Whither now for oil prices?

[room305]

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.

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.

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.

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.

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.

 

[demoivre]

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]

 

[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?

 

[demoivre]

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?

Not sure what you mean here.

 

[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.

 

[room305]

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.

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.

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.

 

[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!

 

[DonCorleone]

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.
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[room305]

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.

 

[room305]

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.

 

[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

 

[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.

 

[Nermal]

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.

 

[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

 

[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.

 

[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?

 

[room305]

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.

 

[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.

 

[leafs]

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

 

[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.