Do we have an oil bubble?

[metalman]

Re: We have an oil bubble : the proof

In California's case we learned EXACTLY how, AFTER the fact.

I suspect that we, in our present situation, will also learn exactly how, AFTER the fact.

many smart folks explained the enron racket while it went on. who listened while the money flowed? no money in not believing, eh?

global enron? who is running it? explaining it?

[Supercilious]

Re: We have an oil bubble : the proof

100% correct. now how do you run that racket globally?

I was trying to suggest a mechanism in the first post of this thread, but honestly I have no clear idea how can something like this can be done (or if it can be done at all)

Let's say that in 2006 many banks got stuck with a mounds of worthless paper. Due to low margin requirements and the birth of the Swap loophole they began to buy futures with swaps.

Such an increased investment in futures may trigger a hike in spot price (although initially, I suspect it was just natural increase of the oil price). The futures, probably, were packed in ETNs (like mortgages in CDOs) and sold to central banks with large reserves, SWF's etc etc money was recycled and bad debt paper laundered.

with $7 mil of stinky swaps a bank could buy $100 mil worth of futures. If in 6 months the price of oil increased 10% that's like 140% return.

As long as the contracts can be cash settled, the futures position is well structured and there is a an increasing flow of investment in "paper oil" from other players there is little chance to stumble into a real hedger that wants to settle in physical oil (actually the probability of stumbling into a real hedger can be calculated with pretty good accuracy).

But let's say that bad luck strikes. A pesky refiner really wants delivery of a $10 million strip of physical oil. One can buy that oil from the spot market and even take a small loss let's say $2 mil. But in the grand scheme, by laundering $7mil of worthless paper in order to buy $100 mil worth of futures, with a 10% increase in oil price over six months, still brings $8 mil net profit.

I wouldn't be surprised if all started as a simple attempt to get rid of some of the toxic debt paper leftovers form the subprime meltdown and later the process got a life of its own.

I don't know .... I can't imagine anything else about how such a global racket may work. Maybe somebody else has a better idea.

[moonshot]

Re: We have an oil bubble : the proof

Such an increased investment in futures may trigger a hike in spot price (although initially, I suspect it was just natural increase of the oil price). The futures, probably, were packed in ETNs (like mortgages in CDOs) and sold to central banks with large reserves, SWF's etc etc money was recycled and bad debt paper laundered.

1. No speculators seem to be hoarding physical oil, or at least there isn't any widespread recognition this is happening. Any evidence that storage levels have increased?
2. If anyone is hoarding, it's the oil producers (by keeping the oil in the ground), but all the suspicion seems to be targeted at speculators, as opposed to producers or consumers of oil.
3. If you agree that no one is hoarding, then the spot price can rise only because the consumers of oil (refineries, etc.) are willing to pay that price.
4. These oil consumers can pay only up until the point the margins on their downstream products (gasoline, diesel, chemicals) approaches zero. If they cannot raise prices to consumers of these end products, then there is a cap on the spot price of oil.

As GRG55 pointed out earlier in this thread, if there is speculation in the futures, then we should see very strong contango.

[GRG55]

Re: We have an oil bubble : the proof

I was trying to suggest a mechanism in the first post of this thread, but honestly I have no clear idea how can something like this can be done (or if it can be done at all)

Let's say that in 2006 many banks got stuck with a mounds of worthless paper. Due to low margin requirements and the birth of the Swap loophole they began to buy futures with swaps.

Such an increased investment in futures may trigger a hike in spot price (although initially, I suspect it was just natural increase of the oil price). The futures, probably, were packed in ETNs (like mortgages in CDOs) and sold to central banks with large reserves, SWF's etc etc money was recycled and bad debt paper laundered.

with $7 mil of stinky swaps a bank could buy $100 mil worth of futures. If in 6 months the price of oil increased 10% that's like 140% return.

As long as the contracts can be cash settled, the futures position is well structured and there is a an increasing flow of investment in "paper oil" from other players there is little chance to stumble into a real hedger that wants to settle in physical oil (actually the probability of stumbling into a real hedger can be calculated with pretty good accuracy).

But let's say that bad luck strikes. A pesky refiner really wants delivery of a $10 million strip of physical oil. One can buy that oil from the spot market and even take a small loss let's say $2 mil. But in the grand scheme, by laundering $7mil of worthless paper in order to buy $100 mil worth of futures, with a 10% increase in oil price over six months, still brings $8 mil net profit.

I wouldn't be surprised if all started as a simple attempt to get rid of some of the toxic debt paper leftovers form the subprime meltdown and later the process got a life of its own.

I don't know .... I can't imagine anything else about how such a global racket may work. Maybe somebody else has a better idea.

I think you'll find that the ETNs are really a retail investor product. They make it easier for small investors who do not have futures trading accounts to gain exposure to commodities themselves, instead of buying the producers (buy the metal instead of the miner).

There is a lot of attention currently focussed on the effect of pension fund [and other similar funds such as endowments] investment in commodities driving up prices because of the huge amounts of money they control [e.g. Calpers, etc.] compared to the size of most traded commodity markets. Pension funds are unlikely to use ETNs as they are already tax sheltered, and they are more likely to be buying a commodity index weighting of the forward month contract and just rolling them over, with continuous reweighting. That would be much less expensive for a large investor than incurring the fee layer, and the intermediary party risk, created by using ETNs.

If the US Congress and regulators are successful in restricting pension funds and endowments from participating in commodity markets it may provide some temporary relief to commodity prices as these investors are forced to sell down, or out, but remember someone is on the other side of that trade and the Fed has not given any indication its about to cut back on the grossly inflationary policies it is following to salvage what's left of the US financial system.

The other effect of this type of action will be to restrict the already ailing US pension system from what has been the best performing asset class this decade, to the detriment of the working class citizens who expect to support themselves with those pensions.

EDIT added: ETNs and CDOs may share one thing in common. ETNs would appear to be backed by nothing more than the balance sheet strength of the issuing financial institution. That would suggest that, in the event of further meltdown in the global financial system, some ETNs could vapourise just like the CDOs are doing now. Just a thought...

[jtabeb]

Re: We have an oil bubble : the proof

OK, so once again, who's the Enron here? ICE? JPM? GS? The Fed? Hank's PPT? OPEC? Aramco? Nameless, faceless speculators? Pension funds, endowments and PIMCO buying commodity futures?

You seem to be trying to tell us that it's conclusive that we have a global gaming of the oil markets. Modelled after what a small group of Enron electricity traders did in California, no less.

Have you ever wondered if that was all Enron alone, then why did these Houston based traders restrict themselves to just California? Surely something that lucrative would have made it irresistable to game the electricity market in every state in the Union, by every energy trading company out there [all the big energy trading houses were concentrated in a few blocks around Enron in downtown Houston, so there were no secrets]. Traders are always looking for an angle they can scale up quickly. How could they have possibly missed that fat pitch?

As I have already pointed out, there is no apparent shortage of transport fuels. Nobody in the importing nations of North America or Europe is carrying a ration card, or has to line up to get a tank of gasoline or diesel. There is no shortage of crude oil either. The world is swimming in the bloody stuff now. The only problem is that too much of it is heavy and sour, and therefore some of that surplus, just like bar scotch in Utah, is going no-bid right now. Until there is demand destruction at a rate faster than the current depletion of light, sweet crude, OR enough new heavy oil refining capacity comes online worldwide, this squeeze is going to continue.

No, I'm not CONCLUSIVELY stating that it is this way. I'm saying there is a plausible alternative explanation (with a historical precident no less) that is worthy of contemplation, and that we would be remiss in our anylsis to not address it if we can not positively exclude that alternative. (our pocketbooks would not be happy).

[Supercilious]

Re: We have an oil bubble : the proof

I think you'll find that the ETNs are really a retail investor product. They make it easier for small investors who do not have futures trading accounts to gain exposure to commodities themselves, instead of buying the producers (buy the metal instead of the miner).

That is possible, but I'm not sure it is still true. I tried to find the total volume of oil ETNs sold on the market but couldn't get any hard numbers.

There is a lot of attention currently focussed on the effect of pension fund [and other similar funds such as endowments] investment in commodities driving up prices because of the huge amounts of money they control [e.g. Calpers, etc.] compared to the size of most traded commodity markets. Pension funds are unlikely to use ETNs as they are already tax sheltered, and they are more likely to be buying a commodity index weighting of the forward month contract and just rolling them over, with continuous reweighting. That would be much less expensive for a large investor than incurring the fee layer, and the intermediary party risk, created by using ETNs.

You are right pension funds should have no clear incentive to buy ETNs but SWFs, foreign banks, and even central banks of countries with large dollar reserves reserves do those incentives

If the US Congress and regulators are successful in restricting pension funds and endowments from participating in commodity markets it may provide some temporary relief to commodity prices as these investors are forced to sell down, or out, but remember someone is on the other side of that trade and the Fed has not given any indication its about to cut back on the grossly inflationary policies it is following to salvage what's left of the US financial system.

I think that everybody is scared of another meltdown and the question is how can the bubble be fizzeled . Look at the small incremental increase in margins at Nymex.

The other effect of this type of action will be to restrict the already ailing US pension system from what has been the best performing asset class this decade, to the detriment of the working class citizens who expect to support themselves with those pensions.

I think the pension fund exposure is pretty small compared to that of overseas investors, and I realy don't think that banks, big funds and other financial players are very concerned about what happens to the pworking class or average Joe's retirement plans.

EDIT added: ETNs and CDOs may share one thing in common. ETNs would appear to be backed by nothing more than the balance sheet strength of the issuing financial institution. That would suggest that, in the event of further meltdown in the global financial system, some ETNs could vapourise just like the CDOs are doing now. Just a thought...

And like in the case of CDOs it would be verry difficult to get a clear picture of the losses not only because a lot of buyers lack transparency and high level of schreding of inidividual future contracts, but also because the losses are dynamic (depend on future oil prices, levels of liquidity in banks etc etc like the CDOs losses are evolving depending on how many forclosures will occur, what the prices of individual homes will be, etc.)

[BlackVoid]

Re: We have an oil bubble : the proof

Thanks to Fred for posting the portion of that subscription article.

As for the oil price, you should analyze geology and geopolitics and not just financials. Oil is not a product, it is a resource.

Here is the reason for high oil prices:
http://bp3.blogger.com/_kdcZbozWthI/...h/JuneMay1.gif

EXPORTS ARE DROPPING SINCE 2005. There you go. :eek:

[FRED]

Re: We have an oil bubble : the proof

Thanks to Fred for posting the portion of that subscription article.

As for the oil price, you should analyze geology and geopolitics and not just financials. Oil is not a product, it is a resource.

Here is the reason for high oil prices:
http://bp3.blogger.com/_kdcZbozWthI/...h/JuneMay1.gif

EXPORTS ARE DROPPING SINCE 2005. There you go. :eek:

We do in:

Review of iTulip policy on Peak Oil: Evidence and Implications

$12 Gas, rationing, and the crybaby congress

Here are some of the charts from the appendix of the crybaby Congress piece.

The USA has 3.6 times the population of Germany but uses eight times more oil. Per capita energy
intensity with respect to oil must decline rapidly. High oil prices will drive investments to achieve it.



High Oil prices are contributing to the recession by reducing household cash flow
available for non-energy spending. Lack of access to credit due to the
aftermath of the mortgage credit bubble is also constraining spending.



No major oil discoveries globally since the 1960s.


Oil demand among developed OECD nations has been declining since 2004.


All oil demand growth since 2004 has occurred in non-OECD countries
where the price and thus the demand curve has been distorted by
subsidies by government, primarily oil producing countries, China and India.


Oil demand globally has increased 2% per year since crude prices
began to rise rapidly in 2004. Prices did not decline during the
2000 to 2002 recession but demand did decline.


The US dollar has declined as oil prices increased; a large
part of the price rise since 2004 is due to dollar depreciation.


There used to be millions of barrels of oil in Illinois. Mr. Obvious says: "Oil runs out."

[Supercilious]

Re: We have an oil bubble : the proof

Thanks to Fred for posting the portion of that subscription article.

As for the oil price, you should analyze geology and geopolitics and not just financials. Oil is not a product, it is a resource.

Here is the reason for high oil prices:
http://bp3.blogger.com/_kdcZbozWthI/...h/JuneMay1.gif

EXPORTS ARE DROPPING SINCE 2005. There you go. :eek:

I would completely agree with that argument of higher prices due to high demand and low supplies if:
-gasoline inventories were vanishing ( Has anybody heard of any gas lines recently or refineries shut-downs because of lack of crude ?)
-the crack spreads were not so low (which btw are discouraging refiners to keep large oil inventories)
-there were no signs of demand limitations on production:
http://www.sbpost.ie/post/pages/p/st...716-qqqx=1.asp

Horgan said that Iran had 50 million barrels of crude in tankers in the Persian Gulf that it had been unable to sell, because it is of a heavy grade that is more difficult - and less profitable - to refine. Saudi Arabia has also been sending ‘ghost tankers’ of oil - shipments that have yet to find a buyer - to the main markets.

IMHO all these point to a lower demand of physical oil due to its high price which is determined by a high demand of "paper oil"

But you have a good point. Let's go back and examine the original issues pointed by Fred:

Oil is not a financial asset backed by a security sold by Wall Street
That is true oil is not but ETNs are.

Lack of artificial scarcity created via inflation
This arguments can go both ways.

Unlike dot coms and houses, oil is the most essential commodity in a developed economy and is without substitutes
This argument has been offered also before previous major corrections in oil price, plus let's not forget about food, another essential commodity with a long history of bubbles.

Oil price appreciation is not a self-reinforcing price appreciation process, but rather is self-limiting (leads to falling demand)
That is true but the future prices appreciation of paper oil can be a can be one especially with all the bad news from every umpttenth Nigerian attack or Iranian tantrum, declining stocks, banks collapsing and uncertainty of the future of the dollar.

No new source of credit has been created to finance oil purchases (No oil CDOs)
ETN's have all the characteristics of oil CDO's, for example, and I wouldn't be surprised to find out there are other derivatives based on commodities index funds etc.

No government deregulation (No change in government regulatory environment fueled the oil bubble; policy has been a constant)
Enron loophole in 2000 and Swaps loophole in 2006

No new tax incentives (No new tax laws lowering capital gains taxes on oil investing ala 1986 tax relief act)
Sullivan & Cromwell loophole offers pretty good tax incentives IMHO (Thanks to Fred for pointing this one out, because I found out about ETN's while looking for tax incentives)

Lack of enforcement of securities law or other market regulations (No instances of market regulators looking the other way while laws are broken)
Enron+Swaps loopholes combined made CFTC regulatory powers a joke. Plus let's not forget about the "dark pools":
http://www.cbsnews.com/stories/2008/...n4188620.shtml

No bubble psychology (No "I'm going to get rich in oil" psychology. Every year since 2004 it's "The oil bubble will burst soon.")
Repeated predictions of spectacular increases in oil prices for various reasons, "Get rich in oil" reality shows and the hundreds of online trading companies that allow small "day traders" to bet in oil futures (just make a Google search for yourseves) look like pretty good pointers for a "I'm going to get rich in oil" psychology.

I want to be clear that just pointing that the arguments against an oil bubble (attacked as a secondary development to a financial bubble) does not constitute a proof that there is an oil bubble in progress.

IMHO a conclusive proof for an oil bubble could be provided only by finding solid evidence of a huge increase in sales of ETNs and ETN-alike paper by the same actors which can take advantange of the Enron and Swaps loopholes. If such evidence is found things should be prety clear....;)

So far I wasn't able to dig out any precise numbers... I 'll keep on digging ...

(By the way I've just found an interesting article

http://www.hussmanfunds.com/wmc/wmc080707.htm

[metalman]

Re: We have an oil bubble : the proof

what is the mean price of oil?

[Supercilious]

Re: We have an oil bubble : the proof

1. No speculators seem to be hoarding physical oil, or at least there isn't any widespread recognition this is happening. Any evidence that storage levels have increased?

Sorry moonshot for not replying earlier but I skipped your message somehow. Yes you are right, there are no signs of hoarding anywhere. If there is some increase in inventories (China building strategic reserves, Iranian tankers full and idle in the Gulf, Saudi ghost tankers sent on the oceans without oil buyers etc) that increase is too small to justify a $130+ price. But the mystery of low oil inventories int the context of an artificial high price of oil is not so complicated.

In order to explain it I'll start with an old story. During the Enron energy price terror I had a friend working in aluminum production. As everybody knows aluminum is actually the solid phase of kilowatts. Hearing about the hike in energy price I asked him how are they doing. His answer was baffling: "Oh we are doing great, we have succeeded to shut down half of the production capacity and I'm trying to find a way to cut back the production to one third".

Why were they doing so great and shutting down? Very simple: they were well hedged with long term energy contracts at reasonable prices. With the high prices of energy during the Enron scam, they were making more money from selling their energy share then from making and selling aluminum.

The funny part is that about a week later I read an article with the title:
"Aluminum production declining amid high energy prices"
in which a very 'competent' analyst was giving a completely different explanation which was perfectly aligned with the Enron catastrophic fairy tales.

The same may happen with refineries now. They make more money by selling their contracts than from refining the oil. They keep their inventories as low as possible (in order to avoid storage fees), process just enough oil to have a getting-by crackspread and laugh all the way to the bank selling their good hedges on the paper market. The guys who buy their contracts probably cash settle and take a small loss.

This is why saudis, kuwetis, iranians and others say that there is no shortage of oil and this is why nobody wants to touch heavy/high sulphur oil.

Actually the saudis are doing now a very smart move and if they'll act in force, not only they will prick the bubble, but they may make a fortune. They are trying to decouple the price of physical oil from that of paper oil by going around Nymex and ICE making direct bilateral contracts with real hedgers who want to buy physical oil. If successful they'll be loaded.

About contango the story is similar. As long as the investment in "paper oil" keeps increasing there will be no or very little contango until the very last moment before the bust.

Now going back to the subject of "paper oil" I found an old but good article:

http://seekingalpha.com/article/3036...-etfs-and-etns

But in another article in Forbes there is a surreal piece of information:
http://www.forbes.com/finance/2008/0...apbox_inl.html

The ETNs issued by Deutsche Bank use a simple mechanism to assure close tracking of the index. They pledge to redeem ETN shares at the calculated market value, thus preventing indexing drift. The bank doesn't actually have to buy the underlying futures, but instead "acts as if it had." The guarantee of the bond and the guarantee that it reflects the futures are backed by Deutsche Bank.

So if my reading is correct, DB takes your money, parks your money in government bonds and if:
-the price of that commodity increases they get some profit from fees and interest
-there is a bubble bust you get stuck with completely worthless paper and they get to keep the bonds... and all this is legal

Also if they don't "actually buy futures" but "act as if they had" CFTC or any commodity regulatory body have absolutely no control. They have created a virtual parallel futures market... Hmmm, to me it smells pretty bad....;)

Right now I'm very frustrated because I cannot find any data about how much money is in the publicly traded ETNs and in the ETNs-like paper traded in private between the big boys. Does anybody has any idea who can I find some data on this subject ?

[BlackVoid]

Re: We have an oil bubble : the proof

"I would completely agree with that argument of higher prices due to high demand and low supplies if:
-gasoline inventories were vanishing ( Has anybody heard of any gas lines recently or refineries shut-downs because of lack of crude ?)"

Not in the USA. NOT YET. Try Nepal, Pakistan, etc.

You are making the mistake of watching the US only. But even in the USA, look at crude inventories:
http://tonto.eia.doe.gov/oog/info/twip/twip.asp
OECD inventories show a similar trend.

Gasoline in the USA: imports are high, because other countries use mainly diesel. This keeps the price down too. Due to the recession, US demand is falling. So gasoline is not the issue now. Diesel and crude are the issues. In a free market there will be no shortages, higher prices will bring demand in line with supply. It is happening, without high prices you would have shortages already. If the politicians limit oil trading, you will have shortages soon.

[c1ue]

Re: We have an oil bubble : the proof

Why were they doing so great and shutting down? Very simple: they were well hedged with long term energy contracts at reasonable prices. With the high prices of energy during the Enron scam, they were making more money from selling their energy share then from making and selling aluminum.

This is an interesting observation.

One item that caught my eye about the Great Depression was that the surge in margin debt demand was such that there were many instances of companies slowing or stopping their normal operations in order to divert cash into making money lending margin.

Your comment about the oil producers potentially locking in their profits via direct sales of future production would seem to be a possible variation on this theme - that derivative sales of product exceed (or at least are unmatched) by delivery capability.

Oil is in this respect a good vehicle; as it is a high volume good which consists of an ongoing stream - there is much less risk of being left holding the commodity bag.

On the other hand, derivative contracts have counterparty risk.

If the oil producers are writing the contracts, there is always the danger of not being paid.

If the oil producers are buying the contracts, there is the equal danger of failure of delivery.

All in all it would seem the oil producers should be the ones selling the contracts (i.e. taking the money up front), and betting that their inherent delivery capability will limit paper losses. In this context the sector rotation into commodities helps by increasing the derivative demand.

Note what is missing in all of this: actual supply and demand of physical product.

[Supercilious]

Re: We have an oil bubble : the proof

"I would completely agree with that argument of higher prices due to high demand and low supplies if:
-gasoline inventories were vanishing ( Has anybody heard of any gas lines recently or refineries shut-downs because of lack of crude ?)"

Not in the USA. NOT YET. Try Nepal, Pakistan, etc.

You are making the mistake of watching the US only. But even in the USA, look at crude inventories:
http://tonto.eia.doe.gov/oog/info/twip/twip.asp
OECD inventories show a similar trend.

I slightly disagree with you here. The long gas lines in the communist countries during the cold war, were not a sign of oil or gas shortages: they were a sign of shortage of government subsidies. In all these countries where there were gas lines the gas prices were decided by the government (fix prices) or heavily subsidized.

Not even china could afford the losses of Sinopec refineries.

In the countries with no price controls the refiners are choosing the optimum return path according to mechanism used by that aluminum producer during the Enron scam. No one can blame them for making a few extra bucks to improve their bottom line.

If we look at a chart of future and spot prices (I can't find one right now) the general view is that the future prices predict pretty accurately the oil price, but i the Enron-aluminum scenario takes place, one may say that the difference between spot and futures is simply the cost of doing business for an "paper oil" trader when he accidentally meets a commercial hedger (somebody who really needs delivery/shipment of "physical" oil). And that cost of doing business seems to be pretty acceptable.

This is an interesting observation.
[...]
Note what is missing in all of this: actual supply and demand of physical product.

c1lue I completely agree with you here at every point but one: I believe that commercial hedgers (refiners or producers) make just a small buck out of partial physical-paper transactions. Why would Aramco get into futures "paper oil" deals when the Gulf SWFs and private equity funds of the fraudi family are much better suited for "paper oil" deals?


Anyway, here is another installment of the follow the money odyssey :

I found a great article (it's worth reading the whole story IMHO) which provides a very interesting piece of information:
http://www.resourceinvestor.com/pebble.asp?relid=44233

For the gamblers with conviction out there, I am going to offer up the latest exchange trader's tools. These are not meant for buying-n-holding; rather, they are meant for making a calculated bet and exiting when you've reached your profit target or stop-loss.
1. PowerShares DB Crude Oil Double Long (DXO). This exchange-traded note backed by Deutsche bank gives investors exposure to 2x the monthly performance of the DB optimum yield crude oil index, plus the monthly T-Bill index return. The annual expense ratio is 0.75%.

Let's get some more information on this great investment opportunity looking in the most obvious places:

here: http://finance.google.com/finance?client=news&q=olo

or here: http://finance.google.com/finance?client=news&q=olo

or even here: http://dbfunds.db.com/notes/Oil/index.aspx

Trying to find how much money is actually piled into an ETN always provides a psychedelic experience. I'm not talking here about ETN-like paper traded through private dark pools to rich SWF's ... I'm talking about public traded peanuts (like the OLO) for the gullible small investor.

Another interesting conclusion can be derived if we look at the math required for an instrument able to offer 2x oil index + T bonds returns.;)

I would not say more for obvious reasons ... everybody can draw his (hers) own conclusions. This kind of financial math can make profits out of anything that has a guaranteed price increase in the future (oil being a perfect candidate due to Peak Cheap Oil and inflation).

This kind of financial math cannot fail as long as the volume of the betting subject is not completely overwhelmed by the volume of parallel virtual financial simulated resource.

Looking at these facts it is very probable that what some people call "commodity speculation" started before 2006 with banks trying desperately to increase returns in the context of the impending housing doom. When the volume increase in the virtual value resource became significant through the Swaps loophole (2006), the virtual demand for high yields began to drive the real price.

Please remember that many believe, the housing bubble bust happened when mortgage brokers ran out of Dumb Joes willing to take a NINA (no income, no assets) subprime loan.

It seem that even the oil producers can't take it anymore:
http://uk.reuters.com/article/UK_SMA...33766220080710

BP says oil may tumble if financial factors removed


SEOUL (Reuters) - Oil could face a "steep" fall if financial factors are removed from the current market, which gained around 40 percent this year, the chief economist at BP (BP.L: Quote, Profile, Research) said on Thursday.
Oil prices have more than doubled from a year ago, driven partly by geopolitical instability from Iran to Nigeria as well as expectations that global supplies will fail to keep pace with unrelenting demand growth in the years ahead.
Non-market fundamentals, including financial factors such as the easing of the U.S. dollar against other currencies, have prompted investors to use oil and other commodities as a hedge against the weaker greenback and inflation.
"If the financial investors move out of the market, then there could be a rapid fall, a steep fall in prices," Christof Ruehl told Reuters on the sidelines of the London-based company's 2008 Statistical Review of World Energy in Seoul. He declined to give an estimate on the fall.

[c1ue]

Re: We have an oil bubble : the proof

c1lue I completely agree with you here at every point but one: I believe that commercial hedgers (refiners or producers) make just a small buck out of partial physical-paper transactions. Why would Aramco get into futures "paper oil" deals when the Gulf SWFs and private equity funds of the fraudi family are much better suited for "paper oil" deals?

I can think of several reasons why SWFs and national oil companies don't play well together in this theme of derivative based market distortion:

1) NOCs are in the business of making money on oil. SWFs are in the business of preserving already made wealth. For an NOC - selling 10 future years of oil production is just a management tool, for an SWF it is a naked speculation - unless the SWF can force the NOC to commit future delivery.

2) NOCs and SWFs are generally not managed by the same groups of people

It would be amusing, though, to see an Enron-style collapse in the oil market due to a sudden price turnaround forcing an ETN sponsor bank to cough up $10B in cash or oil.