$300 oil, very soon?

[Guest]

Re: $300 oil, very soon?

Sounds like a challenge just tailor-made for "big government" to step up to the plate and "mandate the guidance".

bill, we all know you are correct that nuclear is the only large scale alternative at the moment.

But let's think through the possible ramifications of a carbon tax implementation. Let's assume that any such tax structure, regardless of the specifics, is motivated by a genuine desire by policy makers to discourage the use of high carbon fuels. That means that the tax has to ultimately be experienced in the retail price.



If people see their power and heating bills rising, might not this sequence happen:

1. People blame the utility company for the rising price [which suits the politicians just fine];
2. Ratepayers refuse to support the rate increases for installing new capacity including nuclear; after all who is going to support a utility that just keeps hiking your prices?
3. The desire to find a way to be independent of the utilities, already underway, accelerates further;
4. The prime beneficiaries are purveyors of microturbines, solar power systems, wood stoves, ground source heat pumps, energy conservation technologies, and so forth;
5. Nuclear continues to languish; after all who is going to support a utility that just keeps hiking your prices?

[jtabeb]

Re: $300 oil, very soon?

If people see their power and heating bills rising, might not this sequence happen:

1. People blame the utility company for the rising price [which suits the politicians just fine];
2. Ratepayers refuse to support the rate increases for installing new capacity including nuclear; after all who is going to support a utility that just keeps hiking your prices?
3. The desire to find a way to be independent of the utilities, already underway, accelerates further;
4. The prime beneficiaries are purveyors of microturbines, solar power systems, wood stoves, ground source heat pumps, energy conservation technologies, and so forth;
5. Nuclear continues to languish; after all who is going to support a utility that just keeps hiking your prices?

I'll take energy independence anyway I can get it. If this means on a personal baisis and using a distrubuted system vs a centralized system, well, then, "frankly my dear, I don't give a damn".

I agree that centralizaiton is easier and faster, but it is far less robust.

I personally think that a Stronger centralized power generation/distibution system AND distributed local production/consumption would be the best of the best, and I hope we end up trending in that direction.

[Basil]

Re: $300 oil, very soon?

Same answer as always...in the short run the oil price can go anywhere. ;)

But the gold/oil ratio is looking absurd, I continue to get reports of supply project cancellations from people I know all over the world, the capital squeeze is now manifesting itself in layoffs of skilled people in the oilsands, deepwater offshore, and unconventional onshore plays, North American natural gas is now trading below the full cycle cost of finding and developing new reserves in any North American basin [which means the companies producing it are liquidating themselves to keep enough cash coming in to avoid shutting off the lights, for now], and I could go on.

None of this is sustainable based on historical pattens. But maybe "it's different this time" and these gets corrected by:

• a collapse in the gold price?
• a permanent reduction in global oil demand?
• a collapse in natural gas services prices [much lower F&D]?
• bankrupcies in the domestic upstream industry?

I am just trying to keep my powder dry and watch.

GRG55,

What about the contango that some have spoken of recently? I do not know the industry well enough to know if the numbers being cited are correct, or if there are significant holes in the theory that a contango in oil is imminent. You seem to be one of the best people to ask about this. Here is one the articles linked recently in another thread: http://silveraxis.com/todayinsilver/...ntango-in-oil/

Any thoughts? What kinds of questions should someone ask when they see arguments like these for contango?

[GRG55]

Re: $300 oil, very soon?

I listen two days of committee members fire the same question to Geithner. His responds, we are in support of developing alternative/efficiency energy to create jobs developing low carbon industries saving the environment.
http://online.wsj.com/article/SB123607894012717911.html

http://www.c-span.org/Watch/watch.as...aId=HP-R-16000
http://www.c-spanarchives.org/librar...ts_id=284395-1
http://www.whitehouse.gov/omb/budget/
And
Mr Brown
23min
29min
low carbon recovery
http://www.c-span.org/Watch/watch.as...aId=HP-R-16011

That climate change is now a prime revenue raising opportunity for a government mired in deficits "for as far as the eye can see" should be no surprise to anyone. If anyone actually expects this to be "neutral" for that elusive construct popularly known as "The Average American", they are going to be disappointed, unfortunately.

I fear much good work will be promised, but the tyranny of the majority [voter] will demand a more expedient outcome heading into the next election cycle...

[jtabeb]

Re: $300 oil, very soon?

Sounds like a challenge just tailor-made for "big government" to step up to the plate and "mandate the guidance".

Pinch-poke-you-owe-me-coke

(Simultaneous Time stamp)

[GRG55]

Re: $300 oil, very soon?

GRG55,

What about the contango that some have spoken of recently? I do not know the industry well enough to know if the numbers being cited are correct, or if there are significant holes in the theory that a contango in oil is imminent. You seem to be one of the best people to ask about this. Here is one the articles linked recently in another thread: http://silveraxis.com/todayinsilver/...ntango-in-oil/

Any thoughts? What kinds of questions should someone ask when they see arguments like these for contango?

The "normal" situation for crude oil is a backwardated curve [future price lower than current price]. It costs money to store oil, and therefore oil for delivery in the future should be worth less than oil for delivery immediately. The curve goes into contango either because there is a market perception of near term glut, which pushes down the spot price, or the expectation there is going to be a future shortage, which pushes up the long-dated price.

Have a look at the series of posts by various iTulip members starting here; they will shed some light on some of the factors at play:

http://www.itulip.com/forums/showthr...70327#poststop

This is a great game for the traders and they are doing all they can to keep it going as long as they can...:p

[Guest]

Re: $300 oil, very soon?

Found a great post on this topic today from a guy I follow, Tom Szabo. Good for iTulipers to "pick apart" and topical to GRG's observations. Tom Szabo is a bit of a bloodhound - which is to say these speculations of his are often quite astute. Make sure the PM you are holding is a position size where you can handle some potentially brutal downside as well as upside from here. Got plenty of deployable cash? If not, raise some.

The "normal" situation for crude oil is a backwardated curve [future price lower than current price]. It costs money to store oil, and therefore oil for delivery in the future should be worth less than oil for delivery immediately. The curve goes into contango either because there is a market perception of near term glut, which pushes down the spot price, or the expectation there is going to be a future shortage, which pushes up the long-dated price.

Have a look at the series of posts by various iTulip members starting here; they will shed some light on some of the factors at play:

http://www.itulip.com/forums/showthr...70327#poststop

This is a great game for the traders and they are doing all they can to keep it going as long as they can...:p

___________________________

WATCH THE CONTANGO IN OIL!!

MARCH 4TH 2009

I just received a technical update on the oil market from our expert technician at Eidetic Research and the numbers are not looking good — a possible near-term collapse of the oil price under $30 with a probable range between $23.89 and $28.67. To see how this can happen, please read the article As recession saps demand, a world awash in oil. Pay particular attention to this at the end of the article:

Experts aren’t sure what will happen when all that oil finally comes ashore.

One fear is that with oil prices so low, companies will slash drilling and production, setting the world up for an energy crunch that would send prices soaring. The number of oil and gas rigs operating in the United States has fallen a staggering 39 percent since August.

Others say prices would plummet if companies forced millions of barrels onto the market at once.

“If everyone’s running for the exits at the same time, they’ll engineer a price collapse,” Flynn said.

Note that Mr. Flynn makes a mistake earlier in the article:

“It gets expensive to do this,” said Phil Flynn, an analyst at Alaron Trading Corp. “If you’re sitting on a bunch of oil and you’re stuck paying storage and insurance, and you can’t find a buyer, you may have to sell it at a discount just to get rid of it.”

Silveraxis readers already know that traders play the storage game going long spot oil and short futures so that they already have their profit locked in. As long as they can earn more in monthly contango than the monthly cost of storage, they will make essentially risk-free profits. There is, however, a small twist. The only way to close out the short futures position and actually get rid of the spot oil is to force delivery on the long futures counterparty. And this is where the risk for oil prices appears to lie. Such risk increases exponentially when contango starts to decrease below the cost of storage. From the article once again:

On the other hand, as storage units on land have filled up, the companies that own the tankers have profited. Tanker companies charge an average of $75,000 a day, three times as much as last summer, to hold crude, said Douglas Mavrinac, an analyst with Jefferies & Co.

In other words, storage is currently going for $1.10 per barrel per month! The math is: $75,000 x 30 days = $2.25 million / 2 million barrels per tanker = $1.125 per barrel per month.

With the above in mind, let’s take a look at contango in NYMEX crude. Closing prices for March 3:

April ‘09 (CLJ09)	41.65
May ‘09 (CLK09)	43.91
June ‘09 (CLM09)	45.03
July ‘09 (CLN09)	46.01
August ‘09 (CLQ09)	46.88
September ‘09 (CLU09)	47.71
October ‘09 (CLV09)	48.39
November ‘09 (CLX09)	49.01
December ‘09 (CLZ09)	49.63
January ‘10 (CLF10)	50.19
February ‘10 (CLG10)	50.74
March ‘10 (CLH10)	51.27

Do you see the problem here? Only the April to May contango is at least $1.10, from there it starts to shrink substantially. The contango for one year (April 2009 to March 2010) is under $10 yet it costs at least $13 to store oil for one year! The risk here is that the entire pricing structure may collapse during a capitulation in the oil market, sort of like a telescope. As contango collapses it is no longer profitable to store oil and many of the players will be forced to dump stored oil on the market whether there are buyers or not. Under such circumstances it is very possible that the technical target for crude in the $20s will be achieved.

Of greater concern for gold and silver investors and traders is the possible impact on metal prices. Even if you aren’t convinced that the dollar is headed for the 95 to 100 level on the dollar index (it just broke to new 3 year highs above 89.50), a drop in crude into the $20s is likely to create panic for commodity-themed investors who also happen to own quite a bit of gold and silver.

Many of you know that I am not fond of ratios such as the gold/silver ratio, the Dow/gold ratio, or the gold/oil ratio, but sometimes these “tools” are actually useful. One possibly valid use is to indicate extremes from which prices quickly revert. In the case of the gold/oil ratio, the upper extreme has historically been below 30. In other words, one ounce of gold can buy 30 barrels of crude oil at the price extreme. By contrast, as recently as last year, that ratio was under 7 at the other extreme. This doesn’t mean it cannot go above 30, only that it never has. Something never having happened does have a reasonable chance of never happening in the future and so we should be able to make a fair case that the gold/oil ratio should not go above 30 and is even less likely to stay above 30 should it be exceeded.

At an oil price of $25 in the mid-range of the technical analysis (which I hope to reprint in full for Metal Augmentor subscribers), a gold/oil ratio of 30 means that a gold price of $750 is at an extreme. Gold, however, is currently trading at $910, which means $25 oil would result in a gold/oil ratio of about 36. I believe reaching such a ratio is about as likely as the ratio staying around the recent peak at 25, which at $25 oil would mean a gold price of $625. Mind you, this would likely be a spike low and not a price that gold would find itself trading for long, but we are talking about a shakeout of such magnitude that we cannot rule out gold finding its final support near the long-term bull market uptrend currently around $580.

I see two main approaches to speculate on the possibility of these down moves in oil and gold. First is to buy put options in oil futures or any oil-related investments. More risky would be to short an oil ETF such as OIL or buy a short oil ETF such as the PowerShares DB Crude Oil Short ETN, symbol SZO. Going outright short risks the possibility that geopolitical events could overwhelm economic realities, driving oil and gold prices explosively higher. For this reason, I do not recommend outright shorts in either gold or oil. The second approach is one that I have been using since gold surmounted the $900 level at the end of January: buying put options in gold.

I have been discussing and updating for Metal Augmentor subscribers the specific options and strike prices to consider and will be expanding the list of possible strategies shortly.

If the scenario unfolds as I’ve outlined here, most investors should just try to hold on and ride out the turbulence, which could be very violent but relatively shortlived. I expect gold to consolidate near the $800 level once the fireworks are over.

In terms of timing, my gut tells me things will play out in weeks but could drag out as long as the end of May or into June. The overall odds remain low but will increase if the contango in oil shrinks from current levels. Thus, watch the contango in oil!!! If the one year contango in oil drops to $6 or so, the consequences are going to be unpleasant! In comparison, probably very little else will matter in the weeks ahead.

[jtabeb]

Re: $300 oil, very soon?

I think someone else already quoted this exact silver-axis article on this thread.

Found a great post on this topic today from a guy I follow, Tom Szabo. Good for iTulipers to "pick apart" and topical to GRG's observations. Tom Szabo is a bit of a bloodhound - which is to say these speculations of his are often quite astute. Make sure the PM you are holding is a position size where you can handle some potentially brutal downside as well as upside from here. Got plenty of deployable cash? If not, raise some.



___________________________

WATCH THE CONTANGO IN OIL!!

MARCH 4TH 2009

I just received a technical update on the oil market from our expert technician at Eidetic Research and the numbers are not looking good — a possible near-term collapse of the oil price under $30 with a probable range between $23.89 and $28.67. To see how this can happen, please read the article As recession saps demand, a world awash in oil. Pay particular attention to this at the end of the article:

Experts aren’t sure what will happen when all that oil finally comes ashore.

One fear is that with oil prices so low, companies will slash drilling and production, setting the world up for an energy crunch that would send prices soaring. The number of oil and gas rigs operating in the United States has fallen a staggering 39 percent since August.

Others say prices would plummet if companies forced millions of barrels onto the market at once.

“If everyone’s running for the exits at the same time, they’ll engineer a price collapse,” Flynn said.

Note that Mr. Flynn makes a mistake earlier in the article:

“It gets expensive to do this,” said Phil Flynn, an analyst at Alaron Trading Corp. “If you’re sitting on a bunch of oil and you’re stuck paying storage and insurance, and you can’t find a buyer, you may have to sell it at a discount just to get rid of it.”

Silveraxis readers already know that traders play the storage game going long spot oil and short futures so that they already have their profit locked in. As long as they can earn more in monthly contango than the monthly cost of storage, they will make essentially risk-free profits. There is, however, a small twist. The only way to close out the short futures position and actually get rid of the spot oil is to force delivery on the long futures counterparty. And this is where the risk for oil prices appears to lie. Such risk increases exponentially when contango starts to decrease below the cost of storage. From the article once again:

On the other hand, as storage units on land have filled up, the companies that own the tankers have profited. Tanker companies charge an average of $75,000 a day, three times as much as last summer, to hold crude, said Douglas Mavrinac, an analyst with Jefferies & Co.

In other words, storage is currently going for $1.10 per barrel per month! The math is: $75,000 x 30 days = $2.25 million / 2 million barrels per tanker = $1.125 per barrel per month.

With the above in mind, let’s take a look at contango in NYMEX crude. Closing prices for March 3:

April ‘09 (CLJ09)	41.65
May ‘09 (CLK09)	43.91
June ‘09 (CLM09)	45.03
July ‘09 (CLN09)	46.01
August ‘09 (CLQ09)	46.88
September ‘09 (CLU09)	47.71
October ‘09 (CLV09)	48.39
November ‘09 (CLX09)	49.01
December ‘09 (CLZ09)	49.63
January ‘10 (CLF10)	50.19
February ‘10 (CLG10)	50.74
March ‘10 (CLH10)	51.27

Do you see the problem here? Only the April to May contango is at least $1.10, from there it starts to shrink substantially. The contango for one year (April 2009 to March 2010) is under $10 yet it costs at least $13 to store oil for one year! The risk here is that the entire pricing structure may collapse during a capitulation in the oil market, sort of like a telescope. As contango collapses it is no longer profitable to store oil and many of the players will be forced to dump stored oil on the market whether there are buyers or not. Under such circumstances it is very possible that the technical target for crude in the $20s will be achieved.

Of greater concern for gold and silver investors and traders is the possible impact on metal prices. Even if you aren’t convinced that the dollar is headed for the 95 to 100 level on the dollar index (it just broke to new 3 year highs above 89.50), a drop in crude into the $20s is likely to create panic for commodity-themed investors who also happen to own quite a bit of gold and silver.

Many of you know that I am not fond of ratios such as the gold/silver ratio, the Dow/gold ratio, or the gold/oil ratio, but sometimes these “tools” are actually useful. One possibly valid use is to indicate extremes from which prices quickly revert. In the case of the gold/oil ratio, the upper extreme has historically been below 30. In other words, one ounce of gold can buy 30 barrels of crude oil at the price extreme. By contrast, as recently as last year, that ratio was under 7 at the other extreme. This doesn’t mean it cannot go above 30, only that it never has. Something never having happened does have a reasonable chance of never happening in the future and so we should be able to make a fair case that the gold/oil ratio should not go above 30 and is even less likely to stay above 30 should it be exceeded.

At an oil price of $25 in the mid-range of the technical analysis (which I hope to reprint in full for Metal Augmentor subscribers), a gold/oil ratio of 30 means that a gold price of $750 is at an extreme. Gold, however, is currently trading at $910, which means $25 oil would result in a gold/oil ratio of about 36. I believe reaching such a ratio is about as likely as the ratio staying around the recent peak at 25, which at $25 oil would mean a gold price of $625. Mind you, this would likely be a spike low and not a price that gold would find itself trading for long, but we are talking about a shakeout of such magnitude that we cannot rule out gold finding its final support near the long-term bull market uptrend currently around $580.

I see two main approaches to speculate on the possibility of these down moves in oil and gold. First is to buy put options in oil futures or any oil-related investments. More risky would be to short an oil ETF such as OIL or buy a short oil ETF such as the PowerShares DB Crude Oil Short ETN, symbol SZO. Going outright short risks the possibility that geopolitical events could overwhelm economic realities, driving oil and gold prices explosively higher. For this reason, I do not recommend outright shorts in either gold or oil. The second approach is one that I have been using since gold surmounted the $900 level at the end of January: buying put options in gold.

I have been discussing and updating for Metal Augmentor subscribers the specific options and strike prices to consider and will be expanding the list of possible strategies shortly.

If the scenario unfolds as I’ve outlined here, most investors should just try to hold on and ride out the turbulence, which could be very violent but relatively shortlived. I expect gold to consolidate near the $800 level once the fireworks are over.

In terms of timing, my gut tells me things will play out in weeks but could drag out as long as the end of May or into June. The overall odds remain low but will increase if the contango in oil shrinks from current levels. Thus, watch the contango in oil!!! If the one year contango in oil drops to $6 or so, the consequences are going to be unpleasant! In comparison, probably very little else will matter in the weeks ahead.

[Guest]

Re: $300 oil, very soon?

Oops you are right. Basil quoted it earlier. Missed it.

I think someone else already quoted this exact silver-axis article on this thread.

[santafe2]

Re: $300 oil, very soon?

Solar panels don't appear de novo, energy free for the plucking. Actually, PV panels are extremely energy intensive to produce, install, maintain, etc. The energy and economic costs associated with 'solar' energy are actually quite prohibitive and non-competitive. That is the real reason we all don't have them in our backyards, on our roofs, and powering our electric grid. It's too bad, but there is no such thing as a free lunch

Actually PV grows on trees. Just add water and pick when ripe. Plucking is best left for chickens...;)

Several studies have been completed in the last 10 years to measure the environmental impact of solar panel production. Not just crystalline but thin film and CdTe. The accepted range is 2-3 years. Not free, but certainly not prohibitive from an environmental point of view. CdTe presents a challenging end of life environmental issue but it's also the current leader in low cost industrial and 'behind the fence' installations.

Not to put words in your mouth but you may have intended to simply say that PV is not cost competitive with fossil fuel and at today's energy rates, that's largely true. It is not true that there is more than a very marginal maintenance cost. Once installed, the stuff just works. It's the total cost of installation that is still a barrier to massive adoption.

I certainly understand that many don't think solar technologies are worthy of taxpayer support or rate payer support. I don't agree of course but that's a discussion that's been had on iTulip before and I doubt we'll change any minds on this thread.

[Jay]

Re: $300 oil, very soon?

Actually PV grows on trees. Just add water and pick when ripe. Plucking is best left for chickens...;)

Several studies have been completed in the last 10 years to measure the environmental impact of solar panel production. Not just crystalline but thin film and CdTe. The accepted range is 2-3 years. Not free, but certainly not prohibitive from an environmental point of view. CdTe presents a challenging end of life environmental issue but it's also the current leader in low cost industrial and 'behind the fence' installations.

Not to put words in your mouth but you may have intended to simply say that PV is not cost competitive with fossil fuel and at today's energy rates, that's largely true. It is not true that there is more than a very marginal maintenance cost. Once installed, the stuff just works. It's the total cost of installation that is still a barrier to massive adoption.

I certainly understand that many don't think solar technologies are worthy of taxpayer support or rate payer support. I don't agree of course but that's a discussion that's been had on iTulip before and I doubt we'll change any minds on this thread.

I was wondering, because I don't know much about solar, what is the effect of dirt on the panels? Do they self clean? If not, how often and how expensive is cleaning the dirt? I would imagine huge arrays in the desert might get pretty dirty.

[santafe2]

Re: $300 oil, very soon?

I was wondering, because I don't know much about solar, what is the effect of dirt on the panels? Do they self clean? If not, how often and how expensive is cleaning the dirt? I would imagine huge arrays in the desert might get pretty dirty.

Standard test conditions for modules yield 95-98% PTC/CEC output depending on environment. A ground mount system in the Southwest will yield 95% average and a roof mount system in a city about 98%. Cleaning is done with rain or a hose. If done every few months, 98% is a good number to use unless you're installation is in a completely open space.

[Guest]

Re: $300 oil, very soon?

Santafe2 -

Just for the record I'm 100% in favor of it's expansion - real quick and to the maximum, and I wholly back the direction of significant public money to this end.

I certainly understand that many don't think solar technologies are worthy of taxpayer support or rate payer support. I don't agree of course but that's a discussion that's been had on iTulip before and I doubt we'll change any minds on this thread.

[The Outback Oracle]

Re: $300 oil, very soon?

Perry Como? Mister, you are carbon 14 dated, straight back to the middle Jurassic age with this popular crooner (I swear, on my great grandmother's honor, I only "vaguely" remember him).

I dunno...
"Tiny bubbles, in the wine
Make me feel happy, Make me feel fine"

[Roughneck]

Re: $300 oil, very soon?

The energy and economic costs associated with 'solar' energy are actually quite prohibitive and non-competitive. That is the real reason we all don't have them in our backyards, on our roofs, and powering our electric grid. It's too bad, but there is no such thing as a free lunch.

This is spot on. The problem with wind is you still have to have spare capacity for when the wind doesn't blow and integrate this into the grid.

The real danger in low oil prices is a lack of investment in new or existing fields.Then when demand returns and prices increase there is a lag for investment to catch up. Many of the majors are not drastically cutting exploration budgets.This is a sign that they see this pullback in prices as temporary.I think the danger going forward is a repeat of what we saw before the commodities bubble was popped by the financial meltdown.There is a lot of money sitting on the sidelines looking for something better than a 2% return.When things do rebound and oil prices start moving upward you may see another spike upward driven by hot money. There needs to be some light shed on some of the dark markets(like ICE) and possibly some steps taken to curtail rampant speculation.

What this country desperately needs is a replacement for gasoline as a transportation fuel. If I were King we would build Nukes and upgrade the electric grid to accomodate electric cars. Most people would do quite well with an electric vehicle for commuting purposes.The technology is pretty close now. You can still have the SUV and use it like most folks use a boat now,for pleasure. There is also a hydrogen fuel cell being developed that uses gasoline to make H2. It provides an 80% increase in fuel economy and less emisssions and uses existing infrastructure.

I think it's a shame that we have a window to address the problem and our leadership is only focusing on a premature switch to green energy and a carbon tax. Both of which will result in high(er) prices and hardship for our people and our economy(whats left of it)