5 years. I sure hope not. I fear for the future of our planet and my children if it does.
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Where do you put these CERA (Daniel Yergin, etc.) in your list of price predictors? Whose ass are they kissing, anyway? Or, as is often the case with people, do they believe their own bullshit? Clearly, they are making money.
I can't seem to find any CERA price predictions in the public domain. This is probably because they have paying customers who pay for that forecast (as bad as it probably is). However, this is one of their most recent articles on supply.
Keep looking in Feb, they may have a new outlook summary out.
Almost any visitor to this site with decent math skills who has read and digested the available information on the subject would be able to venture a guess that would be as good as anybody's.
There are simply too many factors that influence the equation. If you can predict where all the variables will be and what the equation itself will be in a year, then surely you can predict the price. Good Luck.
On the other hand there is always the possibility of a few major events that could change everything - attacking Iran, coup in Saudi Arabia, or more likely something no one has anticipated. And I figure the GOM will be continually battered by hurricanes - maybe not every year, but if it got hit hard every 3 it would prevent it from truly recovering. How could one possibly translate this into a price per barrel? When I look at the realm of reasonable scenarios, I see far more reasons for it to go up than I do for it to go down.
Lastly, when I look at the energy, environmental, economic, and political situations both separately and in combination, it gives me no comfort in what our future holds. And a collapse in one area could improve the situation in another, making prediction that much harder.
..."As a large chunk of the oil (and natural gas) from the GOM is still shut in, and the price was going up even before Katrina, I am wondering why the steep decline of price in the teeth of a significant drop in supply...."
but if you look at your link, the supply hasn't gone down...stocks are at 320 mbbls compared with 294 mbbls last year at this time. in fact, the next chart down shows a consistant oversupply above average levels since may, in spite of katrina, etc... thats 9% higher than last year. i'm sure that demand isn't proportionally higher... there are all sorts of reasons why price is what it is, but i'm thinking ..there is a peak oil fear factor that ebbs and flows built into price,irrespective of supply and demand characteristics. supply and demand price balance will ultimately win out.
Oil is priced in a worldwide market. Crude stock in the US may be up, but the fact is that relative to worldwide supply, 1 million barrels a day (average) has been off production for the past 3 months. That is a hell of a lot of crude. If supply was tight before, where did the extra 1 MMBOPD come from? It had to come from 1 of three places, - a drop in demand, extra supply elsewhere, or a loan from the SPR. My question is what is happening to overall worldwide supply and demand.
That really a good question! but was the supply really tight before? or the current situation is more a consequence of strong demand and refinery bottlenecks. It's really hard to make sense of what's going on.
what we know from the supply side:
- there is growing evidence that both conventional oil and light seet crude may have peaked last year.
- The new supply is mainly coming from offshore, tar sands and heavy/sour crude supply.
- from different studies (CERA, Koppelaar), new projects will come online in the next few years.
What we observed:- crude oil inventories are above the 5 years historical levels.
- gasoline stocks were in the lower range
- prices are up since 2003 and are still above their 200 days moving average (~$60).
Possible explanations:I could add that IMO there was some sort of bubble in oil prices up until Katrina. There were rising fears for the future supply that boosted demand for futures so price rose quite above what would have rather been. What happens now is a normal "correction" of the markets like the ones we constantly see in Forex. Except that in a much less speculative market like the oil such "waves" have much higher time span.
In addition 1mln.bpd (somewhere I read that it is even less now) is a mere 1.2% of the world production. I can see a lot more of "fat" demand (and not just in the US) dropping to accommodate such shortages. Another important factor is the perception that these 1 mln.bpd. will come online sometime in the future, which stops speculators from being too bullish in the short to medium term.
If you layer this on a 2% to 5% worldwide decline, and the fact that other projects (Thunderhorse for example) continue to be delayed, one starts to wonder where the extra supply is coming from.
Give it another bad year and all bets are off, the demand destruction has to take center stage.
Gvien that the Thrid-world will be almost as low as it can go, and the reserve Owners will not want to part with stocks, you will see demand distruction in the bigger countries. The USA comes first, especially if price goes up too.
As a former (current) trader, I let the market tell me where oil is going. At some point in the next few years, we will have an asymptotic rise, which after a period of months will cause such knee-breaking demand destruction that the price will then crash, as economies swoon and people retrench. Then after a period of years it will happen again, though this time on the Hubbert downslope - thats when it will go sky high and never come back down. We are aways away from that day methinks. 2015?
The worst case scenario is that a series of price spikes and crashes are attributed to other factors than peak oil in the mind of the public. That might mean it would be years past the peak before we have a meaningful discussion among policy setters and mainstream media.
Relative pricing can provide a clue. Austria as part of the European union is obliged to add 5% biodiesel to its diesel consumption by 2007. I am living in a sparsely populated, wood rich region, which is a significant paper producer. Our politicians wanted a biodiesel plant badly, but couldn´t find investors. Value added in paper production is just a vastly better use of our biomass. So Austria´s paper production is expanding, and our biodiesel plants are built along the danube . They are supplied with imported rapesseed. My conclusion: OIL IS STILL RELATIVELY CHEAP
http://www.theoildrum.com/story/2005/12/6/23330/8742
this is the relevant bit:
'I expect an average price for WTI of $71 for 2006. Last December when the price was $42 I predicted spikes of $60 in April 2005 and $75 in Oct 2005 - only a little high for both and 2 months late for second.
Interestingly the average price for the last 2 years has been very close to their prior year's highest spike, I expect that to continue. Now we are about at the turn of the oil age it may be a useful hypothesis - Agric's Law: "The average US$ price of a barrel of WTI oil for a calendar year will be determined by and within 5% of the prior calendar year's highest end of day price."
In the short term I guess a price of $66 at Dec 31st 2005 which will be 50% higher than it was exactly one year before.'
The estimates above assume no major geopolitical shock relating to any major oil producer. Should any such happen I expect the price to spike to $150 at least; I expect a spike to $100 in 2006 (and hence an average price of near $100 in 2007) anyway.
Matt Simmons is being very cautious with his $200 bet IMO. I will be astonished if oil has not spiked above $500 bbl WTI by 2010.
$66 oil on 31st December 2005 may well be a low guess. I expect oil to be back to $70 in March but could go as high as $80 round then. It will take a US recession to get oil back to $50 or below.
Too many people with too many interests to ever get an accurate prediction. People make money off of uncertainty.
As for the oil majors and their associated pundits, the only financial scenario for them better than $100/bbl oil in a couple of years would be convincing everyone that $20/bbl is coming and then getting $100/bbl anyways. Anything they say should be taken with a grain of salt.
HIGH SEAS
The oil tanker headed for Port Y gets diverted to the LOOP.
That is an easy way. Though the fall out would be almost world war. But in the Short run it would work, or other simular NAVY SEAL and CIA run operations.
Any time someone makes a prediction that disagrees with the market, my bet would be on the market. If someone predicts oil will be $25 or $40/bbl, I can in fact make them an even-odds bet that oil will be higher than that, and offset my position in the futures market so that I can make a guaranteed profit! Likewise if someone says oil will be $100/bbl I can make them the same even-odds bet, take an offseting position and again make a guaranteed profit.
In other words, if everyone making those predictions really had the courage of their convictions and took bets on what they said, and if they made the best possible predictions they could, so that they thought there was a 50-50 chance the actual price would come out above or below what they predicted, such a person is a sucker. They are a money-losing machine.
That's why, for the most part, these people won't take bets on what they predict. Simmons did take that one bet last year, but it was just a publicity stunt since he could have gotten something like 30 to 1 odds in his favor in the markets, compared to the even odds he accepted.
I don't think most of these so-called experts even believe what they are saying - not the lowballers, not the Peak Oilers. If someone did, he would put his money where his mouth is.
I'm going to say something pretty radical here. Most of what I write is Economics 101 and is extremely elementary and obvious if you have studied the field at all. But here is an advanced topic.
It is impossible for a rational person to disagree with the markets. I know, it sounds crazy, but it's true. It's called the "no bet theorem". Rational people will not make bets, because in a nutshell the mere fact that the other guy is so convinced of his position that he is willing to bet with you will by itself convince you that he is as likely to be right as you are. And the same thing happens in spades with a futures market where the price is set as the consensus of many, many traders who are serious about their bets and who hate losing money.
Now, this is an idealized result and can only be applied to the real world with caution. Obviously, people do bet and they do have disagreements that get expressed in markets (among other places!). Nevertheless a case can be made that this behavior represents a cognitive error, and I believe it is so in most cases. I personally try to follow the principles of rationality as I understand them, and part of those principles are to accept the wisdom of markets over my own judgement. I believe that for almost all people, almost all of the time, they would do better not to try to form their own opinions about topics but to let the markets decide for them.
Few are willing to follow this path. Actually, I'm not aware of anyone else who does. As I said, this is an advanced topic. I think of it as "advanced rationality". But I thought I would share it in order to shed light on my apparent intransigence with regard to evidence for a serious and destructive near-term Peak Oil scenario.
Now I doubt that works in the markets, but your rational actors sound like chess players locked in a vast, intricate positional match. Somewhere there must be intuitive players that see many, many moves ahead.
Short term market behavior is remarkably stupid and dismissive of fundamentals and news, more dependent on sentiment and timetables of the main market players (eg bonuses, accounting periods). It is amusing to see the attempts of pundits to explain market behavior in terms of the news that they try to suppose caused the behavior.
Currently I expect the next month WTI futures contract to steadily bobble up to maybe $75 by late March 2006. Thereafter it will probably decline by up to $10 over 3 or 4 months, then bob up as the hurricane season unfolds. Geopolitical events are quite likely to intervene and drive it higher at times.
I am most in a quandry about gold and $. I think gold should correct by more than $50 soon, but as the US Overseas Profits Repatriation Freebie bill (or whatever its correct name is) unwinds I expect the $ to decline quite significantly (there is scope for up to 3 months of further $ improvement or stability first), which would probably send the $ price of gold up.
I'd be happy to bet with you on markets but it's not worth exchanging money - I can make more for less effort elsewhere. But if you fancy predicting some prices a month or quarter hence I'm up for it.
Nevertheless, the futures markets are mostly played by businesses hedging their situation - many E&P's are actually forced to sell all or part of their future production by their banking covenants to guarantee they can meet interest payments. Of course, some also sell because of their own personal experience, say from 1998 when oil dropped to $10, tells them to be conservative, and meanwhile most executives are approaching retirement - this is no time for gambles. (Some, like PXP, sold too much for too little, and are now hurt by rising costs.) Buyers have obvious reasons to buy on the futures market to protect themselves from future price increases; these, like Southwest, have been amply rewarded. Other players are hedge funds, whose great brains and computers try to capitalize on continued trends, both up and down, but their net effect is usually neutral.
I think most players who believe in peak oil, large and small, prefer to purchase E&P stocks, thinking if oil goes up, or just stays at this level, the companies will continue to be very profitable, and if oil declines, a substantial portion of the investment remains. The risk/reward in futures markets is simply not as good for most investors as stocks. Consider that, while oil is up 50%, many small E&P's have doubled or tripled over the past year. Futures players can get more leverage, but leverage is a two-edged sword that cuts both ways.
People are not rational decisionmakers. Psychologists and neuroscientists have studied the matter at great length, and emotions are central to decisionmaking. People with neural damage that prevents them from having normal emotional responses completely lose all good judgement and ability to function in normal life. See, eg Descartes Error, by Damasio for a good introduction to this subject. Since we are social animals and emotions are infectious, it is possible for collective emotional currents to roil markets, as happens every now and then. This is not well accounted for in the efficient markets hypothesis.
Additionally, faced with the same pieces of information, not all traders have equally good judgement about how to act. Some people are Warren Buffett's and beat the market year after year. Others, well, don't.
Finally, with "I don't think most of these so-called experts even believe what they are saying - not the lowballers, not the Peak Oilers. If someone did, he would put his money where his mouth is." I think you miss an important point. Many folks are not in the business of trading in the markets, wouldn't know how to go about it, and wouldn't be motivated to do so even if they might make some money. Many people derive meaning in their lives from other things than making money, or would rather make their living a different way than trading energy. It doesn't mean their judgements are necessarily without value or not deeply felt. Even in twenty-first century America, materialism does not hold complete sway over everyone.
Unless as stated someone were to put RPG in a few key spots, and even then a price of 200 would only be there till the demand was destoryed.
As you can tell from my username, I'm a complete Cynic, so I felt I must comment on the remarks about "why did the price of oil fall after Hurricane Rita?"
Simple: a certain hedge Fund, called Refco, had died. Reading between the lines, Refco had bet that the Price of Oil wouldn't get above US$60 per barrel. Note: this is only my interpretation of the news articles about Refco, but it makes sense.
Refco had "hedged" that the Price of Oil would rise, but stop around US$60. Thus when the Price of Oil got to US$70 per barrel, Refco haemorraged so much money, it collapsed.
It didn't help that it's CEO had stolen nearly US$500 million from Refco's own coffers. When Refco (which had been trading heavily on Oil Futures) collapsed, it took the Oil Futures market with it.
Then everything went deathly quiet, which tells us all that the Powers That Be were stitching up a Rescue Fund, because to allow Refco to fully collapse would have wrecked the market.
Luckily for Refco, and Refco's potential buyers, everyone got distracted by what was happening in New Orleans, so they could cover up their corrupt practices nicely.
Now, when the other traders discovered that Refco was more hot air than anything else, they started dumping Oil Furtures desperately, as they realised they were over-exposed to Refco. Please recall Refco traded on Oil futures, and seems to have been a fair percentage of the Oil Future Market.
No, I haven't been able to discover how much of a percentage, because all of the News Stories reporting Refco's collapse seem strangely quiet on this. In any case, it tells one how really really tight the Oil Market is - if one of the biggest traders dies on any other commodity, that commodity would have precipitously fallen, by now. Instead Oil's gone up, and expect to see further rises.
I think Simmon's prediction is going to come true. Why?
The reasoning's easy: The Price Of Oil has been increasing at 164%, averaged over 7 years. Please remember that the First Oil Shock saw the Oil price rise by 254% in 8 hours, supposedly theoretically impossible on today's markets, just like the share-price of the Dot Cons would always go ever upwards. Note my cynicism.
Add the 164% to the 254% and one gets a price rise of 418%.
418% of US$70 per barrel of Oil = US$292.60 per barrel.
And all it will take is some really really cold weather in the North-Eastern US, (as is starting now) and then add some nut with a bomb in the Middle East. Note: this can be a state-sanctioned nut, too - if Israel bombs Iran, then the price really will get to US$300 or above.
Once again, please note this is my first posting, here, and if I've trodden on anyone's pet theories too hard, I apologise.
There did seem to be significant monkey business going on at that time in the oil markets. Rumours had it that several of the Fed's proxies were somewhat short on the oil price at that time and that big hands were put in bigger pockets to get them partly out of a hole. Several people who should know were very, very suspicious at the time. I was not amused cos it cost me a couple of grand.
From your other comments your perception of the likely risks and their magnitude are much like mine, we're probably a mite extreme for many here, for now, at least ;)
I chucked a few more spikes into the Iran bombing scenario and got a 700% rise in the oil price over 3 months, heheh.
http://www.msnbc.msn.com/id/10437549/
So much for pie in the sky $25/bbl or even $40/bbl.