Record-high crude nears $120 on supply concerns - Link

And I was not worth listening according to JudyKen

Alex was concerned last Jan about Oil topping out for good

My Oil targets were too aggressive according to Koala

I won't comment any further...

long/short positions - Link

Commercials have been reducing their net short position, but their not long yet.
Small speculators are net short right now, and we know the small speculators are usually on the wrong side of the markets

No clear signs of a top in oil yet

Link

Traffic jams in Beijing and humming air conditioners in Dubai are replacing U.S. highways and suburbs as the driver of global oil prices.

China, India, Russia and the Middle East for the first time will consume more crude oil than the U.S., burning 20.67 million barrels a day this year, an increase of 4.4 percent, according to the International Energy Agency in Paris. U.S. demand will contract 2 percent to 20.38 million barrels daily, the IEA says.

Economic growth of more than 8 percent in China and India, coupled with increasing car ownership among the countries' combined populations of 2.45 billion people, will more than compensate for falling U.S. demand. Oil use worldwide will increase 2 percent this year because of growth in emerging markets, the Paris-based IEA says.

``Does the U.S. matter anymore?'' said Mike Wittner, head of oil research at Societe Generale SA in London. ``Has the U.S. mattered for the last few years? It is debatable. As far as the oil market is concerned, demand growth is going to be continued to be driven by China and the Middle East.''

Matt Simmons surprised me a bit last week by saying that global oil production has already peaked.  Although some may quibble, it seems clear that the debate has shifted from decades to years.

Yesterday I was perusing "Profit From the Peak", by Brian Hicks and Chris Nelder.  In it was an interesting graph which showed that oil EXPORTS have already peaked as of 2005.  Apparently, additional oil production (if any) has been absorbed by domestic consumption increases.

Interesting stuff.  It remains to be seen whether these incredibly high oil prices will trigger an increase in global supply.  But we could well be witnessing de facto peak oil.

Interesting stuff.  It remains to be seen whether these incredibly high oil prices will trigger an increase in global supply.  But we could well be witnessing de facto peak oil.

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Good point Brian. I was reading an article about this point. And the bottom line of that article was that high oil prices will not bring increase in oil explorations. The article pointed out a detail discussion as to the reasoning. Too detailed to even try to summarize it here. And of course I don't have the link anymore and am too lazy to look for it and post it here..

Last year I said $150 in 2007 was a possibility, although it was a long shot target. I'm beginning to think $150 oil in 2008 is a REAL possibility .We'll find out

The bottom line is that folks like Koala who believe in $50 oil price are just dreaming. Impossible to see Oil below $70, in my opinion, plain and simple

re "where is everybody?"  hmm how about Cushing, OK?  openhurdle you probably know what I'm talking about ;)

I have a question though... WHY is oil trading in such significant backwardation?  The front month vs Dec 2009 spread is something like $9 per barrel?  Do people really think supply will increase (highly unlikely), or do they think demand will decrease in that time frame? (decrease also unlikely, flat demand in OECD is possible but not in developing countries)  This makes NO sense.

re "where is everybody?"  hmm how about Cushing, OK?  openhurdle you probably know what I'm talking about ;)

I have a question though... WHY is oil trading in such significant backwardation?  The front month vs Dec 2009 spread is something like $9 per barrel?  Do people really think supply will increase (highly unlikely), or do they think demand will decrease in that time frame? (decrease also unlikely, flat demand in OECD is possible but not in developing countries)  This makes NO sense.

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Rayden,

The long view, the farther out months for oil trading is in "backwardation" regarding pricing, so it shows pressure on the spot price contract. However the contango relationship, when it returns, should be evidence of a possible turn in the trend. Pair it with the COT data and to me there are no clear signs of a top in oil yet. This does not mean there won't be corrections, but there will be just that, CORRECTIONS, and nothing more.

(Thank God for the edit feature...greatly amended version) 

For the most part, I don't spend much time on this board any longer.  The primary reason is that so few actually read what I write, so I often get irrational and irrelevant responses.  While I might take a lot of time to post, there are just too many people that don't know seem to know how to read with understanding, yet who insist on responding anyway.  That inevitably results in a general waste of my time, and extreme irritation.  So I have mostly given up.

When it comes to my thoughts that oil would go down for awhile, I have clearly been wrong.  I think its because I greatly underestimated how investors would look for alternatives that would shelter them from the dollar.  My gold and silver have done well however, so got a piece of this trend anyway. 

How much higher can oil go?  I am beginning to wonder if there are any reasonable limits?!

Alex,

Sorry, OH, I am jet-lagged and in a crank(ier) mood.  You are a good guy, and to some extent I have been wrong.  So if that irritates me, well too bad for me.  lol..

Still... it is a frustration in this board, that many seem excited about posting opinions without reading the comments of other people.  You are not a problem that way, so please accept my heartfelt apologies.   

[quote user="pink panther"]You folks have a good grasp of the oil markets.     However I am curious why the oil cartel (OPEC) does not seize this opportunity of record prices for crude and make a ton of money by opening the spigot a little.  
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The only country with any meaningful supply is Saudi Arabia and they usually dont break the rules of their cartel quota.  

A lot of good points made here about the price of oil.  For whatever it worth, my opinion is that this high price is here to stay.  I think we may revisit the low 100's in the next 3-6 months but that's most likely as low as it will get.  

The only way i see it coming down from here is if there is a catastrophe in the world economy (similar to the Asian Currency crisis but farther reaching in depth).  It would most certainly have to affect China as probably $25 of the price of oil is the expected growth in oil usage in that country over the next 5 -10 years.   

Another possibility, in my mind, is the research and development of new ways to process oil sands.  Canada (and the US to a lesser extent) are investing heavily in new technologies to make oil sands extraction more economical and increase production.  If that comes to fruition, we may see a 10-20% drop in the price over time.  

Supply will never have the wiggle room it once did, like in the late 90's when OPEC was pumping as much as it could completely ignoring the quotas.  Qatar is really the only country investing heavily in adding to supplies.  Iran is going to the opposite way with virtually no investment and heavy domestic subsidies decreasing export bandwith. 

OH,

Jim Cramer called the top at $125 on CNBC this morning.  If Cramer believes it, it must be true, right?

[quote user="openhurdle"]

The long view, the farther out months for oil trading is in "backwardation" regarding pricing, so it shows pressure on the spot price contract. However the contango relationship, when it returns, should be evidence of a possible turn in the trend. Pair it with the COT data and to me there are no clear signs of a top in oil yet. This does not mean there won't be corrections, but there will be just that, CORRECTIONS, and nothing more.

[/quote]

Well and good, but that doesn't explain WHY the backwardation is there on a mechanical level.  Prices are determined by supply and demand, and futures prices presumably try to predict future supply and demand conditions.  Do people expect future supply would be higher, future demand lower, or what?  If the long-term futures prices do not accurately reflect supply and demand, there should be an exploitable arbitrage opportunity here.

 My guess is, one, speculators like to speculate using the front months, as those are far more liquid (just TRY to buy 2015 oil contracts ;)  And two, people really do expect supply to ramp up over the next 9-12 months which can pretty much only happen by means of a swing producer, which pretty much means the Saudis (as there is purely no way that new capacity can be put into production in that time frame).  But I happen to think the Saudis have no excess capacity, so...
 

[quote user="Alex..."]How much higher can oil go?  I am beginning to wonder if there are any reasonable limits?![/quote]

Define "reasonable".  The price of oil will go just as high as necessary for it to start causing significant demand destruction.  Let us consider the US: based on an informal poll of people I know, I think that point will be reached with gasoline somewhere between $5 and $10, which corresponds very roughly to crude oil in the range of $150 to $300 but most likely $175-$225.  Other countries may vary, I am a lot less able to predict the inflection point in eg China or India, but it wouldn't surprise me if it was the same or *higher* (because most uses there are economically necessary, rather than avoidable/luxury).

That's for the demand side, but how about supply?  It pays to be very familiar with the Saudis here as they almost singlehandedly control the price as the swing producer, and they have several specific (and conflicting) policy objectives.  The rational choice for a major oil producer would *seem* to be, to maximize total oil revenue by *minimizing* production so that you are left as the (more or less) only producer when everybody else has run out.  Unfortunately, it's not that simple: one, the Saudis have massive oil-funded welfare programs, and they *have* to meet a certain budget every year which forces a high production rate, I would guess much higher than they may prefer, and even so the welfare funds have been declining over time which causes considerable unrest; and two, they want to delay the development of any replacement technologies as much as possible, which can only be accomplished by creating the appearance of plentiful supply (and excess capacity).  To belabor the second point, there are alternatives to oil which become profitable at levels somewhere around $50-$75/barrel; but they would take easily over a decade and probably close to a trillion dollars to bring on line (the decade is about right regardless of scale; the trillion is a rough estimate of the capex to replace all US oil demand).  Therefore, nobody is going to do it unless it was either a huge government program, or the investors were sure the long term price would be high enough.  People wanted to build alternatives in the late 70's and got burned then; now they are a lot more cautious.  By occasionally turning on the spigot to max, the Saudis ensure no such replacement gets built until they have simply no excess capacity left, thus ensuring about a decade of very real oil shortages and astronomical prices, which I think is the phase we are just entering now.  Matt Simmons even suggests they have massive storage tanks which give them short term "fake" capacity on the order of a few months worth of production;  whether that is true or not, their annual production has declined in the past few years, and it seems clear that whether the Saudis still have any short term excess capacity, they most definitely do not have sustained excess capacity, ie the kind they could run at for years without damage to their oilfields.

 

My Oil targets were too aggressive according to Koala

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Still sticking with my view... oil can easily keep rising as long as the FedRes cuts rates (hence weakening the US$)... let's see what happens when they stop cutting rates in a few months...

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Oil started to rise from $20 in 2000 to $120 today. In between those 7 and plus years, the Fed cut rates from over 6% in 2001 to 1%, to then reversed course from 1% to over 5% in 2005, and the reversed course again and cut rates from over 5% to 2% today. In between all these fed actions, Oil has ** NOT ** backed off in price. Instead, it rose, then it corrected for a few weeks/months and it rose again. So your theory that Oil price increases just based on US $ weakness is just plain ** WRONG **. I just proved it. It's all in the supply/demand. The US $ weakness is just one of the cards for high oil prices, but not the main one. The fed will stop cutting rates maybe on the next meeting, so what!! Oil prices are due for a correction, but in the long to intermediate term Oil prices are set to rise MUCH higher, regardless of what the Fed will/will not do

BTW Koala, you should read this. $7 gasoline by 2012. Hard to believe right? Yeah, it was hard to believe even to the Judyken of the moments that Oil would get to $120 in 2008

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