A prediction from *T*

[GRG55]

Re: A prediction from *T*

GRG, sorry again if I'm being thick, so putting aside Symbols tin foil hat notion for a minute, most of the movement is due to some sort of financial squeeze (be it Goldman or whatever)?...

Oil is just doing the same thing as some other markets, including stocks. One day it crashes down on some bit of apparently negative news [such as the weekly inventory report] the next it crashes up as temporary euphoria takes over on the latest government "all clear" bullhorn signal.

As to a sustained increase in the price, the squeeze on supply long-term which results from current postponement of development activity and declining production of existing fields, should surely create upward pressure on price...

Certainly will...in due course. But the really big fireworks won't happen unless that slowly emerging situation is layered in with a truly abused global reserve currency. We'll just have to wait to see how far they push it.

I won't go near the geopolitical questions that you know much more about than I do.
I guess we might be just differing over what sort of time frame 'sustained' means.

WRT demand, I have a sort of 'itch i can't scratch' that you are taking a bit too much of a US centric view of the world. The decoupling with China was not going to occur on the way down this escalator, but i'm starting to think the next 5 to 10 years are sure going to see some radical changes and that decoupling is starting to look like a certainty. Demand, or trends in demand in the US, may no longer mean that is the trend world wide. Just a thought!...

This isn't about the USA, or the USA only. But US data is the most readily available to illustrate the point.

[cobben]

Re: A prediction from *T*

Exactly what $WTIC is (or $NATGAS for that matter) I can't tell you.

http://stockcharts.com/h-sc/ui?s=$NA...d=p56724850150

[Jim Nickerson]

Re: A prediction from *T*

Exactly what $WTIC is (or $NATGAS for that matter) I can't tell you.

http://stockcharts.com/h-sc/ui?s=$NA...d=p56724850150

The $-marks before symbols denotes an index. That format is used on stock charts. WTIC is the quotation of West Texas Intermedicate Crude oil. Nat gas, uh, let's see, that must be Natural Gas.

[TRake]

Re: A prediction from *T*

Exactly what $WTIC is (or $NATGAS for that matter) I can't tell you.

http://stockcharts.com/h-sc/ui?s=$NA...d=p56724850150

Thanks for the chart. I do like the looks of it. At first glance it appears that something changed on or about May 2008. I need to look closer at WTIC to fully understand this. It makes me think that the past year or so simply represents volatility and a disconnect by location. My first thought would be higher highs and lower lows until all markets collapse or the government uses price controls. Something really interesting happened at the start of 2007. Supply disruption? Unexpectedly cheap Oil (EOD)? Speculation? I am curious.

[*T*]

Re: A prediction from *T*

My evil plan is unfolding perfectly (*cackles*)...

Worldwide, storage is quite full. Some chap on Bloomberg predicting $20 oil soon.

Verleger Sees $20 Oil This Year on Supply, Limited Storage
July 20 (Bloomberg) -- Philip Verleger, economist and founder of PKVerleger LLC, a professor at the University of Calgary's Haskayne School of Business and a former U.S. government adviser, talks with Bloomberg's Tom Keene about oil and gasoline prices, global fuel demand and a shortage of storage capacity.

[Finster]

Re: A prediction from *T*

THe movements of the oil price in the short run have absolutely nothing to do with supply and demand. If you disagree with that statement then show me a logical argument for how global supply and demand could fluctuate as much, and as rapidly, [up and down] as the oil price has since the beginning of this year.

Predicting "more of the same until it reverses" seems like the sort of forecast one could apply to anything...

When the US Dollar breaks down, the oil price will be one of the main beneficiaries. When...

Strongly agree, GRG. Most of these wild swings in oil prices have had far less to do with supply and demand fundamentals for oil than with supply and demand fundamentals for the currency you're pricing it in. Any forecast for $30 oil embeds a bullish forecast for the value of the dollar itself.

We have to remember that the oil price expresses not merely the value of oil per se, but an exchange rate between two commodities, the oil and some currency (usually USD). Whenever I hear an analyst lay out an oil price scenario that focuses exclusively on the oil half of this ratio, it's usually one who is perplexed that oil hasn't been doing what he thinks it 'should' have been doing. Of course he's only done half the relevant analysis, so no wonder he's confused.

[FRED]

Re: A prediction from *T*

[Finster]

Re: A prediction from *T*

I think you're barking up the wrong tree, Fred. The relationship between volatility and proportion of physical to financial in other markets doesn't support your theory. Take stocks, for example. There is virtually no "physical" market in stocks, yet the volatility over the past year was roughly 2:1, half the 4:1 it was for oil.

[FRED]

Re: A prediction from *T*

I think you're barking up the wrong tree, Fred. The relationship between volatility and proportion of physical to financial in other markets doesn't support your theory. Take stocks, for example. There is virtually no "physical" market in stocks, yet the volatility over the past year was roughly 2:1, half the 4:1 it was for oil.

EJ writes in:

One of our advisers who has 45 years of experience in the industry provided the input.

The paper versus wet oil is part of his response to the question: Why are oil prices going up in a global depression when oil demand is falling? We are not yet convinced that the ratio is 100 to one, but we know that it is more than 10 to one.

Our complete Peak Cheap Oil argument, with his input:

1) If paper oil is 100 times physical oil in terms of payments--there's the iTulip cash flow view of the world again, and

2) If the market for paper oil is primarily betting in the future oil consumers will need more units of the of currency of those payments--U.S. dollars--to buy a unit of oil, and

3) If oil long term is priced at the marginal cost of extraction in real dollars (this is GRG's point) and

4) Governments are increasingly driving production (87% are government controlled versus 50% 10 years ago)

Then, guess what happens to the price of oil above the ground despite falling demand?

That's right. It goes up.

[Finster]

Re: A prediction from *T*

EJ writes in:

One of our advisers who has 45 years of experience in the industry provided the input.

The paper versus wet oil is part of his response to the question: Why are oil prices going up in a global depression when oil demand is falling? We are not yet convinced that the ratio is 100 to one, but we know that it is more than 10 to one.

Our complete Peak Cheap Oil argument, with his input:

1) If paper oil is 100 times physical oil in terms of payments--there's the iTulip cash flow view of the world again, and

2) If the market for paper oil is primarily betting in the future oil consumers will need more units of the of currency of those payments--U.S. dollars--to buy a unit of oil, and

3) If oil long term is priced at the marginal cost of extraction in real dollars (this is GRG's point) and

4) Governments are increasingly driving production (87% are government controlled versus 50% 10 years ago)

Then, guess what happens to the price of oil above the ground despite falling demand?

That's right. It goes up.

Point 2) sounds like what I said. Let's hypothetically assume, just for the sake of argument, that the supply and demand picture for oil held constant over some time period. In other words, the real cost and real value didn't change. But that during that time period, the supply and demand picture for dollars changed - such that that the value of dollars fell by half. Now it takes twice as many dollars to buy the same oil.

What happened to the oil price? It doubled. But it's not the oil that's more valuable, it's the dollars that are less valuable. How can you tell the difference? Look at what happened to other prices over the same period. Copper, corn, cotton ... if they all moved the same direction, or even moved comparably as a whole, you either ask whether there is some common denominator (could it be your money unit?) that changed, or posit some spooky metaphysical conspiracy between these physical commodities. You would, on the other hand, reasonably investigate the particulars of oil supply and demand if other prices did not so accordingly move.

Back to the real world. Do we really believe in our bones that the same physical commodity which took about the same amount of human toil to extract from the ground and which provided the same utility, the same energy output, per barrel actually catapulted over a factor of four in real value in the space of less than a year? While mere pieces of paper - oy, computer chip blips - owed by the trillions and issued by the Federal Reserve in equally massive - and highly variable - numbers, remain a passive, staid and trustworthy Rock of Gibraltar of a reference?

I think this is what GRG was driving at in expressing doubt that "global supply and demand could fluctuate as much, and as rapidly...". Especially in view of his remark that "When the US Dollar breaks down, the oil price will be one of the main beneficiaries...".

[santafe2]

Re: A prediction from *T*

Nice work *T*. You've got the natives thinking and that's always good here. I'll start by saying I don't agree with your assertion but here's a little support for my ideas.

The entities
We have 3 commodities, the US$, Natgas and sweet western crude. Only one might be nearing its peak...no one on iTulip for more than a week will have to guess which one.

One will peak in the next 20-50 years and...same observation.

One is apparently unconstrained.

The environment
Let's next look at charts for each of these and compare them within the context of the economic background we all understand today. Going back 3 years we know life was good and the bubble would never end, 2 years ago it was ending but only a few knew, 1 year ago it was beginning to cave in culminating in the Sept '08 sudden economic stop.

Charts
USD.jpg
WTIC.jpg
NGas.jpg

The first two years are pretty easy. US$ down energy up but take a minute to notice the ratios. The US$ was down about 17% but oil and gas were up well over 100%. We'd have to argue that the US$ fall was not the main driver for the upward movement of energy commodities. I'll let others weigh in on key drivers, I just want to make the point that the US$ was not it.

Then in the late summer of 2008 we have the sudden stop. Merrill Lynch is often sighted as the turning point but I think Merrill was the victim of its vices and these charts lead me to a different culprit, energy cost. The US$ was collapsing and commodities were bubbling. Then we see the reversal.

But where are we today?

The US$ is about at its traditional long term low. I can't comment on where it's going because I've no short/midterm opinion but as long as it's in the 78-82 range, it's not really telling us much.

Oil fell steeply and recovered to about half the peak. Since I agree with the idea that we touched peak production in 2008, this doesn't surprise me. Again in US$ terms you can make a minor case for the movement, but it's not a strong one. I prefer the end of peak-cheap oil and think it's a much more compelling argument.

Natural gas also fell steeply but it didn't recover. Why? The economy is still in ruins and there's no shortage. It was participating in the original oil run-up but it's still a pretender when it comes to wearing the shortage banner.