Do we have an oil bubble?

[GRG55]

Re: We have an oil bubble : the proof

It looks to me that beside the military card, the US is also playing an agriculture card. Elevated world grain prices are due to not only the falling dollar, but also ethanol and other food subsidies in the US, right? It strikes me that this seemingly insane policy of subsidies must also be entwined with the dwindling resource game, i.e. the US can feed itself and a good bit of the rest of the world, whereas the middle eastern countries can not, so the message is that they better be careful or the US will let them starve. Am I reading this right? I have never seen anything here on itulip directly about food prices and how they are part of the worldwide economic and political picture, and how this relates to potentialities in the future. This does seem like a big part of the picture though. Anyone here know how to properly put this in place?

Do you have any idea how dependent on petroleum the US corporate agribusiness [food growing, processing and distribution] system really is? It's far more than just diesel for the family John Deere. And where is the oil? Do you really think the US will [can?] play the starvation card with the Arabs? :p

[Jay]

Re: We have an oil bubble : the proof

Do you have any idea how dependent on petroleum the US corporate agribusiness [food growing, processing and distribution] system really is? It's far more than just diesel for the family John Deere. And where is the oil? Do you really think the US will [can?] play the starvation card with the Arabs? :p

I have thought of this; obviously we need pesticides and fertilizer to maintain the crop yields in place and these are based on oil. But this is why it is so fascinating to me. How does THAT fact relate to reality? Do the oil producers have the US by the balls both ways? Or does the US have an out beside the military card? I.e., can the US produce more crops than most of the rest of the world no matter what oil prices do? Or will high oil prices kill US agriculture too? Are US agriculture subsidies a part of an international political play by people more educated and in the know than me, or is it just stupid American politicians doing the wrong thing to placate voters? Really a fundamental and interesting question, no?

[c1ue]

Re: We have an oil bubble : the proof

Don't get tunnel vision regarding the oil producing nations and the US.

The entire ethanol/high food price/high oil/low dollar play is much more aimed at Asia than it is at the oil producing nations.

After all, between the US and oil producing nations - the game is not necessarily zero sum.

It is because the zero sum occurs with the whole world together.

Europe and Japan have largely insulated themselves via reduced demand for oil.

Africa has no money and not much manufacturing - much as it has for this century.

South America - at least Brazil - has also insulated themselves via deliberate policy.

China, India, and the rest of ex-Japan Asia are vulnerable with their large populations and high spending on food as a percentage of total spending, and more importantly with the large amount of dollars and manufacturing capacity accumulated.

[Supercilious]

Re: We have an oil bubble : the proof

I hope that the big tulipee wigs patrolling this thread are done with the newbee bashing frenzy, so I've decided to shout once again:
"The Nymexeror has no clothes!!!!"


Even the eggheads have decided there is an oil bubble.
http://www.physorg.com/news134646313.html

Are We in the Peak of an Oil Bubble?

By Lisa Zyga, Physics / Physics


Since 2003, worldwide oil prices have quadrupled. According to a new study, the price of oil is rising at a faster-than-exponential rate, and cannot be sustained. In other words, we’re in the midst of an oil bubble, say researchers Didier Sornette and Ryan Woodard of ETH Zurich in Switzerland and Wei-Xing Zhou of the East China University of Science and Technology in Shanghai, China.

By analyzing oil prices over the past four years, the researchers have demonstrated more support for the hypothesis that the recent oil price run-up has less to do with supply-demand interplay and more to do with speculation.
[...]
A comparison of supply and demand showed that, most recently, supply has been exceeding demand by more than a half million barrels per day. Meanwhile, the price continues to increase. Since it appears that the supply-demand balance has only a small effect on the price of oil, the researchers suggest that a major effect lies elsewhere. They point out several reasons why speculation, fed on rumors of rising oil scarcity, may be the positive feedback causing high oil prices.

As one motivating factor, investors could be searching for a new high-return investment following the collapse of three recent economic bubbles in the US (communication technology, which peaked in 2000, real-estate in 2006, and sub-prime mortgage lending in 2007). Also, speculation may have increased due to the deregulation of oil futures in the US in early 2006, corresponding to the fluctuations that occurred shortly after that time. Investors may also be concerned about a weakening US dollar, which may encourage protective hedging against future oil price increases.

At the time when got to the physorg page the link to this article was wedged in between:

Surprisingly rapid changes in the Earth's core discovered

and

Vaginal microbicides may prevent more infections in men than women

If these guys can figure out how fast the Earth's core is changing and what is happening to tiny microbes hiding in dark and not easy to access places, finding scientific evidence for an oil bubble should be a trivial task. :p

[FRED]

Re: We have an oil bubble : the proof

I hope that the big tulipee wigs patrolling this thread are done with the newbee bashing frenzy, so I've decided to shout once again:
"The Nymexeror has no clothes!!!!"

Even the eggheads have decided there is an oil bubble.
http://www.physorg.com/news134646313.html

At the time when got to the physorg page the link to this article was wedged in between:

Surprisingly rapid changes in the Earth's core discovered

and

Vaginal microbicides may prevent more infections in men than women

If these guys can figure out how fast the Earth's core is changing and what is happening to tiny microbes hiding in dark and not easy to access places, finding scientific evidence for an oil bubble should be a trivial task. :p

We're not trying to bash the newbee, trying to educate him or her.

Didier Sornette and Ryan Woodard of ETH Zurich in Switzerland and Wei-Xing Zhou of the East China University of Science and Technology in Shanghai, China may be world class physicists but they are asset bubble rank amateurs. Give them ten years studying and living through them and they'll start to get the hang of it.

One statement in particular stands out as amateurish:

"Further, the models showed that the bubble is close to a local peak, and we may have even reached the peak already. On the other hand, the researchers noted, this critical peak may also be embedded in a larger-scale bubble, one that could develop in the coming months and years."

So has the "oil bubble" peaked or not? iTulip called the tech stock peak in March 2000 and the housing bubble peak in June 2005. Their lack of certainty tells us they don't know what they're talking about.

Many experts have called a top in the rapid rise of the price of oil since 2004, calling the oil price rise a "bubble" at $40, at $70, at $100, at $120, at $140.

They didn't know what they were talking about then and they don't know now.

Yes, oil prices are rising rapidly. Who is getting rich off of it? Your neighbors? The show shine boy? Where's the breathless coverage of the latest oil industry IPO in CNBC? Where is the "get rich quick in oil" enthusiasm?

Expensive oil is bad, bad, bad. It means lower real incomes, rising inflation, and money flowing out of financial assets into hard assets: bad for Wall Street.

Is fund money pouring into oil and other commodities for refuge from inflation? Yes. Is this accelerating oil price increases? Yes. Does that make it a bubble? No. The factors driving bubbles are explained in the Harper's article. The factors driving oil prices are:

- Supply/demand
- Uncertainty about reserves and depletion fears
- Geopolitics
- War
- Government subsidies
- Dollar depreciation
- Speculation
- Inflation hedging

These are not bubble inputs. Bubble inputs are:

- New discovery or re-discovery that cannot be priced because it is without precedent (e.g., South Sea land, Railroads, Internet companies)
- Initial success that creates a market for new waves of investors (e.g., Netscape IPO 1995)
- Self-reinforcing system of profits creating new money that is plowed back into the market (e.g., tech stock IPOs -> VC -> new startups)
- Random event (Revelation of fraud, tight monetary conditions limit liquidity)

See What will Pop the Internet Bubble? Nov. 1999

Buffett calls the waves of investors the three "I"s: the Innovators, the Imitators, and the Idiots. None of this applies to oil.

To call oil a bubble is not merely to grossly over-simplify the dynamics that are driving oil prices, it is flat out wrong.

As we explained before, all asset bubbles are mean reverting and there is no mean oil price for it to revert to. Anyone who believes that oil is a bubble should have sold at $40 when observers first called it one; they haven't changed their reasoning. Either that, or they should go back to the drawing board and try to figure out what is really going on.

[GRG55]

Re: We have an oil bubble : the proof

I hope that the big tulipee wigs patrolling this thread are done with the newbee bashing frenzy, so I've decided to shout once again:
"The Nymexeror has no clothes!!!!"


Even the eggheads have decided there is an oil bubble.
http://www.physorg.com/news134646313.html



At the time when got to the physorg page the link to this article was wedged in between:

Surprisingly rapid changes in the Earth's core discovered

and

Vaginal microbicides may prevent more infections in men than women

If these guys can figure out how fast the Earth's core is changing and what is happening to tiny microbes hiding in dark and not easy to access places, finding scientific evidence for an oil bubble should be a trivial task. :p

Sorry you feel there's newbee bashing going on here. Certainly not the intent or character of this site from my experience.

In the tech/t-com and the more recent real estate bubbles it was speculation that drove the blow-off phase.

Despite what you have been reading in the press and elsewhere, the critical marker that indicates outsize speculation in the commodity markets is missing for oil...a futures curve firmly in contango. There is a very strong case to be made that there was much more speculation in oil as it rose from $40 to $100 than there is now. If you go back and look at the price action for oil in 2006 you'll see it fell quite a long ways [the chart technicians, of which I am not one, tell me it broke a bunch of important levels on the way down]. There was no shortage of people lining up in to declare: 1) oil had been in a massive bubble, and 2) the bubble had popped for good, and we were all going to live happily ever after. They were wrong on both counts.

When your friends, neighbours, coworkers and family start chattering to you about all the money they made "flipping" oil at a weekend party, then you'll know there's an oil bubble. ;)

[c1ue]

Re: We have an oil bubble : the proof

I personally believe there is absolutely a speculative component in oil, but I fully agree the main factor is dollar depreciation.

Looking back at the '70s, it can be argued that the mechanism for the 'oil shock' then is similar to what we are feeling now: '70s the US exited the Bretton Woods agreement which had effectively placed a fixed dollar value for gold. This meant trade deficits in the US could be made good by redeeming US dollars for physical gold.

This in turn meant the Arab nations had a fixed purchasing power value for the dollar denominated oil being sold.

When the US was forced to exit BW due to chronic Great Society and Vietnam war deficits, the oil producing nations saw a precipitous fall in their purchasing power income. Is it so unsurprising that the price of oil suddenly shot up in dollar terms?

The parallel to today is replacing BW with central bank dollar sterilization.

Once again, as Federal spending - including Iraq but also buttressed by massive consumer spending - leads to huge deficits, the US government policy of dollar devaluation again led to massive purchasing power income losses in the oil producing nations.

Again, is it so surprising that the price of oil is going up?

Of course, this parallel is not perfect nor does it capture all of the factors such as the secular increase in BRIC oil use, but it does give a good idea on the macro factors which can intrude.

[GRG55]

Re: We have an oil bubble : the proof

I personally believe there is absolutely a speculative component in oil, but I fully agree the main factor is dollar depreciation.

Looking back at the '70s, it can be argued that the mechanism for the 'oil shock' then is similar to what we are feeling now: '70s the US exited the Bretton Woods agreement which had effectively placed a fixed dollar value for gold. This meant trade deficits in the US could be made good by redeeming US dollars for physical gold.

This in turn meant the Arab nations had a fixed purchasing power value for the dollar denominated oil being sold.

When the US was forced to exit BW due to chronic Great Society and Vietnam war deficits, the oil producing nations saw a precipitous fall in their purchasing power income. Is it so unsurprising that the price of oil suddenly shot up in dollar terms?

The parallel to today is replacing BW with central bank dollar sterilization.

Once again, as Federal spending - including Iraq but also buttressed by massive consumer spending - leads to huge deficits, the US government policy of dollar devaluation again led to massive purchasing power income losses in the oil producing nations.

Again, is it so surprising that the price of oil is going up?

Of course, this parallel is not perfect nor does it capture all of the factors such as the secular increase in BRIC oil use, but it does give a good idea on the macro factors which can intrude.

No argument C1ue. There is always speculator involvement in the commodity markets, including oil. Without speculators the markets don't work [some like Dennis Gartman have being saying that the recent oil price volatility is due to an illiquid market because of a lack of speculators, apparently burned trying to short this market and now standing aside]

What I find interesting today is that many are expecting a crash in commodities due to a rapidly slowing US economy. My recollection of the 1970's is one of US recessions interspersed with periods of slow growth, and relatively high unemployment. Through all that commodities, including gold, performed quite well. And back then there was no China, India, UAE, Russia, etc trying to rapidly develop their own economies and sitting on enormous capital reserves to lubricate that process through the rough patches.

[phirang]

Re: We have an oil bubble : the proof

No argument C1ue. There is always speculator involvement in the commodity markets, including oil. Without speculators the markets don't work [some like Dennis Gartman have being saying that the recent oil price volatility is due to an illiquid market because of a lack of speculators, apparently burned trying to short this market and now standing aside]

What I find interesting today is that many are expecting a crash in commodities due to a rapidly slowing US economy. My recollection of the 1970's is one of US recessions interspersed with periods of slow growth, and relatively high unemployment. Through all that commodities, including gold, performed quite well. And back then there was no China, India, UAE, Russia, etc trying to rapidly develop their own economies and sitting on enormous capital reserves to lubricate that process through the rough patches.

People forecasting a crash in commodities need to travel outside of the G8 and europe.

[metalman]

Re: We have an oil bubble : the proof

No argument C1ue. There is always speculator involvement in the commodity markets, including oil. Without speculators the markets don't work [some like Dennis Gartman have being saying that the recent oil price volatility is due to an illiquid market because of a lack of speculators, apparently burned trying to short this market and now standing aside]

What I find interesting today is that many are expecting a crash in commodities due to a rapidly slowing US economy. My recollection of the 1970's is one of US recessions interspersed with periods of slow growth, and relatively high unemployment. Through all that commodities, including gold, performed quite well. And back then there was no China, India, UAE, Russia, etc trying to rapidly develop their own economies and sitting on enormous capital reserves to lubricate that process through the rough patches.

good point. everyone's heads are still stuck in post fire econ era recessions when a flood of fresh foreign investment boosted the dollar and usa economy. that game's over. the fire econ is on it's way out. we're reverting to pre-fire econ conditions except persistent until we lower energy intensity.

[Supercilious]

Re: We have an oil bubble : the proof

We're not trying to bash the newbee, trying to educate him or her.

Sorry I've mistaken the "talk to the hand" argument as newbee bashing. I apologize for assumption.

Didier Sornette and Ryan Woodard of ETH Zurich in Switzerland and Wei-Xing Zhou of the East China University of Science and Technology in Shanghai, China may be world class physicists but they are asset bubble rank amateurs. Give them ten years studying and living through them and they'll start to get the hang of it.

I completely agree with that. But here is my problem:

Is fund money pouring into oil and other commodities for refuge from inflation? Yes. Is this accelerating oil price increases? Yes. Does that make it a bubble? No.

In a previous post (in beteween two newbee spanking sessions) metalman said something very important:

the mortgage paper was the whole point of the housing bubble. the housing prices were the means to the end. the cdos made the mortgages possible.

I completely agree with metalman here. My point is to try to have a second look at the mechanism that attracted such an increase in funds investment in oil futures.

What if the same people who thought that buying "safe and profitable" CDO's was a great investment idea (creating conditions for a housing bubble) are buying now shares in comodities funds as a perceived "safe and profitable" and the oil prices, as metalman says, are just the means to the end?

The fact that oil futures can be used to get rid of bad smelling swaps by transforming them in T-bonds and other good paper from SWF's and central banks of fast developing EM's, shouldn't be an other argument for having a second look at the bubble issue?


OK, now I'm ready to talk to the hand!:p

[metalman]

Re: We have an oil bubble : the proof

Sorry I've mistaken the "talk to the hand" argument as newbee bashing. I apologize for assumption.

I completely agree with that. But here is my problem:

In a previous post (in beteween two newbee spanking sessions) metalman said something very important:

I completely agree with metalman here. My point is to try to have a second look at the mechanism that attracted such an increase in funds investment in oil futures.

What if the same people who thought that buying "safe and profitable" CDO's was a great investment idea (creating conditions for a housing bubble) are buying now shares in comodities funds as a perceived "safe and profitable" and the oil prices, as metalman says, are just the means to the end?

The fact that oil futures can be used to get rid of bad smelling swaps by transforming them in T-bonds and other good paper from SWF's and central banks of fast developing EM's, shouldn't be an other argument for having a second look at the bubble issue?

OK, now I'm ready to talk to the hand!:p

can't take credit for that observation... that insight's from an itulip article many years old. fact is, there is no security that wall street has invented using commodities as backing and is selling to pension fund managers in germany. oil is real and scarce, dot coms and houses are not, and the dollars used to buy oil most certainly are not. and that's the key problem.

if you'd been around here for the whole show, you'd have seen itulip call the nasdaq a bubble when 99% said it wasn't, the housing bubble when 99% said it wasn't. now every dimwit financial reporter looks at every increase in price of anything and yells "bubble! see i'm wicked smart now! now i can see bubbles, too!"

here's the kind of pedestrian slop you can read anywhere...

Pop goes the gold bubble, March 2008

gold dropped from $1070 to $920 when the article came out. gold today? $921

so much for the popped "gold bubble"

wasn't the first erroneous bubble call. same deal in 2006. ej responded with... What Gold Bubble?

no matter what asshat analysis you read in the msm, repeat after me: a price rise is not a bubble. a price rise is not a bubble. a price rise is not a bubble. a price rise is not a bubble. a price rise is not a bubble. a price rise is not a bubble. a price rise is not a bubble. a price rise is not a bubble. a price rise is not a bubble.

a price rise CAN be a bubble. but many conditions have to apply that do not apply to oil.

we don't go to physics web sites to challenged their understanding of quantum physics and they don't come to itulip to challenge our understanding of asset bubbles

[Supercilious]

Re: We have an oil bubble : the proof

fact is, there is no security that wall street has invented using commodities as backing and is selling to pension fund managers in germany.

Why cannot be commodities ETN's considered as the CDO's of the oil bubble

They even have the tax incentives equivalents of the previous bubble attached directly to the paper.

http://money.cnn.com/2007/11/25/news...ion=2007112608

Like exchange-traded funds, exchange-traded notes (which we'll call ETNs) are traded on stock exchanges, unlike open-end mutual funds, whose shares are issued and redeemed by fund companies. But ETNs have a big advantage over their fund sibs: a nifty tax shelter, at least for now, because of a tax opinion issued to Barclays by the prestigious Sullivan & Cromwell law firm.
The opinion held that Barclays ETNs (other than those linked to foreign-currency exchange rates) don't generate taxable income to investors. That's because ETNs are "prepaid forward contracts" in which the issuer agrees to pay holders an amount based on specific criteria rather than offering them an interest in a pool of assets, which is what mutual funds and ETFs do.
An ETN's income - such as dividends generated by the Barclays Indian stock market index issue or Merrill Lynch's high-yielding "Dogs of the Dow" - gets added to the price of the security rather than being paid in cash. So holders don't pay tax on that income until they sell or redeem their ETN. And if holders are careful, they'll pay only at the tax-favored long-term-gains rate.
"Under current law the holder of a non-debt financial instrument does not include income in advance of receipts," explains David Hariton, a Sullivan & Cromwell tax partner. Hariton cautions (as do Barclays'offering statements) that this is his firm's opinion about ETNs; it's not settled law.
Right now this barely matters to tax collectors because there are only a bit more than $4 billion of ETNs in existence - impressive for a complex product less than two years old, but a rounding error compared with the $12 trillion of open-end mutual funds or even the $550 billion of exchange-traded funds.
But if ETNs retain their tax advantage, you can bet that the likes of Vanguard and Fidelity will turn them into mass products with minimal trading costs and lower annual fees than Barclays' typical 0.4 to 0.9 of 1%. I can see ETNs replicating bond and money market funds, or even individual high-dividend stocks.

[c1ue]

Re: We have an oil bubble : the proof

What I find interesting today is that many are expecting a crash in commodities due to a rapidly slowing US economy. My recollection of the 1970's is one of US recessions interspersed with periods of slow growth, and relatively high unemployment. Through all that commodities, including gold, performed quite well. And back then there was no China, India, UAE, Russia, etc trying to rapidly develop their own economies and sitting on enormous capital reserves to lubricate that process through the rough patches.

Several things to keep in mind why today is not exactly like the '70s:

1) While the US was running large deficits, the US did not have monstrous debt. In the 70s this nation was a creditor nation, not a debtor nation.

Why does this matter? Because interest rates shot up to ridiculous levels culminating in the Volcker era. As a creditor nation, this hurts but doesn't murder the economy.

As a debtor nation furthermore dependent on foreign imports, plus with a huge current account deficit, a jump to Volcker era interest rates would be disastrous.

2) In the 70s, the US was a net exporter nation. Today, the flows are reversed. Similar to Japan since their bubble burst in the early 90s - a net exporter nation can endure massive government debts since taxes on proceeds from exported goods can be used to pay for external debts. Or put another way, the home government's currency purchasing power losses can be offset by taxes on export profits in export payment currencies.

If, on the other hand, you owe lots of money and furthermore must spender stronger currencies to buy your daily survival - normally a feedback loop arises where your debt (denominated in stronger foreign currency) rises, which in turn worsens your trade deficit as internal interest rates rise, which in turn hurts your currency, which in turn increases the purchasing power necessary to repay (or pay interest) on said debt.

The only reason this has not occurred in the US yet is because most of our debt is denominated in dollars - benefit of being the fiat currency home.

Of course rather than accept this mulligan, the US as a nation has decided to double down. So all the pain being saved up thus far, plus the negative spiral outlined above, could all potentially hit at once.

Make no mistake, this country is playing with matches in a highly flammable environment.

[Supercilious]

Re: We have an oil bubble : the proof

Originally Posted by someone else not $#*
What I find interesting today is that many are expecting a crash in commodities due to a rapidly slowing US economy. My recollection of the 1970's is one of US recessions interspersed with periods of slow growth, and relatively high unemployment. Through all that commodities, including gold, performed quite well. And back then there was no China, India, UAE, Russia, etc trying to rapidly develop their own economies and sitting on enormous capital reserves to lubricate that process through the rough patches.

c1lue when did say that?