Does anyone understand this (an oil drum post)?

[davidstvz]

I'm pretty much stumped. How does this relate to the iTulip thesis. Do you think this authors position is accurate:

www.theoildrum.com/node/8834

[bpwoods]

Re: Does anyone understand this (an oil drum post)?

Sort of - but I would need a significant amount of tutoring about some of the finer points. If someone could draw a flow chart - great!

Brian

[davidstvz]

Re: Does anyone understand this (an oil drum post)?

I'm reading it and what I'm seeing is an extremely convoluted way of saying that the price is spiking now and will very soon crash. That looks like peak-cheap-oil cycle to me. However, this guy seems to be arguing that the current and previous spikes were not demand driven which doesn't make much sense to me.

[dcarrigg]

Re: Does anyone understand this (an oil drum post)?

I'm reading it and what I'm seeing is an extremely convoluted way of saying that the price is spiking now and will very soon crash. That looks like peak-cheap-oil cycle to me. However, this guy seems to be arguing that the current and previous spikes were not demand driven which doesn't make much sense to me.

You're essentially right David.

The only qualifier relates to the 'demand-drive' argument you put above. It seems to me that the author follows the peak-oil thesis. Further, he is arguing that financial middle-men distort the market so that there may exist a financial dark inventory that is not related at all to physical oil inventory or demand. Put another way, he is arguing that volatility makes the financial middlemen money, so the normal price equilibrium between sellers and buyers is often and perhaps deliberately distorted to introduce extreme volatility to necessitate additional trades (and therefore fees). He points to some direct conflicts of interest between CEOs and board members of some of the biggest oil and financial firms. There may also simply be enhanced volatility due to increasing retail traders who obviously never intend to take delivery of the commodity.

He explains this himself later in the comments section:

We are indeed talking about financial inventory here.The economic interest in the oil has become detached from the oil itself, so that the oil has literally been monetised.
Dark Inventory is very much a factor on a short to medium time horizon which may keep commodity prices and even equity prices (not just oil prices) financialised and inflated wherever it deployed.
As I have written on the Oil Drum before I see two trend lines in oil prices - both of them rising (because I subscribe to the peak oil thesis).
The upper boundary trend price is the 'seller's market' at which demand is destroyed: the lower boundary trend price is a buyer's market, at which production is locked in/destroyed.
In a perfect world, sellers, who desire a stable (ideally increasing) high price and buyers, who desire a stable (ideally decreasing) low price, would aim to agree a formula for a stable and equitable (inevitably increasing) 'fair' price.
But for the middlemen who intermediate buyers and sellers, Stability is Death, and so they will always tend to cause volatility. Financial middlemen also enable buyers and sellers to finance or fund stocks, and to manage price risks from price volatility through using debt and derivatives.
Note also that if producers CAN hold prices at the 'upper bound' - because financing and funding of inventory is available - then they WILL.
I think we will see the price collapse within Q1 and Q2, and attempts will then be made to resuscitate the price as before.
Now, in the long term the oil price can, and for the sake of the planet IMHO should, be at the level which destroys demand.
But for the next year or two at least - absent a new settlement and market architecture - I see desperate producers pumping as much as they can. I also see a world in pretty deep recession if not depression which will keep 'real' demand low, and I see no appetite for the sort of financial demand necessary to fund the maintenance of the price above the 'lower bound' trend line.

[Shakespear]

Re: Does anyone understand this (an oil drum post)?

He points to some direct conflicts of interest between CEOs and board members of some of the biggest oil and financial firms.

I always found this to be shady setup. One that certainly did not help in any direct way to make the system work. It looked to me more like a Work Union for the Rich.