Do we have an oil bubble?

[bart]

Re: We have an oil bubble : the proof

Should I understand that all has been so extensively explored that Fred has already calculated a mean price for oil?

Don't you know how to calculate a mean yourself?

[bart]

Re: We have an oil bubble : the proof

To say there is a gold bubble is to say that oil producers are the political and military leaders of the world. This is an absurd notion.

Indeed, but I expect to see much more absurdity about oil and hard assets and gold over the next few years, no matter what happens to their prices... sign (and *sigh*) of the times.

All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.
-- Arthur Schopenhauer (1788-1860)


Perhaps there should be a new award, in the great tradition of the Laugh In(?) "Fickle Finger of Fate" award? ;)

[Supercilious]

Re: We have an oil bubble : the proof

Don't you know how to calculate a mean yourself?

No, unfortunately I don't. I know how to use a spreadsheet function i can write even my own PDE numerical solver code, but I have serious difficulties in understanding some basic concepts such as mean price or a risk neutral option pricing based on a Black–Scholes model .... nobody is perfect

I'm not saying that I'm a Black Swan worshiper and a follower of the Prophet Nassim Taleb .. but still ...

Anyway Bart, I hope that after reading the The Coal Question one can get more insight into the intricacies of the Peak Cheap Oil Theory that is officially endorsed by iTulip

[phirang]

Re: We have an oil bubble : the proof

No, unfortunately I don't. I know how to use a spreadsheet function i can write even my own PDE numerical solver code, but I have serious difficulties in understanding some basic concepts such as mean price or a risk neutral option pricing based on a Black–Scholes model .... nobody is perfect

I'm not saying that I'm a Black Swan worshiper and a follower of the Prophet Nassim Taleb .. but still ...

Anyway Bart, I hope that after reading the The Coal Question one can get more insight into the intricacies of the Peak Cheap Oil Theory that is officially endorsed by iTulip

I have a friend who works for Aramco. He knows what's going on. There's PLENTY of spare oil capacity, but it's SOUR and HEAVY.

The real issue is the economics of refining, which frankly suck, especially in a price-controlled, centrally controlled economy(cough ahem ahem). If we had sufficient coking capacity to use the sludge sitting in those iranian supertankers, then Matt Simmions would be out of a job until the next "crisis".

[Supercilious]

Re: We have an oil bubble : the proof

I have a friend who works for Aramco. He knows what's going on. There's PLENTY of spare oil capacity, but it's SOUR and HEAVY.

The real issue is the economics of refining, which frankly suck, especially in a price-controlled, centrally controlled economy(cough ahem ahem). If we had sufficient coking capacity to use the sludge sitting in those iranian supertankers, then Matt Simmions would be out of a job until the next "crisis".

Phirang I'm skeptical about that explanation for the following reasons:
1) If you look at OPEC's June 2008 Monthly Report at Graph 1




You see the same story for OPEC basket of crudes. That would indicate a general shortage of oil (including heavy grades). Suddenly what Martin Mayer said about banks, in the mid 2007, using treasuries as an investment in commodities (oil) futures makes a lot of sense...

2)The increasing in average API and sulfur content is not a new story . It didn't start in 2006-2007:



Do you have any data or charts suggesting that since 2006 or 2007 there is a sudden change in the average sulfur content of specific gravity of the oil supply?

3) If the problem was the lack of capacity in refining heavy sour crude, that means that all refiners capable of processing heavy sour crude would make a killing and their refining margins would go through the sky. If you look in the same OPEC Report you will see that is not the case .... Even the refining margins for WTI went down from about $25 in may 2007 to about $7 in may 2008.

4) If there was a real shortage of oil ( of any kind of oil) how one could explain the increase in distillate and gasoline inventories?

5) The decrease in light crude price form $147 (a month ago) to $117 can be explained by a flood of light sweet crude dumped on the market by who?

[Supercilious]

Re: We have an oil bubble : the proof

A new development... The ETN-like instruments for virtual commodities doesn't need anymore and anchorage into paper commodities (futures contracts on a futures exchange).... Virtual commodities traded on parallel, unregulated futures exchange platforms can bring great returns without having any connection with the physical commodity

Am I the only one who smells a huge Enron here ?

http://www.metalprices.com/metalNews...svc=ODJ&type=1

The New Chemistry Of Speculation-WSJ

DJ WSJ(8/1) The New Chemistry Of Speculation

(From THE WALL STREET JOURNAL)
By Ianthe Jeanne Dugan

As Washington attempts to crack down on speculation in food, fuel and metals,
Wall Street is rolling out new ways to bring in money.

In May, Credit Suisse Group and Deutsche Bank AG began offering investments
in iron ore, a component of steel. About one billion tons of iron ore is mined
a year but isn't traded on a futures exchange. So it has been virtually
impossible for speculators to bet on price movements.

The investment banks were inundated with interest in iron-ore deals, which
function like futures contracts. In just two months, investors and hedgers took
on more than $500 million of notional exposure -- about 2.7 million metric tons
-- making this one of the biggest commodities markets to spring up almost
overnight.

The new markets show how hard it will be for legislators to curb commodities
speculation. Such trading is spreading to an array of other goods, from jet
fuel to chicken, that have been off-limits to investors because they aren't
traded on futures markets. They also are offered for commodities already bought
and sold on global exchanges, including crude oil, corn and coffee.

Through Goldman Sachs Group Inc., clients can invest in palm oil and other
biofuel components. Deutsche Bank is trading ruthenium, an obscure metal used
in fountain pens. Along with other firms, Deutsche is expanding into rhodium,
used in catalytic converters.

Deals are being teed up in lithium and "rare earth" metals, including
components of electric and hybrid cars. One Credit Suisse list reads like a
science textbook: alumina, cobalt, molybdenum, ferrochrome and vanadium.

"The model is virtually limitless," said Kamal Naqvi, a 36-year-old,
London-based Credit Suisse executive who helped create the new platform after
joining the bank last year. In July alone, Credit Suisse was asked to put
together similar contracts by producers of wood chips, chicken and potash
fertilizer.

Some lawmakers have been alarmed by the surge in investments by big
institutions such as pension funds and university endowments, which allocate
money to commodities tied to indexes that track futures exchanges. Big
institutions have about $260 billion invested in commodities, up from $13
billion five years ago, hedge-fund manager Michael Masters told Congress
earlier this summer.

These "index speculators," he testified, were driving up prices of oil and
other natural resources. Several senators agreed, responding with bills that
would limit what investors can channel into commodities they don't intend to
own.

Many economists and investors balk at the bills, attributing high commodities
prices to demand from emerging economies and production squeezes. Often, they
hold out iron ore as evidence: Even though it wasn't traded on a futures
exchange, its price surged in the last year. The price Chinese steelmakers pay
to Australian mines, for example, has nearly doubled.

"It is not that the flow of money has no impact," said Mr. Naqvi, the Credit
Suisse executive. "But this flow . . . is a distant second to the impact of
market expectations on physical supply and demand fundamentals."

If passed, the legislation could complicate contracts linked to exchanges.
The bills, investors and bankers said, are inadvertently helping nurture these
nascent, over-the-counter markets. That worries some critics.

In June, Mr. Masters urged Congress to investigate the iron-ore contracts and
similar deals, claiming they could help investors buy natural resources, sit on
them until their price rises and then sell them. "This is Wall Street
innovation run amok," he said in an interview.

"He misunderstood our product," said Mr. Naqvi. "There is no requirement to
take physical delivery at any point, so there is no encouragement to physically
hoard."

Credit Suisse's contracts are offered by a London unit that is an alliance
with Glencore International AG, a Swiss commodities company. The alliance has
about 75 people in London, New York, Hong Kong, Switzerland and Sydney.

Though clients can obtain physical assets through Glencore, Credit Suisse
isn't directly involved in any physical transactions, other than its
precious-metals business in Zurich. The alliance helps Credit Suisse collect
information about commodities and pass it onto clients in exchange for more
trading business.

These instruments have implications for the way money flows into commodities.
Historically, if someone sought to profit from iron ore, they could buy shares
in a producer or a mine, but not the underlying assets.

"Iron ore is probably the largest commodity market in the world that hasn't
had financial trading around it," said Raymond Key, the global head of metals
trading for Deutsche Bank in London.

Under the contracts, known as "cash-settled swaps," the client -- a hedge
fund, pension fund or steelmaker -- agrees to pay a fixed price for iron ore in
the future. Now, it stands at about $180 per metric ton. The bank lines up a
seller that wants to lock in a price.

Credit Suisse's minimum transaction is 5,000 metric tons. No physical
delivery is taken. Instead, every month, there is a net payment in cash of the
difference between the set price and a floating price pegged to an index of the
spot price that steelmakers pay for iron ore that is delivered immediately.

Among iron-ore suppliers working on the deals with Credit Suisse is mining
company BHP Billiton Ltd. "We support any mechanism that leads to more
transparency in the market," a BHP spokeswoman said in an email.

[c1ue]

Re: We have an oil bubble : the proof

I especially like this line:

"He misunderstood our product," said Mr. Naqvi. "There is no requirement to take physical delivery at any point, so there is no encouragement to physically hoard."

Hmm, so there really IS no link between delivery and ownership.

This is exactly like the Florida land binders which propelled the 1927 land crash there.

The parallels to 10% margin trading (1929) and ARM/Option ARM mortgages (2005) are also apparent.

Why would this matter? Because the speculative money concentrated in a few hands can exert a much larger imprint on the overall market than otherwise possible.

One of the 'between the lines' things I learned from 'Reminisces of a Stock Market Operator' was how being a big player could itself be used to create profits... at least until your bluff was called.

[metalman]

Re: We have an oil bubble : the proof

I especially like this line:



Hmm, so there really IS no link between delivery and ownership.

This is exactly like the Florida land binders which propelled the 1927 land crash there.

The parallels to 10% margin trading (1929) and ARM/Option ARM mortgages (2005) are also apparent.

Why would this matter? Because the speculative money concentrated in a few hands can exert a much larger imprint on the overall market than otherwise possible.

One of the 'between the lines' things I learned from 'Reminisces of a Stock Market Operator' was how being a big player could itself be used to create profits... at least until your bluff was called.

ok so NOW we have the tool that %*&$ says makes an oil bubble. oops, too late! bubble's over. :p

[Supercilious]

Re: We have an oil bubble : the proof

ok so NOW we have the tool that %*&$ says makes an oil bubble. oops, too late! bubble's over. :p

Is it over?

[metalman]

Re: We have an oil bubble : the proof

Is it over?

Is what over?

[Guest]

Re: We have an oil bubble : the proof

Is what over? Why, jawboning the oil price down, of course.

JAW_BONE_VERY_OLD.jpg

[Supercilious]

Re: We have an oil bubble : the proof

Is what over? Why, jawboning the oil price down, of course.

Not necessarily ... I expect to see at least a couple of well formed bull traps ... you know just for unloading long position and passing them to suckers

[c1ue]

Re: We have an oil bubble : the proof

It is funny - Mayer in his iTulip interview by EJ clearly stated that the financials were using Treasuries received in exchange for worthless MBS crap to pump up the commodities.

Yet somehow this artificial stimulus and its recent reversal is being ignored as the proximate reason for the present gold/oil price rise, then drop.

I do still believe that the future must hold continued dollar depreciation -> inflation, but this recent action would seem to vindicate that the rapid oil price increases were indeed due in part to speculative action.

For all the Lukester Rove-like polarization tactics, the original point of this thread was that speculation via the ETNs could easily have been a factor in the recent oil price spikes.

Whether the price was a bubble, was a secondary discussion.

At this juncture the conclusions regarding ETNs as the culprit is still unclear - unless there are clear money flows out - but the possibility of the then oil price spike being at least partly due to speculation would seem to have significant credibility, if not proof.

[Supercilious]

Re: We have an oil bubble : the proof

It is funny - Mayer in his iTulip interview by EJ clearly stated that the financials were using Treasuries received in exchange for worthless MBS crap to pump up the commodities.

Yet somehow this artificial stimulus and its recent reversal is being ignored as the proximate reason for the present gold/oil price rise, then drop.

I do still believe that the future must hold continued dollar depreciation -> inflation, but this recent action would seem to vindicate that the rapid oil price increases were indeed due in part to speculative action.

For all the Lukester Rove-like polarization tactics, the original point of this thread was that speculation via the ETNs could easily have been a factor in the recent oil price spikes.

Whether the price was a bubble, was a secondary discussion.

At this juncture the conclusions regarding ETNs as the culprit is still unclear - unless there are clear money flows out - but the possibility of the then oil price spike being at least partly due to speculation would seem to have significant credibility, if not proof.

I believe you are absolutely correct. But let's not forget the official line:

1. Oil and commodities are not a bubble. They will rise, with occasional corrections as other currencies are depreciated in kind, until the US regains its position as a net creditor with a positive trade balance and energy independence. That day is a long way off, and the process of re-adjustment will be extended and arduous.

Of course, one could say housing is not in a bubble and what we see now is just a long due correction ...(you know.... the Carl Steidtmann argument )

IMHO the recycling of treasuries into commodities hedged investment instruments (ETN -like paper) had an inflationary effect. The abandoning of commodities as an investment will have, obviously, a deflationary effect that could mislead us into believing that the decrease in oil prices is due to a soaring dollar

Metalman (believing in the no-bubble theory) said the conflict in Ossetia won't help with the oil prices. He was right again .... it didn't ... the price is $112 today and, I guess, by next week or so it will fall bellow $100.

http://online.barrons.com/article/SB...lenews_barrons

Just a month ago, crude hit a record $147 a barrel, and bulls said it was headed toward $175 or $200. With oil dropping $5 a barrel Friday to $115, leaving the market down about 20% from its peak, the talk now is about the possibility of crude cracking $100.
Oil may hold above $100 a barrel because of still-strong crude demand in non-Western countries and the difficulty of developing significant new crude supplies. But it does appear that crude has peaked.
[...]
Some of the factors that helped produce the spike in oil, particularly speculative demand, have eased with non-commercial investors (a proxy for speculators) now showing roughly flat positions at the New York Mercantile Exchange, which is the main oil trading market. Earlier this year, speculators had big long positions in crude.

[c1ue]

Re: Do we have an oil bubble?

$#*,

There are significant differences between bubbles and speculative market manipulation.

Bubble prices, once burst, will not return for a generation or more.

Tokyo real estate in 1990, Florida real estate in 1927, Internet stocks in 2001, and the dollar volume of residential real estate transactions in 2006 will likely all fall into the above category.

Speculative market manipulation, on the other hand, may accelerate or hold down price action, but ultimately is not a once in a generation occurrence.

Despite all of Lukester's bombast, he has yet to categorically demonstrate that the prime driver of oil/gold is supply limitation as opposed to dollar devaluation or some other factor. Thus even should oil demand drop worldwide - but the US is forced to devalue its currency by 50% in order to keep up debt interest payments, the price of oil could still easily surpass its previous mark. The good news is that with regards to gold, the ultimate effect for a holder of PMs may not matter, but the bad news is that a similar or better performance could be obtained just by getting out of the dollar.

For while the PM holder sits on his stash of metal or ETF certificates, interest rates in many part of the world along with dollar depreciation yield daily income. More importantly for all the weakness the USD has undergone, it is still significantly overvalued. To be able to buy income producing property with an overvalued currency, well, I like that.

We're in a goldilocks period where the pain from reduced consumer spending has not yet significantly impacted corporate earnings (not as it will to come), but simultaneously the recognition that the US is in a world of economic hurt is still under debate.

The summer real estate season is clearly turning out to be a bust, however, and once September rolls around and the REALLY ugly off-season numbers come in, we'll start seeing some significant dollar devaluation as the bank earnings pain parade continues in earnest.