![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksI'm beginning to get puzzled by oil. Its current spot price and the price for future delivery just doesn't seem to make sense. It's as if every futures trader in the world was convinced that production levels were going to fall off a cliff the week after next.
Any number of experts can be wheeled out on TV to tell you why the price is so high; they may well be the same experts who assured people that house prices in Las Vegas would only go in one direction because it was the fastest growing city in the US. The tricky thing about these expert prognoses is that they usually obtain a veneer of truth that conceal an underlying logical flaw.
So, let's look at some of the surface truths:
1) A weak dollar.
A) Well, yes, but the recent decline in the dollar has not been directly correlated with the rise in the price of oil, and the futures price of oil is definitely not correlated with the futures price of the dollar.
2) China and India.
A) Once again yes. But there's been no change in demand levels here to explain the recent price change.
3) Shortage of refineries.
A) No longer true. The "spike" caused by this has about worked itself out.
An important point to make here is that all oil is not created equal. The "headline" oil price is usually related to a light sweet crude -- Brent or West Texas Intermediate. In the past few months there's been a significant rise in the spread between light sweet and/or low sulphur content and so-called "sour, or heavy crude with a high sulphur content. There are fundamental reasons for a differential, but there don't seem to be fundamental reasons for a significantly widening differential.
Which brings me to the Hunt brothers (Nelson Bunker and William Herbert) and their attempt to corner the market in silver. This drove silver to record prices in 1979 and a lot of money was made and lost. I don't think that there's a deliberate Bunker Hunt cabal at work here, but it does seem to me that the frenzy for sweet crude futures is feeding on itself and is outpacing the actual demand for the stuff.
That would mean that a lot of money could be made on the future price of sweet crude, if you can get the timing right. Of course, if you get the timing wrong, then you lose money (the Hunts went broke) , but this is a situation where you can restrict your downside and have a fairly large upside -- as is often the case when prices get out of touch with reality.
So, what might the timing be? Well, the Hunts started building up silver stocks for nearly a decade before the big rise took place, and the fourfold spike took place over four months, before falling back to the old price two months after that.
That would hint to me that if the current frenzy continues, we might see a peak around September and a fairly dramatic pullback by January. What might the peak be? Ugh, that's a toughie. How about $160 for light sweet, with a $40 differential over heavy sour?
Unfortunately, if you go manically short at $160, and it pushes up to $200, then you go rather broke. And if the peak turns out to be $158 before falling back to $90, you feel a bit sick because you never got a bet on.
I don't know the answer to that poser.
++++++
Any number of experts can be wheeled out on TV to tell you why the price is so high; they may well be the same experts who assured people that house prices in Las Vegas would only go in one direction because it was the fastest growing city in the US. The tricky thing about these expert prognoses is that they usually obtain a veneer of truth that conceal an underlying logical flaw.
So, let's look at some of the surface truths:
1) A weak dollar.
A) Well, yes, but the recent decline in the dollar has not been directly correlated with the rise in the price of oil, and the futures price of oil is definitely not correlated with the futures price of the dollar.
2) China and India.
A) Once again yes. But there's been no change in demand levels here to explain the recent price change.
3) Shortage of refineries.
A) No longer true. The "spike" caused by this has about worked itself out.
An important point to make here is that all oil is not created equal. The "headline" oil price is usually related to a light sweet crude -- Brent or West Texas Intermediate. In the past few months there's been a significant rise in the spread between light sweet and/or low sulphur content and so-called "sour, or heavy crude with a high sulphur content. There are fundamental reasons for a differential, but there don't seem to be fundamental reasons for a significantly widening differential.
Which brings me to the Hunt brothers (Nelson Bunker and William Herbert) and their attempt to corner the market in silver. This drove silver to record prices in 1979 and a lot of money was made and lost. I don't think that there's a deliberate Bunker Hunt cabal at work here, but it does seem to me that the frenzy for sweet crude futures is feeding on itself and is outpacing the actual demand for the stuff.
That would mean that a lot of money could be made on the future price of sweet crude, if you can get the timing right. Of course, if you get the timing wrong, then you lose money (the Hunts went broke) , but this is a situation where you can restrict your downside and have a fairly large upside -- as is often the case when prices get out of touch with reality.
So, what might the timing be? Well, the Hunts started building up silver stocks for nearly a decade before the big rise took place, and the fourfold spike took place over four months, before falling back to the old price two months after that.
That would hint to me that if the current frenzy continues, we might see a peak around September and a fairly dramatic pullback by January. What might the peak be? Ugh, that's a toughie. How about $160 for light sweet, with a $40 differential over heavy sour?
Unfortunately, if you go manically short at $160, and it pushes up to $200, then you go rather broke. And if the peak turns out to be $158 before falling back to $90, you feel a bit sick because you never got a bet on.
I don't know the answer to that poser.
++++++
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
no subject
Date: 2008-05-22 02:09 pm (UTC)Don't talk of speculators. You hear people blaming the rise in food, oil and metal prices on speculators and how bad these speculators are. Where would a stock market be without speculators? You never here the political puppets blaming moves in he stock market on speculators. Why? Because the government wants you to sink your pension and every spare penny into the stock market so they can tax you and their broker friends shaft you on the spread.
Could the truth be... I don't know... the fact that all the cheap oil has been pumped to the surface? That Saudi Arabia pumps so much sea water into its wells because of dwindling pressure (55% of liquid coming out of Saudi wells is water) and a begging GW can't get them to produce more because they just don't have any excess capacity.
I'm afraid it is supply and demand. Regardless of the rate of demand increase. Most oil producing countries have peaked and the OPEC countries are close to peak or are lying about their reserves. Remember the sudden doubling of reported reserves in the 80s? Just lies to justify more pumping. They regret it now because they were pumping at $10. Kuwait recently admitted they lied about their doubling up.
The UK peaked in 1999 and is now once again a net importer of oil and gas. Knocking on to higher fuel, food and commodity prices. A barrel of oil to produce the feed and transportation for a cow. Oil to dig gold out of the ground. Already expensive oil to drill more expensive oil.
Change those out-dated economic models.
And don't start gambling on the price of oil. Just buy stocks in oil companies with proven reserves and into commodities dependent on oil. Gold!
no subject
Date: 2008-05-23 11:31 am (UTC)What you are putting forward is the "Peak Oil" theory, that the movement in prices is based on some kind of sudden realization amongst the world's traders that the world is running out of oil, that we are currently pumping as much out of the earth per day as we ever will, and that, with demand increasing and supply contracting, the price must go up.
The problem with this theory is that it isn't a sudden realization. It has been known for years, even seven or so years ago when you could buy oil for 10 bucks a barrel.
I'm not blaming speculators or market manipulators. I love 'em. The question is, are these players making pricing more efficient or less so? My view is that, at the moment, they are making pricing less efficient, which creates a market opportunity. What you have to do, though, is allow for the fact that, just because there is an inefficiency in the market at the moment, that does not mean that it won't get even more inefficient before it starts to get efficient again.
PJ
no subject
Date: 2008-05-23 12:03 pm (UTC)Market efficiency is dependent upon complete information. With OPEC nations not letting anyone know their true reserves we can be sure that you are correct in saying the oil market is not efficient.
Are there other factors? That people are addicted to their oil-based lifestyles and behave irrationally. Even with the knowledge that cheap oil is a thing of the past they continue driving big cars, take long haul holidays or plotting the overthrow of oil nations.
Maybe they believe that a new wonder technology will be their saviour, as Nazis said when the Soviets were knocking at the doors of Berlin. You would think these factors would calm the market but they don't.
Oil fields that were shut down or oil shale deposits that were scoffed at when oil was at $60 are being opened up. The market demands more oil but to pay for new techniques to get at the hard to get stuff requires investment. It all has to be paid for so up goes the price on a barrel.
History is littered with people who knew what was coming but were incapable of changing their behaviour.
Easter Island had a much larger population than today. They knew that cutting down trees was not a good idea. They still continued to add to the population and cut down trees until the last tree was felled and then they tore into each other.
Anasazi, Mayans, Icelanders, Greenlanders and now the Global Village. We know we are doing harm but we just can't change our behaviour.
There might be a price correction but not a collapse and no popping of bubbles. We can do without tulips but not without oil. These oil prices are forward contracts so they reflect a belief that future supply will get tighter. More investment is needed to get what is left out of the ground.
A recession will reduce demand so that will calm the oil price. But oil will be needed again when economies pick up. Only this time with more competition from hundreds of millions of middle-class Indians and Chinese.
Conventional wisdom? No guey! I only have two paintings. A long way afore I catch up. I'm sticking to gold. Bought at $830.