Whither now for oil prices?

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room305

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I am posting this in response to a private message in relation to a previous post of mine

Barring some kind of geopolitical event (war with Iran for example) I expect to see oil collapse to somewhere in the $40-$50 range. I kept wondering whether I'm looking at the same data as everyone else when it comes to oil. US gasoline drawdowns are huge but it is mainly an issue with refiners who got badly short-changed by the weather. There doesn't seem to be any actual shortage of the black stuff and this should become even more apparent as the US stumbles into a recession.
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My opinion on the above hasn't changed, US economy is going down pretty hard, developed world oil demand is decling, apart from the weak dollar I'm struggling to understand why oil prices are so high at the moment.

Anyone shed any light on this?
 
Even if US goes into recession and even if China goes into recession, the bottom line is that world consumption is rising every year and this consumption cannot be met by production. The supply/demand equation is very tight. A severe recession would not result in big fall off in demand.
 
To understand where the future for oil is one should take the time to read the following. The Last Oil Shock by David Strahan, The End of Oil by Paul Roberts and Twilight In The Dessert by Matt Simmons. In a global economy one faces many risks, however, the risk of a major oil shock is possibly the greatest danger facing the western world. We will see oil at $100p/b and what is scary is that a time will come when $100 will be seen as cheap. Take the time to inform yourself and come to your own conclusions.
 
room305 said:
I am posting this in response to a private message in relation to a previous post of mine



My opinion on the above hasn't changed, US economy is going down pretty hard, developed world oil demand is decling, apart from the weak dollar I'm struggling to understand why oil prices are so high at the moment.

Anyone shed any light on this?
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The US economy is not doing well, but the GDP figures are still higher than last year, meaning higher demand for oil

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So even in recession (not sure what official definition is, but still a small positive growth in GDP) oil demand should grow.
 
As oil goes up in price alternative solutions become more viable. I was in B+Q the other day and they had these wind turbines on sale for €2999, now I didn't look at them for long but they were about 8 foot high and each of the 3 blades about 2 foot long, how far would one of these go in supplying the backbone of your home energy needs?

I don't know the ins and outs of it nor do we need to go into it here but as oil increases in price these type of solutions become more viable, electric cars etc. etc.
 
Thats interesting . Do you remember what the power output of the turbines was ? And do you need planning permission to install one ?

About oil prices, its a cartel and the cost of production has no relation to the price. The only oil shocks we will see are upward shocks. Not downward ones. Iranians in their country get their petrol at the pumps for something like 8 cents a gallon and the only downward pressure I see on oil prices is if people switch to alternative fuels more quickly than is currently the case.
 
Oil below $50 was always an anomaly. It's a scarce resource, with exploding demand from China and India. And oil for fuel purposes is only part of the developed world's demand for oil.

It's needed for fertilizer and any plastic components, too.

Oil being as cheap as it was in 1999 was simply a temporary blip caused by dot-com mania. As soon as that nonsense dissipated, real-economy resources went back to commanding real prices.
 
badabing said:
The US economy is not doing well, but the GDP figures are still higher than last year, meaning higher demand for oil

[broken link removed]

So even in recession (not sure what official definition is, but still a small positive growth in GDP) oil demand should grow.
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Surely you mean US GDP is lower than last year, otherwise they would be talking about the economy accelerating rather than slowing? How could an economy be doing badly if its GDP was increasing?

Typical definition of a recession is where real GDP declines in two successive quarters.
 
joe sod said:
Even if US goes into recession and even if China goes into recession, the bottom line is that world consumption is rising every year and this consumption cannot be met by production. The supply/demand equation is very tight. A severe recession would not result in big fall off in demand.
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OECD demand is falling - here

I cannot make sense of your statement. If production cannot meet demand then why would OPEC have needed to cut production to support prices? Supply/demand balance is now above 2003 levels. Back then oil traded at a lowly $30 a barrel. What's different now? Weaker dollar and increased middle eastern tension. I don't think this justifies a more than 100% increase in the price of crude.

A severe US recession would almost certainly result in a big fall off in demand and it is fool hardy to imagine otherwise.

- Less workers = less commuters = less driving = less demand for oil
- Less demand for Chinese imports imports from US consumers = less Chinese demand for oil
- Less flights = less demand for oil

And so forth. If oil is the lifeblood of modern economies (which it surely is) then how can an economic slowdown not impact on the demand for oil? In the same the US housing crash has impacted on the demand for copper.

This is an excerpt from the always entertaining Bedlam Asset Management, which is similar to my own views on oil - except to say I am a believer in much of what peak oil theorists say and oil will eventually trade for several hundred dollars a barrel.

Super cycles do not exist Commodity super-cycles are an investment chimera but are a popular concept because on occasions – 1978/81, 2003/06 - large gains can quickly be made. The pattern of each boom is remarkably similar, be it cocoa, steel, maize or copper. Essentially they commence after a long period of weak demand, or over-supply, resulting in poor returns on capital and miniscule profit margins. Thus very little new investment takes place. Gradually, some producers go bust, stockpiles soar and the least incompetent or best capitalised operators hang on by a thread. Then an ‘event’ occurs which disrupts supply – it could be war, weather, or politics - or demand increases through a change in the economic growth rate. Shrunken capacity is insufficient, so prices soar, stockpiles vanish and the commodity producer has a field day. Every cycle accelerates about half way up the price curve, as speculators and gamblers join the easy-money party. Then within one to four years, three events take place. First, high prices bring on stream previously unprofitable operations, be it low grade copper mines in Central America or marginal wheat lands adjoining Australia’s deserts. Next, substitution kicks in dramatically: between 1979 and 1985, the weight of the average American auto declined by almost a half in response to both high metal and oil prices. Third is the classic response to any commodity boom - those whose earnings cannot increase enough to buy commodities at these higher prices are simply squeezed out of the market; i.e. poor people starve when food prices soar. This has been, and will be the history of all commodity cycles.

Close to, or just past the peak, totally irrational behaviour takes over and we meet ‘The Church of
the Super Cycle’. Its apostles, whose message is forever ‘this time it’s different’ always have a
slightly different excuse why the coffee, zinc or uranium cycle will run forever, even though they
know it has never happened before. It is particularly odd: for these people, outside their highly paid
hobby of investing other people’s money, are normally pleasant and rational human beings.
The fourth quarter of 2005 was an interesting example of this phenomenon for several
commodities. We will focus solely on oil. Within weeks of the devastating hurricanes Rita and
Katrina causing an oil price surge to nearly $80 per barrel, there was overwhelming evidence that
world supply exceeded demand by between half a million and two million barrels per day (on a
daily production rate of around 85 million barrels). This has remained the case for the last fifteen
months and whilst every world oil storage facility is brimming over, tankers are steaming as slowly
as possible to their destinations, because there is no storage capacity left. Industrial nations,
including China, have become slightly less oil inefficient; 2006 was one year of only four since
1945 when world oil consumption actually fell. Changing economic activity also kicked in: China
switched much power production to coal and macho American SUVs were left unsold as more fuel
efficient and lighter Asian automobiles were snapped up. Such information was available in free
newspapers.

Institutional investors however, having avoided significant exposure to oil companies at $25 or $45
per barrel in the three years to 2005, then decided in 2006 as the price peaked that oil was the sure
fire, no-risk, and super-cycle safe investment. As a consequence, the sector last year witnessed not
only the largest number of new issues worldwide (many now trading below their offer prices), but
the highest level of net new investment of any major sector. Despite this inflow, oil shares
generally performed poorly.

We have not held a single oil, gas or coal share since the end of the first quarter in 2006. Although
we have no idea where the price is going (but our guess is down, down, then down), so utterly
clear was the data showing supply thumping demand that this was hardly a genius call. We even
tried modelling supply and demand on the assumption that the two key countries behind higher
consumption - China and America - grow at record rates: still the oil market had a problem. So it
remains very puzzling why so many rational people persist with such dramatic denial, as
demonstrated in their investment portfolios.
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sign said:
Thats interesting . Do you remember what the power output of the turbines was ? And do you need planning permission to install one ?
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I did a quick net search and individual private wind turbines are not really viable in Ireland at the moment because the ESB won't buy your excess power, unlike in the UK, so you need expensive batteries to store it and as well as this there are no grants available and you pay VAT etc.

Basicly for this system to work well you need to be able to give the ESB your extra power when its windy or when you are gone away and then the ESB need to give you "free" power when you need it.

The payback on this type of thing in Ireland appears to be about 10 years which is way too long because the unit will probably need to be replaced around then.

I don't think you need planning permission from what I've read today.

The point is that if oil etc. go up then the payback on these things will come down and down and people will start driving electric cars etc. charged by them.
 
"I cannot make sense of your statement. If production cannot meet demand then why would OPEC have needed to cut production to support prices? Supply/demand balance is now above 2003 levels. Back then oil traded at a lowly $30 a barrel. What's different now? Weaker dollar and increased middle eastern tension. I don't think this justifies a more than 100% increase in the price of crude."

Yes the supply/demand situation at this instant maybe better than in 2003. But the reason for that maybe that most of the potential production is producing whereas in 2003 some production may have been knocked out by hurricanes etc. However the risks to the global supply chain are much higher now than they were in 2003. The supply demand equation is finely balanced a few percent knocked off supply can have a huge effect on price.
 
joe sod said:
Yes the supply/demand situation at this instant maybe better than in 2003. But the reason for that maybe that most of the potential production is producing whereas in 2003 some production may have been knocked out by hurricanes etc. However the risks to the global supply chain are much higher now than they were in 2003. The supply demand equation is finely balanced a few percent knocked off supply can have a huge effect on price.
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Ah I see where you are coming from now. Bidders are upping the price in anticipation of possible future shocks to supply (as the market is a forward discounting mechanism). This implies two things.

1) Any shocks that occur will not have as great an effect as might be imagined as the shock is already partially discounted in the price.
2) If said shocks do not materialise then the price will collapse.
 
The US slowdown isn't happening in a vacuum: economic activity isn't disappearing from America, it is moving into China and India.

So a recession in the USA does not in any way imply that world economic activity will not continue to grow at a rapid pace.

China and India will continue to grow because of their inexhaustible labour supply and relaxed attitude to global warming. Their economies will hungrily and rapidly gobble up any cheap barrels of oil that appear on the market.

Hence any dips in oil futures will be short-lived until the Chindia growth story ends sometime around 2020.
 
rock3r said:
So a recession in the USA does not in any way imply that world economic activity will not continue to grow at a rapid pace.

China and India will continue to grow because of their inexhaustible labour supply and relaxed attitude to global warming. Their economies will hungrily and rapidly gobble up any cheap barrels of oil that appear on the market.

Hence any dips in oil futures will be short-lived until the Chindia growth story ends sometime around 2020.
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Emmmm ... is the 'Chindia' growth story not predicated on exporting huge amounts of goods to the US?

Having an inexhaustible supply of labour does not necessarily a good economy make, otherwise Ireland in the 1980's would have been a very different place.
 
I'm not so sure about that. It took about 15 years of adjustment from the late 70s, but that labour supply (albeit aided hugely by uncharacteristically astute tax management by the state) managed to create an explosion in the economy in the 90s and early noughties.

Also, our labour surplus never went much above 300K, whereas the smallest Chinese and Indian provinces can rely on at least 10 times that.
 
rock3r said:
I'm not so sure about that. It took about 15 years of adjustment from the late 70s, but that labour supply (albeit aided hugely by uncharacteristically astute tax management by the state) managed to create an explosion in the economy in the 90s and early noughties.

Also, our labour surplus never went much above 300K, whereas the smallest Chinese and Indian provinces can rely on at least 10 times that.
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Are those jobs not in manufacturing stuff? Stuff that is mainly exported to the US? If an increasingly tapped out US consumer stops buying, will it not mean less jobs and less manufacturing (even if only temporarily).
 
There was an article in the independent which ties in with what i was saying earlier, the world is moving away from oil, which will means that alternative energy sources moves toward mass production the price of the technology will fall and crude oil may lose its mainly monoply status as a fuel source.

Article:

INCREASED use of biofuels and other measures that steer consumers away from oil could prompt Opec to rethink its investment plans for future oil production, an official from the producers' group said.
"We have great concerns about policies which discriminate against oil," Fuad Siala, alternative energy sources analyst at the Organisation of the Petroleum Exporting Countries, said at a Hart energy conference in Brussels.
"We have legitimate concerns to revisit our investment plans," he said.
The European Union and nations around the world are looking at biofuels, made from plant and animal matter, to boost energy security, reduce greenhouse gas emissions and open new markets for farmers.
Though Siala said biofuels were not necessarily a big competitor for crude oil, Opec was concerned they could replace a significant portion of its projected output in coming years.
Projections
"In 2030 our projections say that Opec will be called upon to produce about 49m barrels per day. By that time, if biofuels are able to supply 5m barrels per day, that's 10pc of the target on Opec oil. That is significant."
The EU has set a binding target for biofuels to make up 10pc of vehicle fuels by 2020.
But production of biofuels is already pushing up the cost of food, according to reports. European grain prices have risen sharply this season on fears that demand could outstrip supply.
Recent jitters over drought hitting this summer's grain harvest have again rattled markets that are already tight. Wheat is trading in Paris at around €150 a tonne, up from around €120 at the same time last year, affecting everything from bread to livestock prices.
Analysts say rising world demand for grain, driven up by increasing wealth levels in China where more meat is being consumed, has combined with the extra biofuel needs to create a shift in the outlook for agricultural markets.
 
room305 said:
Are those jobs not in manufacturing stuff? Stuff that is mainly exported to the US? If an increasingly tapped out US consumer stops buying, will it not mean less jobs and less manufacturing (even if only temporarily).
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There's as many working in Chindia building infrastructure to meet the demands of industrialists for new factory space.

It's a simply fact that over the next few decades, hundreds of millions of manufacturing processes will shift to Chindia. Chindia needs to spend like crazy in order to prepare the industrial base for this move.

A 5% reduction in US demand will therefore not necessarily cause any contraction in Chindia. Their economies will simply grow at 4-7% rather than 10-12%

A recession in the USA will speed up, not stop the process. Strapped for cash, companies will accelerate their plans to offshore production from the West to Chindia, thus boosting their individual company's bottom line at the expense of the nation's.

Bottom line: Chindia will immediately hoover up any oil that the West doesn't buy first. There will be no meaningful, sustained drop in oil prices
 
sign said:
Thats interesting . Do you remember what the power output of the turbines was ? And do you need planning permission to install one ?
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Two 3.5 metre span wind turbines mounted at at least 10 m (3000W total) running at maximum output would heat about two rooms in your well insulated house. You'll be sticking to the oil, gas or pellets for now unless you have a couple of acres clear area around your house.
 
davidoco said:
Two 3.5 metre span wind turbines mounted at at least 10 m (3000W total) running at maximum output would heat about two rooms in your well insulated house. You'll be sticking to the oil, gas or pellets for now unless you have a couple of acres clear area around your house.
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AFAIK, if you were to buy two 3.5 metre span wind turbines, you'd pay VAT at 21% on them, while if you simply continue sucking electricity from the nearest ESB global-warming causing fossil fuel plant, you pay VAT at 13.5%.

So as far as the taxation system is concerned, the outcome of the system is that it's cheaper for you to pollute via ESB.
 
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