# Whither now for oil prices?



## room305

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.



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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## joe sod

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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## kerrybull

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.


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## badabing

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?



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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## MrKeane

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.


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## z108

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.


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## rock3r

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.


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## room305

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.



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.


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## room305

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.



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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## MrKeane

sign said:


> Thats interesting . Do you remember what the power output of the turbines was ? And do you need planning permission to install one ?


 
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.


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## joe sod

"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.


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## room305

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.



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.


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## rock3r

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.


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## room305

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.



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.


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## rock3r

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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## room305

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.



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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## MrKeane

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. _


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## rock3r

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).


 
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


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## davidoco

sign said:


> Thats interesting . Do you remember what the power output of the turbines was ? And do you need planning permission to install one ?



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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## rock3r

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.


 
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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## room305

rock3r said:


> There's as many working in Chindia building infrastructure to meet the demands of industrialists for new factory space.



Factory space to manufacture goods to sell to the west.



rock3r said:


> 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.



Logistics problems have been slowing the pace of outsourcing but the trend for global wage arbitrage remains intact. However, I do not see why they need to "spend like crazy" to prepare for a decade long trend. Surely new factories and infrastructure will be deployed as needed. Outsourced factories still need a market to sell to but the US consumer has stopped buying. Look at yesterday's same-store sales figures. This during a period when revolving credit (unsecured credit - credit cards, personal loans) grew at its fastest rate in over four months. Smacks of desperation.



rock3r said:


> 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%



Economic growth at 4-7% would cause major problems for a Chinese economy that is overheating. They need to grow by at least 8% to generate enough jobs to satisfy population growth. That the economy has been growing well in excess of that is leading to some major inflationary problems.



rock3r said:


> 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.



Actually it will stop it. No company is going to engage in a major capital expansion during a recession. Finance is harder to raise as nervous investors demand a greater return for perceived risk, market capitalisation will be lower etc. There will be massive lay-offs in US factories but they won't immediately re-open factories in the China until after the recession.



rock3r said:


> 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



What do you mean by _first_ - crude spot prices are set on an internationally traded market. There's no preference given to the US. Prices being paid for materials by manufacturers are at record highs across the board yet not a single commodity is listed as being in short supply. This includes oil and refined oil products. Think about it for a second. There is already more oil available than either the West or any BRIC country is buying. During a period when both China and the US are extending their strategic oil reserves.

On Wednesday, the value of shares traded on the Shanghai Composite exceeded the rest of Asia combined (including Japan). Be interesting to see how willing China is to "hoover up any oil the West doesn't buy first" when that bubble collapses.


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## demoivre

rock3r said:


> There will be no meaningful, sustained drop in oil prices



That is far from  a done deal . Last summer oil prices reached highs driven largely by hedge fund activity evidenced by the fact that the futures market was in contango for several months - it doesn't take that many lots to shift oil prices. I don't and never did buy the notion that  " oil is running out, demand is ever rising so price will continue to rise ". The demand for oil is not perfectly inelastic - there comes a point where demand falls when price is too high. On the supply side better technology going forward could mean deeper drilling for accessible light, sweet crude oil but also [SIZE=-1]technology may well be developed to economically recover oil from oil shale[/SIZE] just as  oil sands are being used to extract oil -[SIZE=-1] world resources of oil shale are conservatively estimated at over 2.5 trillion barrels ! [/SIZE]


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## rock3r

> Surely new factories and infrastructure will be deployed as needed.


 
Deployed onto land with no electricity stations to power them, or sewerage and roads to service them? I think not. If the ground on whic hthese factories are to stand has not been prepared, the factories cannot be built. This isn't Monopoly, you can't plonk a "hotel" or a factory onto a random square of land without prior work being done.

The Chindian governments are working feverishly to prepare sites for this future deployment, and that preparation requires energy.

Technology may well be developed, but it's not particularly likely.

Remember, the immediate economic advantage of such technology would be rather tiny: the Saudis can currently pull oil from the ground at three dollars a barrel.

And even if a company managed to pull oil from shale for free, what would be its incentive to sell that oil below market value?


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## demoivre

rock3r said:


> Technology may well be developed, but it's not particularly likely.
> 
> Remember, the immediate economic advantage of such technology would be rather tiny: the Saudis can currently pull oil from the ground at three dollars a barrel.
> 
> 
> 
> 
> I disagree. There is every incentive to improve technology since US oil shale reserves alone  are five times  the oil reserves of the Saudis.  Shellhttp://en.wikipedia.org/wiki/Shell_Oil_Company is already developing a new in situ method of oil extraction from shale in Coloradohttp://en.wikipedia.org/wiki/Denver.
> 
> 
> 
> 
> And even if a company managed to pull oil from shale for free, what would be its incentive to sell that oil below market value?
> 
> Click to expand...
> 
> 
> Not sure what you mean here.
Click to expand...


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## joe sod

"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."

I'll believe that when I see it. World oil consumption is rising by at least 2% every year including during recessions averaged out. If world oil consumption goes down in absolute terms along with world energy consumption continuing to rise, then I will believe it. At the moment world energy consumption is increasing and oil consumption is increasing therefore the world is still very much addicted to oil. Theres alot of talk about alternative energy lets see the walking. A year ago biofuels were the fashionable alternative now they are falling out of favour because of their effects on grain prices and all agricultural commodities. I believe the answer will be nuclear power along with clean coal technology buts thats still along way away.


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## room305

rock3r said:


> Deployed onto land with no electricity stations to power them, or sewerage and roads to service them? I think not. If the ground on whic hthese factories are to stand has not been prepared, the factories cannot be built. This isn't Monopoly, you can't plonk a "hotel" or a factory onto a random square of land without prior work being done.
> 
> The Chindian governments are working feverishly to prepare sites for this future deployment, and that preparation requires energy.



Are you contending that as the outsourcing of factories and imports from China to the US slows, China will start ramping up its industrialisation programme? It's not about China's demand for oil declining - that won't happen - but the growth rate of its demand for oil will slow. It's an important distinction because current prices are only justified if the growth in China's oil demand accelerates.



rock3r said:


> Remember, the immediate economic advantage of such technology would be rather tiny: the Saudis can currently pull oil from the ground at three dollars a barrel.



If demand for oil is anything like you contend then the immediate economic advantage of such technology is absolutely massive. You would essentially be untapping reserves that are several orders of magnitude of what the Saudi's have.



rock3r said:


> And even if a company managed to pull oil from shale for free, what would be its incentive to sell that oil below market value?



Perhaps you have a misunderstanding of how markets work. It's not the seller who sets the price but the buyer. The seller can refuse to sell until prices improve but there is a limit to how much oil you can store.

At the moment, buyers appear to be willing to pay historically high amounts of money for commodity that is not in short supply. They do this on the basis that it may be in short supply in the future. If this scenario doesn't materialise i.e. oil supply remains abundant, then the price will collapse.


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## Remix

Personally, I think there is some merit in the argument that oil is as much, if not more, in a financial bull market as it is in physical bull market. The growth in the financial aspects of oil trading in the past few years makes the physical demand growth crude (apologies) by comparison.

With global interest rates so low for so long, it shouldn't be surprising that some of that cheap money would also start chasing future barrels of oil upwards.

If something causes all that excess liquidity to reduce I think we will see some of the financial pressures on oil easing up. Of course if and when that happens then having cheaper oil will be small consolation given would might happen to other assets (property, stocks etc.) that have grown accustomed to cheap money. 

Seems to be so many speculative bubbles at the moment that I'm starting to long for the simplicity of the dot com days !

Heard a distrubing news item the other day regarding the millions of chinese citizens putting everything - and by everything I mean everything: savings, pensions, proceeds from sales of possessions etc. into the chinese stock market. I'd love to know what central bankers are really thinking at the moment - but I digress!


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## DonCorleone

room305 said:


> At the moment, buyers appear to be willing to pay historically high amounts of money for commodity that is not in short supply. They do this on the basis that it may be in short supply in the future. If this scenario doesn't materialise i.e. oil supply remains abundant, then the price will collapse.



It's an interesting point.

The supply of sweet crude - which is cheap to extract, is correctly viewed to be in short supply. Buyers are paying historically high amounts for this commodity, because of their fear for it's dwindling supply.
However, as the price of oil keeps rising, it is becoming more and more cost effective to extract different types of oil. Oil that was previously not profitable...oil sands and oil shale for example.
Currently, oil sands is where huge investment is going. In Alberta alone there is over 100 billion in capital investment scheduled to tap into the (at least) 175 billion barrels of recoverable crude bitumen. However, this is a costly process - it's profitable at $20 plus a barrel. 

This added supply of 'costly oil' to the global reserves could eventually take away the fear that the supply of oil is peaking. 
Strangely, increasing the future supply of oil depends on the high price of oil. 
[FONT=&quot][/FONT][FONT=&quot][/FONT]
[FONT=&quot] [/FONT]


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## room305

DonCorleone said:


> This added supply of 'costly oil' to the global reserves could eventually take away the fear that the supply of oil is peaking.
> Strangely, increasing the future supply of oil depends on the high price of oil.



Exactly and in this the proponents of 'peak oil' are absolutely correct. If oil stays cheap it will be scarce supply because it will not be profitable to extract oil from oil shale, oil sands, deep water, frozen ice wastelands or areas of heavy conflict. When it is expensive these become viable.

It is unlikely that oil prices will continue in a linear upwards trajectory and it is possible that instead prices will become increasingly volatile over the longer term. Soaring to unimaginable heights before collapsing as new supply comes online swamping the market.


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## room305

Remix said:


> Heard a distrubing news item the other day regarding the millions of chinese citizens putting everything - and by everything I mean everything: savings, pensions, proceeds from sales of possessions etc. into the chinese stock market. I'd love to know what central bankers are really thinking at the moment - but I digress!



On Tuesday alone nearly half a million new brokerage accounts were registered. The rise in Shanghai shares has been parabolic and the value traded recently exceeded the entire value of all shares in the rest of Asia combined. They trade at a near 100% premium to their international counterparts (accessible to Westerners) on Hang Seng and other indices.

It's a bubble and the fallout on collapsing will be huge.


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## tyoung

*China Bubble?*

This is the most interesting global financial topic. There definitely seems to be a bubble in China. How do you invest with that in mind? Just avoid China? Avoid Asia? Avoid all EMs? Go to cash/bonds?.
Certainly off topic, maybe worth a seperate thread. Anybody have any views?
Regards


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## joe sod

Im an oil an energy bull and i also believe in precious metals, in asia the safest country is japan, in europe its germany, i believe the asian currencies will rise in value but the euro/dollar exchange rate is at its peak, the price of oil is such a political hot potato that there is probably alot of chatter in the western media regarding alternative energy etc to talk down the price, even the saudis are saying they are worried about the affect of biofuels on oil price. However this is just a smokescreen to allow them to cut production quotas if the price should slip. Big oil companies are still the cheapest big companies on the S+P and also the footsie. The cheapest company on the DOW is an american oil company with a P/E of 7. Also where has the most successful investor in the world (warren buffet) got some of his money invested right now in two big oil companies. Five years ago he had no money invested in oil so that should tell you where he thinks oil is going.


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## Nermal

Remix said:


> Seems to be so many speculative bubbles at the moment that I'm starting to long for the simplicity of the dot com days !


 
I feel the same. I was too young to have anything to invest around the dotcom boom, but I'd like to think that I would be smart enough, given what I now know, to realise what was cheap (quite a few things) and what wasn't (the nasdaq).

But in this boom, I just don't see anything that's cheap. Certainly not oil.


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## rock3r

You don't think gold is cheap?

As for oil, does anyone know a decent source for China/India's actual oil usage figures? I'm thinking they're probably showing a linear growth pattern


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## room305

Looks like the high price of gasoline is really starting to bite for the US consumer, as America sees the first cut back in mileage by drivers in 26 years.

Not that it will matter according to those in the oil bull/commodity super-cycle camp, as the bottom line is China and India will "immediately hoover up any oil that the West doesn't buy first" and there will be "no meaningful, sustained drop in oil prices" ...

Now exactly how much of world oil demand is comprised of India and China, compared to the US? Oh that's right, you don't know.

Very astute.


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## rock3r

> I would agree with Towger that the bulk of poverty in this country is down to cultural, generational and educational/parenting issues. Throwing taxpayer money at the problem in the form of increased social welfare is a wasteful and ineffective solution from a lazy government.



Isn't it odd how people with the above type of views are usually oil bears?

If I looked at your posts on various websites from 2005, would I find you denying that mankind had a hand in causing global warming?


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## room305

rock3r said:


> If I looked at your posts on various websites from 2005, would I find you denying that mankind had a hand in causing global warming?



I'm a scientist so I doubt it. When the facts add up, the facts add up.


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## Maine

Also where has the most successful investor in the world (warren buffet) got some of his money invested right now in two big oil companies. Five years ago he had no money invested in oil so that should tell you where he thinks oil is going.[/quote]

Think the world uses 85 to 90 million barrels a day which will rise to 120 million barrels a day by 2020.

Oil companies are struggling to replace production - for past 15 years

If and when UK/US pull out of IRAQ then production there will likely fall, Venezuala / Nigeria / BP problems in Alaska / increased hurricanes offshore 

Who knows what the reserves are in Middle East - they have a massive incentive to overstate reserves i.e. Tell your boss that his field has 10B extra barrels in reserves is likely to 

a) get a bigger bonus 
b) Allow him to go public with new massive spending plans today

A lower number could cause upheaval - what if Saudi Arabia said it would run out of oil for export by 2025.

PS Nuclear energy in UK is great news for us as we will be able to access it given we do not have an energy policy here.


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## leafs

Maine, how exactly will we be able to access Nuclear energy in UK?


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## Persius

We already are. We have all-island electricity connectivity. We receive surplus electricity from NI, and NI also receives surplus electricity from GB. Despite politicians denials to the contrary, there is no way of guaranteeing that none of this surplus energy from GB comes from nuclear powered stations.


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## room305

Maine said:


> If and when UK/US pull out of IRAQ then production there will likely fall



Production in Iraq has already fallen. From 2.5 million barrels a day to just over 1.5 million. Of which anywhere between 100,000 and 300,000 barrels are stolen and smuggled out of the country. It's hard to imagine production falling much further when the US and UK forces leave.

Given that the extraction technology used in Iraq is extremely outdated, it is estimated that once the Production Sharing Agreements (PSAs) are put in place and western oil companies move in, production could easily hit 3.5 million barrels a day.

That's for existing fields. The US Energy Information Administration (EIA) estimates Iraqi proven oil reserves to be in the region of 112 billion barrels. The second largest proven oil reserves in the world behind Saudi Arabia. However, 90% of the region is still relatively unexplored. The EIA conservatively estimate that exploration could yield another 100 billion barrels.

So it is feasible that within a five to ten year time frame, Iraqi oil production could hit 10 million barrels a day. Potentially offsetting production declines in Mexico and Saudi Arabia.

Even a second Saudi Arabia coming online doesn't change the essential facts. Oil is a limited resource for which it is becoming increasingly difficult to increase supply (otherwise why would oil companies be exploring five miles deep in the Atlantic ocean or on the frozen wastes of Siberia etc.) and for which demand continues to grow.

Eventually, existing oil prices and greater will be justified on a supply/demand basis. However, we are paying high oil prices now for something that will be in short supply in several years. This isn't an item we can store very easily so forward discounting should be relatively minimized. Very few market participants are buying to store and sell later and if they are, why are they bidding on front month contracts?.

I think it is simply sentiment. An Internet bubble-survivor stock I own recently reported a second year of good earnings. It now trades at over $2, up from $1 last year. Back in the heady dotcom bubble days traders paid over $160 a share for the company despite it being deeply in debt with no earnings whatsoever. No doubt many of those traders thought the same thing - the Internet will revolutionize the global supply chain business. Indeed it has. So why aren't those traders flocking back to the company?

The possibility, or even the certainty of, a peak-oil situation manifesting at some point in the next twenty years in no way guarantees that oil will always trade at over $50 a barrel during this period.


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## Maine

The possibility, or even the certainty of, a peak-oil situation manifesting at some point in the next twenty years in no way guarantees that oil will always trade at over $50 a barrel during this period.[/quote]

All good points. For one I do not believe anything US EIA says as it has a vested interest in talking up reserves to keep oil prices low for the US consumer or God forbid worry them about buying 4X4s from US car manufacturers.

If US pulls out of Iraq ( oil exports could dry up) then serious destabilisation of Saudi Arabia will begin. 

The West politicians focus on today (European gas reliance on Russia, UK has energy crisis, power blackouts in US, Ireland!) while China is playing a 20 year game - they want oil for next 20 years so oil imports in 2025 is an issue for them. By them securing rights to oil for long term means it is simply not available for others - this is what is worrying everyone 

Just think of the vast numbers of Indians and Chinese who are leaving largely rural low energy lifestyles for high enerygy urban lifestyles( dishwashers, washing machines, fridges, TVs, videos, sat tv, food packaging, food transport - they will want strawberries all year round too,cars, street lighting). 

Oil may indeed fall but long term that will look cheap IMO. Oil majors remain relatively cheap against the general market.

Mostly what people said about the Internet in 2000 has come true less than 10 years later.


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## room305

Maine said:


> Mostly what people said about the Internet in 2000 has come true less than 10 years later.



Exactly, this is the key point. Dotcom bulls were completely justified in everything they said - increased productivity, reduced costs, globalized niche markets and so forth - you just won't find many people now willing to pay $800 a share to get a piece of Nortel.

It is a point worth remembering when considering that a commodity that is not currently in short supply has enjoyed a three fold increase since 2001.


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## Savvy

room305 said:


> Exactly, this is the key point. Dotcom bulls were completely justified in everything they said - increased productivity, reduced costs, globalized niche markets and so forth - you just won't find many people now willing to pay $800 a share to get a piece of Nortel.
> 
> It is a point worth remembering when considering that a commodity that is not currently in short supply has enjoyed a three fold increase since 2001.



Darn, I knew i should have bought some Nortel shares when the were below $1(back in 2002). I see they are over $25 now


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## Remix

There is an enormous amount of excess liquidity currently sloshing round in global financial markets.

(Actually it's not just in financial markets, there was a segment on Bloomberg the other day on the bubble that has emerged in parts of the Art market - driven by hedge fund buying !)

Over one 18-month period recently, the physical market for oil grew by about 5%. Over the same period the futures market in oil grew by over 70%. That's a lot of growth in cash chasing a price.

But I can't see how the Oil price can come down and stay down in isolation from other frothy markets. The liquidity factors that might be keeping the price high may also be propping up the valuations of many other things ranging from Dublin houses to Stock Markets to works of art by Francis Bacon.

Much cheaper petrol? Be careful what you wish for!


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## z108

Remix said:


> There is an enormous amount of excess liquidity currently sloshing round in global financial markets.



Is this money borrowed at low interest rates ? where is the extra liquidity coming from if it wasnt here before ?


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## room305

Remix said:


> There is an enormous amount of excess liquidity currently sloshing round in global financial markets.


 
Indeed there is but as someone far more versed in these matters than I am once opined, "liquidity is the daughter of sentiment". These same arguments were advanced as reasons why the US real estate market would never crash but it did and loans are tougher to come by now even for those willing to buy into a falling market.

Rising asset prices increase margin buying power, favouring those using the most margin and encouraging others to do the same. 

However, should asset prices begin to fall, people are forced to liquidate their positions prompting further falls.


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## Maine

Note OPEC has learned in the past 5 years is that they were selling oil too cheaply previously - that is the current high price of oil has been absorbed by the global economy without too much difficulty.

In the past 10 years OPECs power has risen dramatically as oil production has become more concentrated at the same time as demand has risen.

A second oil shock is needed to wean us off oil. If Saudi production was to be taken off the market for even a year then G8 would take remaining oil and countries like Ireland may not even get any oil.

Global liquidity in part comes from Middle East petro dollars being invested for long run and necessity to keep interest rates relatively low in the heavily indebted Anglo Saxon world to keep residential property markets up. Low interest rates = high PEs for residential property means equity PEs can rise. If bank will lend to investor in property to get return of 5% then same bank will lend to investor to get same return in stable equity. Hold ?  Of course this happened in past 10 years when China emerged as provider of global deflation with other providers like Germany and Japan.


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## room305

Maine said:


> In the past 10 years OPECs power has risen dramatically as oil production has become more concentrated at the same time as demand has risen.



I agree that OPEC realises now they were selling oil quite cheaply - possibly not realising the full extent of dollar depreciation or increased Western purchasing power. However, to imagine that OPEC's power has risen dramatically is almost laughable. During the 70's price shocks, brought about by OPEC cuts, OPEC brought the Western world to its knees. Now an announcement by OPEC that they plan production cuts barely causes oil prices to rise as commodity traders have learned to ignore their veiled threats. Usually OPEC members expect someone else to do the actually cutting while they continue to sell into higher prices with the result that prices barely rise and production barely falls. In fact, OPEC is scared to announce dramatic cuts because it might highlight how little control they have over their own individual members.

If anything, commodity traders become emboldened and companies less driven to hedge prices when they hear about oil production cuts because it reminds them that crude supply currently trumps crude demand.


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## BillyNoMates

"crude supply currently trumps crude demand"
Is this true?

There is an impression that there is never enough of the stuff?


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## joe sod

Savvy said:


> Darn, I knew i should have bought some Nortel shares when the were below $1(back in 2002). I see they are over $25 now


 
I think nortel had a share consolidation recently where they reduced the number of shares in circulation, where 5 years ago you may have owned 10 shares at $2 now you own one at $25. Im not entirely certain on this but Im pretty sure that something like this occured. I also looked at nortel a few years ago but when i looked at their balance sheet it was very bad with huge debts so i stayed away.


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## room305

BillyNoMates said:


> "crude supply currently trumps crude demand"
> Is this true?



Currently yes. I haven't checked the stats in a few weeks but last time I did there was global headroom of about 1.5 million barrels a day. 



BillyNoMates said:


> There is an impression that there is never enough of the stuff?



When you have an entire economic system built upon the prevailance of cheap and abundant energy it is probably fair to say there is never enough of the stuff.


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## Maine

room305 said:


> Currently yes. I haven't checked the stats in a few weeks but last time I did there was global headroom of about 1.5 million barrels a day.


 
This shows why oil is high.  And we need to analyse where the production comes from - is there a democracy as we know it among them

Add fact that demand is growing and alot of refinery assets are old and prone to breakdown ........and the traders have good reason to gamble


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## room305

Maine said:


> This shows why oil is high.  And we need to analyse where the production comes from - is there a democracy as we know it among them



Here is a good source of such information (compiled from EIA reports):

http://omrpublic.iea.org/World/Wb_all.pdf

Certainly a lot tighter than 1.5 million barrels a day at the moment. Although I think forecasted 2007 demand will be revised down from 85.7 to closer to 83 mbpd in line with GDP revisions in the US.



Maine said:


> Add fact that demand is growing and alot of refinery assets are old and prone to breakdown ........and the traders have good reason to gamble



Both demand and supply are growing. It's just a question of which is growing faster. Also I do not see why refinery problems (responsible for current high gasoline prices) necessarily translate to higher oil prices? If the omelette factory in a town burns down, will people automatically pay more for their eggs at the market?


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## rock3r

> Also I do not see why refinery problems (responsible for current high gasoline prices) necessarily translate to higher oil prices?


 
maybe you should try filling a car with unrefined oil, then you'll figure out why lack of refineries causes price to rise.


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## room305

rock3r said:


> maybe you should try filling a car with unrefined oil, then you'll figure out why lack of refineries causes price to rise.



Perhaps for the slower inclined among us you could explain why filling my car with crude would serve to illustrate why crude prices soar when there is a lack of refineries? Are you suggesting that when gasoline is not available people actually purchase the raw crude for their vehicles and this puts upward pressure on crude spot prices?


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## rock3r

Crude prices rise when people buying oil futures to guarantee next year's oil supply are willing to pay a higher premium for guaranteed supply.

High prices at the petrol pump, though caused by lack of refining capacity, have a strong psychological effect on demand for all forms of petroleum, refined or not. It helps create a perception of scarcity, and that perception becomes reality.

High petrol prices are a good thing, as they spur increased creation of renewables. Since oil got pricey, scientists have developed a solar panel that repays itself far more quickly, and is far cheaper to produce.

As pricy oil causes far more research into renewables, the cost of renewables will decrease.


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## room305

rock3r said:


> High prices at the petrol pump, though caused by lack of refining capacity, have a strong psychological effect on demand for all forms of petroleum, refined or not. It helps create a perception of scarcity, and that perception becomes reality.


 
Right so it is just sentiment. An illusion of scarcity. Exactly the point I have been making all through this thread.

Although I guess I'm glad I didn't have to fill my tank full of brent just so you could point it out to me.


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## rock3r

Well all markets are mostly psychological. The fact is, supply shocks are a real, non-illusory danger and people hedge to insure against that. Hedging puts up the price at all stages of the oil production cycle, from pre-drilling to finished product.


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## room305

rock3r said:


> Hedging puts up the price at all stages of the oil production cycle, from pre-drilling to finished product.



Why?


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## Maine

room305 said:


> Here is a good source of such information (compiled from EIA reports):
> 
> http://omrpublic.iea.org/World/Wb_all.pdf
> 
> Certainly a lot tighter than 1.5 million barrels a day at the moment. Although I think forecasted 2007 demand will be revised down from 85.7 to closer to 83 mbpd in line with GDP revisions in the US.
> 
> 
> 
> Both demand and supply are growing. It's just a question of which is growing faster. Also I do not see why refinery problems (responsible for current high gasoline prices) necessarily translate to higher oil prices? If the omelette factory in a town burns down, will people automatically pay more for their eggs at the market?


 

What was the IEA trying to do by releasing its report on supply tightness?  Its one thing to say it when oil is $ 40 a barrel but over $75 !!  

What agenda is being driven and who is doing the driving


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## redstar

*What is driving petrol prices upwards ?*

Now petrol prices are at 1.64 and rising weekly, what is driving this ? 
Its not taxation because the prices are creeping upwards steadily.

Are there any signs that it will stop rising or even fall ?

Strange that prices are increasing in a recession.


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## allie12

redstar said:


> Now petrol prices are at 1.64 and rising weekly, what is driving this ?
> Its not taxation because the prices are creeping upwards steadily.
> 
> Are there any signs that it will stop rising or even fall ?
> 
> Strange that prices are increasing in a recession.


 
I wouldbe interested to know- as this is drivingup all costs of living at a time when people are strapped for cash. Are we going to hit the €2......?


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## PolkaDot

I am also a bit puzzled about the continued increases in prices.

The Euro's fall against the USD between Oct to Jan was stated as being a factor, but it has recovered somewhat against the Dollar since then.

So this doesn't seem to have much of an influence?


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## theoneill

It's probably just a mixture of demand, speculation and supply. I hear at current levels of consumption we would need at least three earth's to sustain us. This cannot continue. back in the day it was really only the west that were the largest consumers of oil, now it's basically the entire world with the exception of parts of Africa and other smaller regions. You also have to consider that most of the oil comes from politically unstable regions. It really is a toxic mix.


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## Chris

Production of oil in recent years is pretty flat and consumption declines in the western world have been offset by increases in Asia. By and large though, supply of and demand for oil in barrels per day is pretty much unchanged. The only explanation left is inflation. Central banks around the world have flooded the system with newly printed money for the last 4 years now. You basically have more money chasing the same amount of oil and that is driving up prices.


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