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  • Oil Market Top?

    Posted by Jonathan on June 10th, 2004 (All posts by )

    Could be. There’s a lot of this kind of chatter around.

    (Via: Seykota trading FAQ)

     

    12 Responses to “Oil Market Top?”

    1. Kerry Is Unelectable Says:

      I was listening to World Business Review on the Beeb last wekend and they were talking about this. I think it was WBR it might have been another program. So anyway, they talked to Daniel Yergin ( The Commanding Heights, The Prize ) and he said he didn’t actually think we would ever run out. Technological advances in searching for oil, in pulling it out of more and more places we never could have reached before, in efficiency of processing oil and in appliances that use oil all add up to the abscence of “peak oil”. Maybe. Maybe we’re 30 -40 years away from “peak oil” though, but we’re certainly not there yet. The other fella they featured prominently (can’t remember his name) has been warning about “peak oil” for 40 years. I trust Yergin.

      That said, I think the Saudis are certainly in for a bumpy ride starting in about summer 2005. I think that’s part of why we did Iraq so quickly in the WOT. Not just part of why it was a good idea, but I think it was a prime motivator. And if Chavez gets tossed ( and I think there is a good chance he will ) and decides not to leave after all, then Venezula could become a real problem. I believe we get about 20% of our crude from them. As far as Nigeria is concerned I think the “rumblings of discontent” in the street are largely exaggerated by a foriegn press that can’t help but agitate for class war and the like. Gasoline prices have doubled and people are upset, but when the subsidies are re-directed and schools and hospitals start getting built and the infrastructure gets better they will calm down. Gas is still incredibly cheap there. And does any one think the Nigerian government is going to let their only source of income stop? Would the IMF and World Bank seriously deny them assistance if the reforms were undermining national security in a tight oil market? Of course not.

      The End of Cheap Oil? HA! A Short Term Tightening of the Market Exploited by Greens and Anti-SUV Fetishists? Probably.

    2. Jonathan Says:

      I moved your comment to the appropriate thread.

      I am basing my suggestion of a top in oil prices on several factors:

      -The fact that recent price volatility has increased significantly while prices have been slipping.

      -The deferred delivery months are trading at discounts to the front month in the futures market.

      -The recent prevalence of expensive-oil hype (e.g., the National Geographic cover) in the press, to the extent that it’s now conventional wisdom.

      -An out-of-the-blue email from an independent-thinking individual whose opinion I respect, calling a top in the oil market.

      These are all pretty good indicators and they all point the same way. I don’t know about the geopolitical and macroeconomic arguments (and I’ve been wrong about them for years), and anyway arguing about predictions is a fool’s game. We need only wait and see.

    3. Michael Hiteshew Says:

      Then there’s this:

      WASHINGTON, 29 April 2004 — Officials from Saudi Arabia’s oil industry and the international petroleum organizations shocked a gathering of foreign policy experts in Washington yesterday with an announcement that the Kingdom’s previous estimate of 261 billion barrels of recoverable petroleum has now more than tripled, to 1 .2 trillion barrels.

      Additionally, Saudi Arabia’s key oil and finance ministers assured the audience — which included US Federal Reserve Chairman Alan Greenspan — that the Kingdom has the capability to quickly double its oil output and sustain such a production surge for as long as 50 years.

      Of course, that’s what the Saudis say. I’d like to see an independent confirmation of some sort.

      Still, I’m all for electrifying much more of our economy. Now that the Yucca Mountain issue is settled, I think it’s time to double or perhaps triple the number of nuclear power plants in the US. And what about introducing mag-lev train technology on a large scale in the US? Something similar in scope to the interstate highway program of the 1950’s. Where’s the leadership on these issues? We don’t have any!

    4. Jonathan Says:

      Of course, that’s what the Saudis say. I’d like to see an independent confirmation of some sort.

      I don’t think it matters what anyone says. All of the info that we need is in the prices.

    5. John Thacker Says:

      All of the info that we need is in the prices.

      For future expected price, yes. For actual shortage and such, it’s a little difficult because OPEC is a cartel, and Saudis drive a lot of that. Of course, that tends to raise the price of oil, not lower it, but it makes it complicated.

    6. Jonathan Says:

      Oil futures prices are currently cheaper the more time there is until contract expiration. This price pattern indicates temporary supply constraints or high demand or both. Not so complicated.

    7. jon Says:

      Today’s closing prices for crude on the NYMEX show this:

      Dec 04 – 36.80
      Dec 05 – 34
      Dec 06 – 32.15
      Dec 07 – 30.80
      Dec 08 – 30.15
      Dec 09 – 29.55

      Anyone notice a pattern here?

      This is particularly noteworthy since the market is pricing cheaper oil as time goes out *despite* the greater uncertainty of political risk. IOW, supply is expected to so plentiful in 5 years, that it overwhelms future political risk – much less constraints on production, etc.

      Prices do not lie: I wholeheartedly concur with Mr. Gerwitz

    8. Tim Shell Says:

      I read somewhere that coal can be converted to oil at around $21 a barrel. I’m not sure how accurate that price is. But given the fact that coal can be liquified at some price, doesn’t that imply that there is a pretty solid ceiling on long-term oil prices? If oil becomes too expensive, we would start to deriving oil from coal, reducing demand for crude and thus driving down the price of crude.

      There is a similar argument to be made for deriving oil from shale, which (as I read somewhere) can be done now for $30 a barrel.

      Both shale oil and coal are extraordinarily abundant in North America, so a politically reliable supply would be available for more than a century, at least.

      Don’t these proven alternatives to pumping crude make runaway oil prices economically impossible?

    9. Anonymous Says:

      I blame day traders. The more scottrade and amerix the greater the volitilities until they all figure out to drop thier stocks and go into index.
      the shale and coal conversions are a great alternative, which means that even if go over the hump in 30 years, maybe we can make it last for 30 years! Nuclear power is the way to go gents, clean, reliable, cheap (long run), and safe.

      Who would use the trains? No one as long as a round trip ticket is

    10. Jonathan Says:

      You blame day traders for what — high oil prices, low oil prices, something else?

      I’m not sure what you’re talking about but you don’t seem to know either. Day traders aren’t a problem: they reduce volatility, not increase it. Otherwise day traders would flock to slow markets which would then become active. In reality the opposite happens.

    11. Robert Schwartz Says:

      Daniel Yergin. Ah the memories come flooding back to me. In the summer of 1979 the boffins at the Harvard Business School published:

      Energy Future: The Report of the Harvard Business School Energy Project by Roger Stobaugh, Daniel Yergin,

      That was the summer of Jimmy Carter’s malaise and I read that wretched book. Oil at $100/bbl. ($250 in 2004 money) We would be rubbing dry cliches together to start fires and ward off the cold.

      Didn’t happen that way, did it.

      My guess is that most of the current situation is more currency/interest rate driven than anything else. The fed will be raising rates for the rest of the year, the EU will have to lower theirs and the Chinese will have to raise theirs. The dollar will rise, oil in $s will go down. relax.

    12. Robert Schwartz Says:

      The Dollar Factor By John Tamny

      . . . the Euro price of oil greatly resembles the one from 15 months ago. . . and it turns out the Yen price of oil from 15 months ago is actually higher than today’s. . .

      The answer is pretty simple though, and would be especially obvious to those who have watched the dollar’s fall against the Euro and Yen over the last couple of years. This isn’t to say that demand plays no factor in the oil price, just that it is small compared to local currency effects.

      Oil did . . . become expensive in the U.S. in the ’70s, rising 43% from 1975-79 despite a sluggish economy. . . yet oil only rose 7% in Yen over the same period, while in Germany the “spike” in Deutschmarks was only 1%.

      What this evidence hopefully shows is that as opposed to being an indicator of supply/demand imbalances, the price of oil, like the price of most commodities, is most useful as an indicator of dollar strength and weakness.