Do we have an oil bubble?

[Supercilious]

Re: We have an oil bubble : the proof

I have a slightly different view. At the time it went down Enron, for all practical purposes didn't have any link between their trade book and the physical market in some of their trade divisions. Like pretty well all the trading companies of that era it started with a need to hedge around the physical transactions. That evolved into the creation of a speculative trading book - but still around the physical assets. But over time, as the need to keep driving profit growth at the rates the market demanded, the size of the trade book and leverage work their usual magic. By the end Enron traders were often being smoked by their counterparts at other companies [on the other side of the trade] simply because they were seemingly totally divorced from what was happening in the physical market.

I know. I used to work for one of their competitors. That is not an indictment of Enron's raw trading talent by the way.

That is very interesting GRG55. I thought that the physical and virtual energy were decoupled just before the fall of Enron.

Anyway Gustav was just a Cat 3 and no major damage was inflicted on the Gulf platforms ... as a result the oil price is now down to $108/bbl

[metalman]

Re: We have an oil bubble : the proof

That is very interesting GRG55. I thought that the physical and virtual energy were decoupled just before the fall of Enron.

Anyway Gustav was just a Cat 3 and no major damage was inflicted on the Gulf platforms ... as a result the oil price is now down to $108/bbl

my take of this analysis... the dollar ratchet price of oil trades between 80 and 100 for a while...

[GRG55]

Re: We have an oil bubble : the proof

That is very interesting GRG55. I thought that the physical and virtual energy were decoupled just before the fall of Enron.

Anyway Gustav was just a Cat 3 and no major damage was inflicted on the Gulf platforms ... as a result the oil price is now down to $108/bbl

If you wish to believe that short term events such as Gustav, internet day traders, momentum hedge funds, and quants, are truly relevant to the petroleum market, be my guest.

A short while back Finster and I were bantering back and forth about how $100 oil would now be seen as "cheap".


I've been long oil since the first quarter of 1999, added more during the 2001 recession pull-back, added through the "deflation" scare early this decade, and will selectively add [with a natural gas bias] through this one as well. I have been doing with energy, much the same as EJ (and a few others here) did with gold. Buy it, hold it as long as the fundamentals remain intact. I sleep better knowing the world needs energy a hell a lot more than it needs US$. ;)

[Supercilious]

Re: We have an oil bubble : the proof

my take of this analysis... the dollar ratchet price of oil trades between 80 and 100 for a while...

Can you roughly define "for a while"?

I'm not sure I can understand completely the "dollar ratchet" concept, because I suspect there is a more complex interaction between oil and dollar.

If commodities are used as a medium to recycle treasuries, I believe there is a monetary leveraging wake that comes into play.

Let's say for example that a bank recycles $4 bil worth of treasuries in leveraged oil short positions and $6 bil worth of treasuries in leveraged longs. The bank basically receives $10 bil hard cash and has to hedge just the differential ($6bil long - $4 bil short= $2bil long) in oil futures (paper oil).

In order to hedge the $2bil differential, the bank has to put as little as $20 mil in oil futures.

Let's do some simple math again:

$20 mil in hard cash is required to heddge $2bil of paper oil (futures), that in turn is required to hedge $10 bil of OTC virtual oil, which the bank sells to commodities investors, receiving in exchange $10 bil of hard cash in treasuries.

If $20 mil are withdrawn from futures (the investors get cold feet) then such a small amount can result in the disappearance from the monetary circuit of at least $10 bil (more if that money is used, not to cover holes from the subprime debacle, but to increase the bank's reserves). Therefore decrease of open interest/volume in futures market can have quite a strong deflationary effect, blowing to pieces the simple correlation between oil and dollar.

The nice part is that the same paper-virtual leveraging effect can take place, to some extent, on the downward slope of the oil price.

If the bank recycles $10 bil out of which $6 bil are in short positions and $4 bil are in longs (most of its investors bet on a decrease in oil prices), it has to put only $20 mil in short positions (for hedging $2 bil in short futures). If that takes place, I wouldn't be surprised to see the dollar and oil mysteriously falling together.

Of course on the downslope of the oil price that scheme cannot last for long, because we would get to the sureal scenario in which the oil price (paper oil) will keep falling, while there would be a shortage of physical oil.

I know very little about precious metals and I usually don't like to talk about things I don't know and understand well, but seeing what happens right now with gold, with a real shortage of physical gold while the paper gold price is going down, I keep wondering if gold is not one step ahead of oil in this insane leverage game.

[raja]

Re: We have an oil bubble : the proof

If you wish to believe that short term events such as Gustav, internet day traders, momentum hedge funds, and quants, are truly relevant to the petroleum market, be my guest.

I agree about the short term events . . . and that energy will be more needed than dollars.

But what makes me hesitate to buy energy now is my concern that a US recession . . . or perhaps a global depression, will reduce energy consumption, and prices will fall. This won't be a short term event, but could last years :eek:

[metalman]

Re: We have an oil bubble : the proof

Can you roughly define "for a while"?

about a year.

[Guest]

Re: Do we have an oil bubble?

Maybe 6 months?

[Supercilious]

Re: Do we have an oil bubble?

Originally Posted by $#*
Can you roughly define "for a while"?

about a year.

Maybe 6 months?

Hmmm. My hunch is about 1-2 years if nothing unexpected happens (stuff like wars, collapse of a few BRIC states, successful application of nuclear fusion etc.)

For time being I believe we will see a major deleveraging phase as investors begin to withdraw from commodities. Today we have seen the first official withdrawal step. I think the AP reporter has read stuff from iTulip ... oil, gold , cocoa , pork bellies

http://ap.google.com/article/ALeqM5h...LH-zQD92VFNIO2

Commodities bubble burns big investment funds

By STEVENSON JACOBS – 2 hours ago
NEW YORK (AP) — The deflating commodities bubble is claiming its first casualties as large investment funds absorb staggering losses from bad bets that prices for oil, precious metals and grains would keep going up.
Hedge fund operator Ospraie Management LLC notified investors Tuesday that it's closing its flagship fund after it suffered losses in August on positions in energy, mining and other natural resource-related stocks that left the fund down nearly 40 percent year-to-date. It's believed to be the first hedge fund to go bust in this latest commodities boom as prices come crashing down after a historic bull-run earlier this year.
And the bloodletting may have only begun. Wall Street analysts say similar trouble looms for other funds that got caught up in the exuberance of the boom but were too late in getting out.
They say Ospraie's misfortunes illustrate one of the hard lessons emerging from the commodities bubble: Many money managers have never been through a commodities boom and so were ill-prepared for the hyper-volatility associated with hard assets.
"You're always going to have victims when a market comes down this fast. People stayed at the party for too long," said Phil Flynn, energy analyst at Alaron Trading Corp. in Chicago.
As commodities prices soared into the stratosphere in the first half of the year, hedge funds and other big institutional investors plowed money not only into oil, gold, copper and corn, but also into more obscure assets like cocoa, lead and pork bellies.
That, analysts say, helped drive a wedge between commodities' trading price and their real price as reflected by actual supply and demand — foreshadowing the violent correction of recent weeks. Since July 1, crude oil prices has fallen 22 percent, gold 15 percent and corn prices 9 percent.
[...]

For funds like Ospraie that invested heavily in commodities-related stocks, the whiplash of the market's reversal was stunning.
By early August, Ospraie's flagship fund had $2.8 billion invested, but it had a negative return of 26.72 percent after commodities and related equities fell into a six-week tailspin "characterized by some of the sharpest declines in these sectors in the past 20 years," the fund's founder, Dwight W. Anderson, said in a letter to investors that was obtained by The Associated Press.
The losses left the fund down 38.59 percent so far in 2008.
"As the fund's performance deteriorated, we made the decision — despite continued confidence in the fund's positions — to reduce risk and de-lever the portfolio significantly due to concern of incurring even greater potential loses," Anderson told investors.
The fund, of which embattled investment bank Lehman Brothers Holdings Inc. owns a 20 percent stake, was closed after the losses exceeded a threshold which would have allowed investors to pull out money without restriction,
[...]
Spokesmen for both Ospraie and Lehman declined to comment.
[...]
Peter Holst, managing director at Delta Global Advisors in Huntington Beach, Calif., expressed surprise at the rapid demise of the highly regarded fund but said it serves as a cautionary tale about the too high, too fast commodities cycle.
"It's disturbing to see the smartest guys in the room losing so much money in commodities," Holst said. "The problem is when your holdings are in a momentum sector, your stocks aren't based on fundamentals, so you need to be one of the first ones out, not the last."
[...]
More bad news could be ahead for other hedge funds. Jon Nadler, analyst with Kitco Bullion Dealers Montreal, said large investors have been dumping positions in commodities since Ospraie's failure, suggesting other funds could be in trouble.
"One ... has to extrapolate that this failure is not going to be a 'one-off' event," Nadler said in a note. "Not when considering the tens of billions that have been thrown at the commodities sector over the past several years."

This may be another nail in Lehman's coffin...;)

[bart]

Re: Do we have an oil bubble?

For what its worth:

[GRG55]

Re: Do we have an oil bubble?

Hmmm. My hunch is about 1-2 years if nothing unexpected happens (stuff like wars, collapse of a few BRIC states, successful application of nuclear fusion etc.)

For time being I believe we will see a major deleveraging phase as investors begin to withdraw from commodities. Today we have seen the first official withdrawal step. I think the AP reporter has read stuff from iTulip ... oil, gold , cocoa , pork bellies

http://ap.google.com/article/ALeqM5h...LH-zQD92VFNIO2


This may be another nail in Lehman's coffin...;)

The last two days looked more like the capitulation/forced liquidation that usually comes near the end of major moves, not a "first official step".

On the other hand...

You may be right
I may be crazy
But it just may be a lunatic you're looking for
Turn out the light
Don't try to save me
You may be wrong for all I know
But you may be right...
--Billy Joel-- "You May Be Right" from Glass Houses; 1980

[phirang]

Re: Do we have an oil bubble?

The last two days looked more like the capitulation/forced liquidation that usually comes near the end of major moves, not a "first official step".

On the other hand...

You may be right
I may be crazy
But it just may be a lunatic you're looking for
Turn out the light
Don't try to save me
You may be wrong for all I know
But you may be right...
--Billy Joel-- "You May Be Right" from Glass Houses; 1980

The best indicators are what are companies with high-hurdle rates and cautious management doing:

Exxon is building a refiner in China.

That's all I need to know.

[Guest]

Re: Do we have an oil bubble?

Sorry to have to remind you GRG55, but this quote really dates you. 1980 eh? Was that in your salad (fresh out of college) daze, when you were running about in a Ford Pinto by any chance? Or did you never actually stoop to driving a Ford Pinto? [ That tune echoes through my head, from running about in NY in 1980. That was back when the upper west side north of Lincoln Center was considered a "badland" and you could rent pre-war apartments on 86th street for $400 a month. ]

You may be right
I may be crazy
But it just may be a lunatic you're looking for
Turn out the light
Don't try to save me
You may be wrong for all I know
But you may be right...

--Billy Joel-- "You May Be Right" from Glass Houses; 1980

[Guest]

Re: Do we have an oil bubble?

Bart - That looks like a horrifyingly precipitous drop there, at the end of the pink line. Must have been an absolute stunner when they were living through it, back in 2008. :eek:

[bart]

Re: Do we have an oil bubble?

Bart - That looks like a horrifyingly precipitous drop there, at the end of the pink line. Must have been an absolute stunner when they were living through it, back in 2008. :eek:

Ummm... aaah... well...

http://www.nowandfutures.com/grins/alive.wav ;)

[GRG55]

Re: Do we have an oil bubble?

Sorry to have to remind you GRG55, but this quote really dates you. 1980 eh? Was that in your salad (fresh out of college) daze, when you were running about in a Ford Pinto by any chance? Or did you never actually stoop to driving a Ford Pinto? [ That tune echoes through my head, from running about in NY in 1980. That was back when the upper west side north of Lincoln Center was considered a "badland" and you could rent pre-war apartments on 86th street for $400 a month. ]

Yep, not long out of engineering school. No Pinto, just a well used, highly modified, somewhat rusted Datsun (my college weekend gymkhana racer) and an old Ford pickup.

And it just occurred to me that was about the time of the secular top of the last great commodity boom...:eek:...as Darth Volcker began to cast his rather long shadow across the land.