60% Of Today's Oil Price Pure Speculation

[c1ue]

Re: 60% Of Today's Oil Price Pure Speculation

I've said for a while now that speculation has an impact, but I've never said it was the only impact.

What GRG is saying making sense to me - we're are a point where the 2006 oil consumption/world economy dynamic is only starting to change to a 2012 US=Poland per capita income.

It would be perfectly possible to see a short term spike in oil prices - exacerbated by the floating investment pool of money - before ultimately succumbing to greater efficiencies/lower consumption.

From economic terms, the US is only now starting to be aware that reducing consumption of oil is desirable.

Should oil and gasoline prices continue to grow - a 1975-1985 net reduction in oil consumption by 10% in the United States is entirely in the cards. Yes, that's only 2M barrels/day and change, but it would be a mistake to think only the US would reduce consumption.

[jacobdcoates]

Re: 60% Of Today's Oil Price Pure Speculation

GRG55, I would like to add the threat of an oil supply disruption has always been around for a least the last 30 years. So that should bee priced in already, I don't see how the threat of disruption has increase in the last 6-12 months. Excess capacity has increased a little bit lately, mostly likely from reduced demand, -4% jan08 vs jan07.

http://www.reason.com/news/show/125414.html

I think the housing bubble would have taught everyone a lesson that nothing goes up forever, and oil has gone nearly vertical recently.

[Guest]

Re: 60% Of Today's Oil Price Pure Speculation

GRG55, I would like to add the threat of an oil supply disruption has always been around for a least the last 30 years. So that should bee priced in already, I don't see how the threat of disruption has increase in the last 6-12 months. Excess capacity has increased a little bit lately, mostly likely from reduced demand, -4% jan08 vs jan07.

http://www.reason.com/news/show/125414.html

I think the housing bubble would have taught everyone a lesson that nothing goes up forever, and oil has gone nearly vertical recently.

But isn't there a big difference? That being that the ability to produce homes was nearly limitless, and substitutes plentiful (apartments, rental homes, etc) , and supply exceeded demand for its actual use as housing (speculators and a huge surplus built up that will take years to diminish) while the ability to produce oil seems fairly fixed and perhaps declining, we don't seem to be running out of places to stockpile it, and alternative fuels are at this point even more expensive.

And unlike the tech stock bubble, oil has a tangible use and one can produce value from using it.

I don't think there isn't room for a decline in the price of oil. But just how far and for how long? A dip back to $90/barrel in the winter is one thing, but could that price be sustained?

[GRG55]

Re: 60% Of Today's Oil Price Pure Speculation

GRG55, I would like to add the threat of an oil supply disruption has always been around for a least the last 30 years. So that should bee priced in already, I don't see how the threat of disruption has increase in the last 6-12 months...

The actual threat of an oil supply disruption may have "always been around for at least the last 30 years", but it's the perception that counts more than the reality.

The stock builds we saw in 2005 and 2006 were in an environment where the future price of oil was higher than the then-current price...in other words one of those rare occasions (contango) when it paid to buy and hold oil inventory. During that time there was no shortage of pundits telling us that rising inventories were a sign of surplus and prices were about to collapse any minute. They were wrong.

Today we are again seeing stock builds. At at time when oil for future delivery is cheaper than it is today (forward curve is backwardated). That's a change in behaviour. That's all I am trying to point out. People can draw their own conclusions...

[Jim Nickerson]

Re: 60% Of Today's Oil Price Pure Speculation

The actual threat of an oil supply disruption may have "always been around for at least the last 30 years", but it's the perception that counts more than the reality.

The stock builds we saw in 2005 and 2006 were in an environment where the future price of oil was higher than the then-current price...in other words one of those rare occasions (contango) when it paid to buy and hold oil inventory. During that time there was no shortage of pundits telling us that rising inventories were a sign of surplus and prices were about to collapse any minute. They were wrong.

Today we are again seeing stock builds. At at time when oil for future delivery is cheaper than it is today (forward curve is backwardated). That's a change in behaviour. That's all I am trying to point out. People can draw their own conclusions...

GRG, I expect your observation here is much more profound than is my understanding of it, and for sure knowing so little, I can only make a guess at a conclusion.

IF there is anyone else here nearing my level of ignorance about futures, options, backwardation, contango, here are some references, which I have just read and re-read, that might have lessened my ignorance by a nanometer.

http://www.investopedia.com/terms/b/backwardation.asp

http://www.investopedia.com/terms/c/contango.asp

http://www.investopedia.com/articles...kwardation.asp

I think the most I got from these is from the last article:

Sorting Out the Confusion

Clearly, it is more precise to say that in contango, futures prices for a given maturity date are falling. In normal backwardation, futures are rising. This is not exactly the same as the shape of the futures curve because futures prices are constantly adjusting to consensus expectations about the expected future spot price.

Finally, consider a distinction that seems to exist only to confuse. Normal backwardation is not quite the same as backwardation. (For more insight on this, pick up a copy of "Futures, Options And Swaps" (2007) by Robert Kolb and James Overdahl). Backwardation is the same as inverted when futures prices are lower than spot prices. But in many cases, it's better to stick with inverted and drop backwardation altogether.

Copyright ã 2007 Investopedia.com I am not asking anyone to teach me about futures and options, because I am not interested in them to the extent I shall ever use them; however, I would like to arrive at the appropriate conclusion regarding GRG's informed observation. From here (sorry a subscription is needed to that table online.wsj) I can see where the prices of future contracts are down from $122 today to the range of $116 in a year to $112 for Dec. 2012. I accept your statement that "Today we are again seeing stock builds." (where does one track that just out of curiosity?) I surmise that stocks are building because demand is slackening. Further that future prices are lower because it is anticipated that future demand will also slacken, or that the dollar will strengthen, or both? Is this the correct conclusion, or is it totally wrong?

[Finster]

Re: 60% Of Today's Oil Price Pure Speculation

60% Of Today's Oil Price Pure Speculation

100% of it is pure inflation. We settled that in Peak Oil - Has It Been Pushing Up Prices?.

[friendly_jacek]

Re: 60% Of Today's Oil Price Pure Speculation

100% of it is pure inflation. We settled that in Peak Oil - Has It Been Pushing Up Prices?.

I would not say 100%. If you look at the oil:gold ratio in a scale of a couple of years, there is a lot of fluctuation and occasional swings away from the mean. Take now for example. Either oil is too expensive or gold too cheap. And not by a small margin. We are talking 50% relative value change in 12 last months. Now, is it a fluctuation by chance, a long-term trend, or temporary disequilibrium? This is where the big disagreements start.

[jtabeb]

Re: 60% Of Today's Oil Price Pure Speculation

I would not say 100%. If you look at the oil:gold ratio in a scale of a couple of years, there is a lot of fluctuation and occasional swings away from the mean. Take now for example. Either oil is too expensive or gold too cheap. And not by a small margin. We are talking 50% relative value change in 12 last months. Now, is it a fluctuation by chance, a long-term trend, or temporary disequilibrium? This is where the big disagreements start.

I hope it is that gold is too cheap because I have a lot of gold and not alot of oil!

[GRG55]

Re: 60% Of Today's Oil Price Pure Speculation

I accept your statement that "Today we are again seeing stock builds." (where does one track that just out of curiosity?) I surmise that stocks are building because demand is slackening. Further that future prices are lower because it is anticipated that future demand will also slacken, or that the dollar will strengthen, or both? Is this the correct conclusion, or is it totally wrong?

The US Energy Information Agency has a good website with weekly updates of most information:
http://www.eia.doe.gov/

The International Energy Agency also has a website, but the Oil Market Report data is delayed two weeks for non-subscribers (or more for other types of data they collect).
http://omrpublic.iea.org/

Jim: Nobody can really answer your last question because we can't tell what the "correct" conclusion is until we can look back, in the fullness of time, and see what actually happened. That's the point I keep trying to make with Lukester and others, who seem so absolutely certain they know how the future of oil and other resources will unfold. I have my own opinions, but they are just opinions and no more right, wrong or correct than anyone else; even those with whom I may disagree.

I am in complete agreement with you that expectations of slackening demand and a firmer US Dollar are the most likely reasons for the current shape of the futures curve...which should be promoting inventory liquidation.

My educated guess is that the current inventory builds, in the face of increasing cost to hold stocks, are partially normal seasonal builds due to temporary refinery maintenance outages, lack of markets for the increasing volumes of heavier, sour crudes being developed/produced (mostly by OPEC), and fear of possible unpredictable future disruption of the supply of higher-yield light, sweet crudes. But that's just a guess.

[Jim Nickerson]

Re: 60% Of Today's Oil Price Pure Speculation

The US Energy Information Agency has a good website with weekly updates of most information:
http://www.eia.doe.gov/

The International Energy Agency also has a website, but the Oil Market Report data is delayed two weeks for non-subscribers (or more for other types of data they collect).
http://omrpublic.iea.org/

Jim: Nobody can really answer your last question because we can't tell what the "correct" conclusion is until we can look back, in the fullness of time, and see what actually happened. That's the point I keep trying to make with Lukester and others, who seem so absolutely certain they know how the future of oil and other resources will unfold. I have my own opinions, but they are just opinions and no more right, wrong or correct than anyone else; even those with whom I may disagree.

I am in complete agreement with you that expectations of slackening demand and a firmer US Dollar are the most likely reasons for the current shape of the futures curve...which should be promoting inventory liquidation.

My educated guess is that the current inventory builds, in the face of increasing cost to hold stocks, are partially normal seasonal builds due to temporary refinery maintenance outages, lack of markets for the increasing volumes of heavier, sour crudes being developed/produced (mostly by OPEC), and fear of possible unpredictable future disruption of the supply of higher-yield light, sweet crudes. But that's just a guess.

Thank you, GRG. That first link is a helluva good site.