"Judicious investment" in oil

"Downgrading the forecast, IEA said the oil demand would rise 0.6% or 540,000 barrels per day on average during 2008-2014. In its latest Medium-Term Oil Market Report, the Paris based agency said the oil demand would rise to 89 million barrels per day in 2014."

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OK.  Crude prices declined to around 32 dollars per barrel and now are back up around 70 dollars.

Why?

There is no short term shortage of crude.  Oil producers and traders are impounding the stuff all over the world, holding it in waiting for the steadily rising price to come to the level they want.  Speculation?  The "S" word?  OK.  Let's call it "judicious investment."

Demand is down just about everywhere at the moment, so more and more oil has to be withheld from the markets to keep the price going up.  This is very "judicious investment."

How high will the price of crude go this summer?  That depends on the skill of the producers and investors.  pl

 

Comments

[N. M. Salamon]

Colonel:

This is off topic, but I wonder if you would be able to comment on the cited article, seeing that you had past experience in this line:

http://www.foreignpolicyjournal.com/2009/06/23/has-the-u-s-played-a-role-in-fomenting-unrest-during-irans-election/

Regards

[Dave of Maryland]

Matt Taibbi has a new article in Rolling Stone, saying that Goldman Sachs were responsible for last year's spike in oil, and have set a $200/barrel price for this year. The new big thing: Big run ups in commodity prices. Taibbi concludes his article by saying that GS wants to run up the price of electricity by manipulating the new cap & trade law.

The article is not actually on-line. Zero Hedge has a copy, here.

Goldman's response is here.

See also this, also from Zero Hedge. Here's a quote:

I keep telling people but the market does not listen to me: Commodity hyperinflation is causing DEFLATION in the price of everything else, especially when necessities like fuel are allowed to run out of control. This is sucking money out of the rest of the economy and causes a deflationary cycle that ends up snapping back and bursting the commodity bubble anyway. IT JUST HAPPENED LAST YEAR - WHY DOES NO ONE THINK IT WILL HAPPEN AGAIN? - emphasis in original.

[Andy]

Here's some tidbits from the Economist Intelligence Unit:

In the last six weeks, the oil market has chosen to brush off data showing the steady accumulation of stocks and weak demand, and has instead focused on nascent signs of improvement in economic data releases, particularly from the US and China. This optimism has led to some return of investors’ risk appetite, which has boosted commodity prices generally. Rising prices have also led to more consumer hedging (creating demand in the market) owing to fears that prices could go higher. The US dollar exchange rate continued to have an impact on the market, with its relative weakness contributing to the rise in prices.

and

Another important factor has been the contango, or strong premium in forward prices, in the oil market which has led to market players buying available supply and putting it into storage for sale at a later date—some 100m barrels are thought to have been set aside in this way. If a large amount of this oil were to be released at one time, it could lead to a very sharp drop in the spot price.

The International Energy Agency (IEA) has made a small upward revision to its demand forecast for 2009, but it still envisages a 2.9% year-on-year contraction to 83.3m b/d, compared with 85.8m b/d last year and 86m b/d in 2007. OECD stocks are now sufficient to cover 62 days of consumption, compared with 55 days this time last year. The IEA said that OPEC compliance with its 4.2m target for output cuts has slipped to 74%. Saudi Arabia continues to have the best compliance record, at 100%; Iran is among the worst, at 32%.

Then there is this important note on the long-term:

In its presentation of the 2008 figures, BP highlighted what it termed a “tectonic shift” in the pattern of world energy demand, with non-OECD countries now account for more than 50% of global primary energy consumption for the first time. Over the past decade, oil consumption in the US and Europe has remained more or less flat, and in a number of major economies it has actually fallen, as a result of greater fuel efficiency and increased use of gas—for example, Germany consumed 2.9m b/d in 1998, which had fallen to 2.5m b/d ten years later. Conversely, China’s oil production has almost doubled over the same period from 4.2m b/d to 8m b/d in 2008. Middle East oil consumption has also been rising rapidly—5.5% in 2008, compared with the previous year, outstripping China (3.3%) and India (4.8%). Consumption in Saudi Arabia, Kuwait, Qatar and the UAE rose by more than 10% on average.

[Patrick Lang]

Salamon

No idea. pl

[N. M. Salamon]

Colonel:

That the price of crude is rising notwithstanding the fall in demand in OECD land is due to the correct presumption of the dealers that the field production decline in numerous supergiant/giant fields is irreversible and thus need new sources which can be only achived by exploration and by developing more expensive soiurces. Canada's oil sands need $80, so does Saudi Arabia's Brazil's etc new developments. Another aspect is that the NET EXPORTERS [OPEC, Russia etc] are all using more and more, leaving less and less for export. Another point is most reasonable people are worried about the USA/UK/Mossad meddling in Iran, and such effort's effect on a major exporter.

One final point you may wish to relate to is that China has an almost complete monopoly on rare earth metals necessary for compact maqnets for wind turbines, etc, the source of the US/OECD/EU attempt at WTO to get China to release more for international use, rather than keeping it for herself [net effect that they will have monopoly on efficient wind-power turbines.

Without doubt the depriciation of the USA $ also assists in this rising price structure [in USD, not necessarily in EURO/YEn, etc]

[J]

Talking with oil people here in oil patch, I'm told we're 'importing' most of our 'refined' gasoline we buy at the pumps. 'If' we 'built' 19 NEW refineries, it would 'relieve' the current 'importation' of 60% plus of 'refined' gas.

[J]

Don't forget what the Saudi King said after oil plummeted into the $30s is that they felt a 'fair price' for oil was around $75 a barrel.

Caveat: When oil was at $140 plus a barrel, the Saudis were only getting a little over $3.00 at the well head, and it cost them approx. $.44 to bring a barrel to the surface.

One has to wonder if the Saudi King has forced a re-adjustment of 'how much' the Saudi Kingdom receives for each barrel they supply. The London based International Petroleum Exchange and their 'speculators' were ripping off the 'producing' nations -- big time.

[Patrick Lang]

Salamon

Your supposed notion that "dealers" have motivations higher than merely making a profit amuses me. pl

[Highlander]

Colonel,

If you recall a few months ago you boldly posted that oil would stay in the basement at a price below $35/barrel. I as usual took the contrary view, and said it would be back above $65/ barrel in the near future.

Keep in mind the average costs involved just to recover and move a barrel of oil to market is now in the $45/ barrel range.

As to the manipulation of the oil markets in the summer of 2008. Well, Duh!
As a former professional commodities trader, I can attest the oil markets have always been subject to a fair amount of manipulation. But the little trick last summer was over the top.

It was simply insurance to make sure Obama could be elected as our savior. Obama had many supporters with the market knowledge, capital, and interest in politics and making mega profits to pull off that little spike in oil prices, just 5 critical months before the Presidential vote. Goldman Sachs? George Soros? Who knows who did it, and if you did you would be killed.

Interestingly enough, it was Republican oilmen Bush and Cheney. Who years ago quietly had the CFTC rules changed to make this kind of gross manipulation possible. Surely they wouldn't be thieves also?

[N. M. Salamon]

Colonel:
With respect SEC could arrange that only users and producers can buy/sell oil on the futures market, thereby kicking off all gamblers to stop money games [we saw how money games can destroy the economy, just reflect on the derivqative market].

The other point, Colonel, to ensure future long term profit, it is necessary that the market insure cashflow for exploration and development [this implies necessity of present profit]. Sans the cashflow, in a year or two the price would rise to stratosphere, where we know from experience $140/Barrel oil is the breaking point for OECD economics.

J: that the USA imports gasoline [mostly from Europe, has to do with refining process, where Europe uses higher percentage of Diesel [cars] and have excess amount of gas. The USA aside from supplying Israel with Diesel, has no capacity to increase gas production without shortening aviation and other requirements [including the world's highest user DoD].

[Patrick Lang]

Highlander

I do not recall that I said that "oil would stay in the basement at a price below $35/barrel." Citation?

Salomon

"SEC could arrange that only users and producers can buy/sell oil on the futures market, thereby kicking off all gamblers to stop money games [we saw how money games can destroy the economy, just reflect on the derivqative market]."

Splendid idea!!! What do you think is the probability of that? pl

[JohnH]

"Alaron Trading Corp. analyst Phil Flynn said China's plans to increase its strategic crude oil reserves by 60 percent should provide the market with some long-term support."

Among major oil consumers, China has been most at risk of a disruption in oil supply. Creating a strategic oil reserve should address that problem and provide a little security against any future producer embargo or any US move to cut China off in the event of future tensions.
http://finance.yahoo.com/news/Oil-settles-above-71-China-to-apf-2774808596.html?x=0&sec=topStories&pos=6&asset=&ccode=

[curious]

is this some kind of joke?

http://www.presstv.ir/detail.aspx?id=99363&sectionid=351020101

'US forces attempt to hijack Iranian oil field'

American forces have attempted to take over an Iranian oil field near the country's western border with Iraq, a security official says.

“US forces backed by tanks entered the Mousian area of the Dehloran County, laying around 100 meters of pipeline in Iranian territory," the source, talking on condition of anonymity, said Monday.

[DaveGood]

Why is the price of oil rising while there is an apparent glut?

Simple, the last time we managed to find more oil then we burnt was back in the sixties.

All oilfields we now know of that could be opened up are so deep or otherwise difficult to exploit that it requires a price of over 70 dollars per barrel before the finance can be raised to do it.

Which means no new production has come on stream for over a year.

Meamwhile all the old fields have had another years worth of production pumped out of them.

Mexico's production for example has dropped like a stone.

The Glut is temporary.

At the first hint of the Global Economy (As presently structured) picking up any kind of steam the price will sky rocket, leading to another sharp recession\depression.

But facts remain facts, the days of easy cheap crude are long gone.

DaveGood

[DaveGood]

PS....

I have also read that the problem with Oil production now is that the sources of Oil we can get too are enough to (Theoretically), power our industrial culture (as currently structured) along for another three or four decades , except for the fact we cannot get the stuff out of the ground fast enough anymore.

The Quantity is there, (Even though the quality is crappier, no more sweet light crude).

But the Flow rates, the rate at which we can pump it out is way below what's needed.

Take the favoured solution of the Bush Regime, destroy the ANWR and pump out the oil known to be there.

Well even if that was done, and even if it could be delivered as one unstoppable gusher, delivered on tap, as much as you want as fast as you want it.

It would all be gone in just nine months at the rate the US burns Oil.

DaveGood

[DaveGood]

PPS...

And as far as the IEA goes, you only have to back four years and you will find them swearing that production of Oil around 2015 would be in the 125 million barrel mark.

Now they are saying it will be 89 million which will the swear, honest to God, will miraculously match global demand.

DaveGood

[William R. Cumming]

Is it true that 90% of all reserves and production now controlled by NOCs (National Oil Companies)and all of which of course are non-US? What countries allow a private oil industry and free market? Any? Does the US really allow a totally free market?
Why didn't the oil industry save Detroit?

[David Habakkuk]

Dave of Maryland,

Thanks for the very helpful links to the Taibbi piece, and Tyler Durden's reflections at Zero Hedge.

I think Durden hits a very important nail on the head. Where economies are grossly overburdened with debt -- as is the case in the U.S. and the U.K. -- one option open to the central bank is to attempt to generate inflation. It has not infrequently been suggested that this is one of the objects of Ben Bernanke in flooding the system with liquidity.

However, if labour has no bargaining power, as is the case in the U.S. and U.K. today, you may not get any inflation in wages, at the same time as the liquidity surge fuels inflation in commodities. So we have a form of inflation which will not ease debt burdens, but make them worse. This will itself ensure that the hopes of rapid economic recovery, and fears of a rise in inflation, which are the 'real' elements in the recent sharp rises in the price of oil and other commodities, are dashed. So we will indeed end up with another burst bubble.

Looking longer term, it seems to me overwhelmingly likely that 'real' factors will drive oil prices much higher. Moreover, wild oscillations in oil prices will encourage oil companies to base their investment programmes on conservative assumptions about the oil price, which will exacerbate the longer-term constraints.

But it is not clear to me precisely how prospects for long-term oil shortage are supposed to account for short-term price movements. A key reason why energy policy cannot be left purely to the market is, quite precisely, that long-term problems are not reflected in short-term price signals.

[N. M. Salamon]

Colonel:
With respect to your Q on SEC and regulation:

IF SEC has the benefiot of the nation [USA first, the World Second] they could act. Unfortunately SEC is in the pocket ot the oligarchs same as Congress, that is the major problem of USA [and similar issues in Canada, UK and many other countries]. You, Sir, no doubt recall that when OTC was criticized from within the Bush Administration, the agents of the oligarchs, Alan Greenspan, and the Treasury black balled the critic, and drove her out of her position.

I am not sure what the aim of the Obama Administration is, is it to reform the oligarchy, and thus the economy for the benefit of the 90-%, or is it to try to create another bubble, hoping that the big banks, hedge funds, Private Equity cohorts can recover their power, and repeat the fiasco of 2007/8 a few years hence.

Whether the SEC likes it or not PEAK OIL is here [production will not rise, while cost of extraction is using more and more energy] so, SEC has to adjust its thinking, for what Dave GOOD said about recovery/oil price is a fact, not a pessimistic opinion.
No doubt you, Sir, noted that China is a winner in the first round of Iraqi oil licences [with BP], similarly China is winning in Iran's oil gas investment scene. At present 80% of the oil/gas resources are controlled by STATES, thus leaving less and less room for the large [mostly USA] based oil firms. Soon West Texas and Brent oil quotes will be passe, as their production is getting negligible [TEXAS] or falling very fast [North Sea] to be effective % of World's daily oil demand.

[William R. Cumming]

Some evidence that China has given blank check to Iraqi pols on oil issues. Is that wisdom or desperation?

[N. M. Salamon]

William:

Without having an overwhelming armed forces, not having 11 carrier groups, China has to insure her access to hydrocarbons with Cash [arms do not work anyway, see Iraq v USA, Afganistan v USSR & USA]. They are also trying to get pipeline to deliver same from Iran [then from Iraq?] to reduce the problem of the Mallacala straight ??] the one by Singapore.

Blank cheques serve two purposes: no one can out bid you, you get rid of excess USD -by paying with treasury bills. Great idea to reduce your head ache!! LOL

[zanzibar]

"Judicious investment" no doubt has had a role in the recent doubling of crude prices. JPM & GS and I am sure others too have leased VLCCs to store crude as they play the contango and other games.

We continue to see reduced demand as households rebuild their balance sheet and the economy deteriorates further. Today's employment report reinforces the deflation in labor markets - U6 at 16.5%, total hours worked in the private sector down to a new record low of 33 hours and lower average weekly earnings.

Opposing these demand reducing forces is money printing by the Fed and other central banks. And they have committed trillions. As Janet Yellen of the San Francisco Fed stated in a speech to the Commonwealth Club this week - "deflation will not be tolerated".

Who is going to win this tug of war? Currency debasement or deflating economy. Of course it does not have to be either or - there's plenty of precedent for stagflation.

As an aside, when looking at a long term price chart of crude we see a trading range of $10 to $40 over 30 years which was broken decisively in 2004 to the upside in the run to $145. The price corrected in the 2008 swoon just below $40 and has doubled in the past few months. If around the $40 price level is held in the next down cycle it is quite possible we will have a new floor which was the previous ceiling.

For the record, I have nothing against speculators as long as they put up sufficient collateral, are minimally leveraged and there is complete transparency. I also admit to taking advantage of mispriced assets on occasion.

[curious]

And what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical-commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.

http://www.rollingstone.com/politics/story/28816321/the_great_american_bubble_machine/2

[optimax]

The average citizen is about to get sold out to the corporate/financial powers once again. The folowing article explains cap and dividend and how it will lower greenhouse emissions without undue burden on citizens and without benefiting Goldman Sachs and The Rothschilds Group.

http://www.scientificamerican.com/article.cfm?id=cap-and-divident-not-trade

The air is not a private property to be traded on the free market but a commons we all own and have a stake in.

[optimax]

According to this Financial Times article a rogue trader in London caused a spike of 2 dollars that day in the price of crude.

"Oil traders in London and New York said the “unauthorised trading” explained the exceptional spike in business activity and prices in the early hours of Tuesday that some initially thought must have been caused by a geopolitical event. “Trading volumes rose overnight and prices jumped more than $2 a barrel without apparent justification,” a senior oil trader in New York said."

Unfortunately all I got was that one quote from article because you need a subscription to access the whole thing.