MP : A few answers to your question. 

• Saudis do not have much light sweet crude production. 95% of their production is "sour", a less desirable (lower sulfur) grade. Of that 95%, about 75% is light sour, meaning not as difficult to refine. The rest is heavy sour. Until recently, this was the pattern, but it might change this year in Sep when they bring in some more light sour production.
  
• Most refineries can run some sour crude, some can run more than others. However when we run refineries at 90+% utilization, most refineries generally have used up their sour crude capacity (because sour crude is cheaper). Thus, at current ~87%+ utilization, many refiners would prefer the light sweet variety that is easier to refine, but more expensive.
  
• Thus, Saudis may have a problem of not enough buyers for their additional production. This will hopefully bring down the price of heavy sour grads in relation to lighter grades. That. hopefully is how we may get a start towards lower crude prices.
  

The title of my post was meant to stimulate discussion - as you say, we may just be taking a breather or may be starting a true decline. However, in view of many fundamentals, I feel that we may be in the 8th or 9th innings of this oil bull run, rather than 5/6th inning. So, we must decide which way to go when we come to that unevitable fork in the road. Cheers .... Anil

AKHalea:

So, we must decide which way to go when we come to that unevitable fork in the road. 

"When you come to a fork in the road, take it... "  Yogi Berra

China and Rio Tinto just agreed to a 97% increase in the price of iron ore. RIO That is above what most analysts expected and says at least a big portion of the China commodity boom story is alive and well.

I don't mean to stereotype any China deals, but I worry about many of these contracts. My experience in the Fareast suggests that many times, the Chinese may not believe as strongly in the sanctity of the contract. Meaning that if the market prices drop significantly after the contract is written, they will come back and ask for a price readjustment. So, the price rise may not be as dramatic or may not be as much of an anchor for prices as one would think it is ..... Just my 2 cents .... Anil

Sorry DrH,  meet me at the Abyss and I'll buy you one.

I'm still not sure about commodities, but I will continue to monitor that potential H&S pattern on the CRB.  Fwiw, at the present time I only own bear funds, precious metals, and one stock which is a special situation play on cleaner air, [FTEK]. 

The stock market might give us a rough time today.  The futures are predicting a serious gap down on the nasdaq at the open. The S&P will probably do better, but still decline.   Europe is in the red as I type and Asia closed decidedly mixed.    Oil and precious metals are drifting up.  This should be a good day for cash.

uh 

A strong second to Anil's view.  One of the complexities/risks of investing in foreign cultures in general and China in particular is a very different legal and cultural attitude towards contracts.  The deal was struck by Baosteel (Shanghai Baosteel Group Corporation), a state-owned enterprise headquartered in Shanghai.  Wikipedia has a good summary of the company's history and the actual site of the company is here.  I like the comments on the site about corporate culture:

 "We carry out mechanism innovation to set up a staff team consistent with the corporate value orientation and adapted to the corporate strategic goal; we carry out Party construction innovation to exert the unique political advantages of Chinese enterprises in the construction of corporate culture."

In other words, this is very much a state/Party operation--and the history of China simply changing contracts when they want is quite clear. But at the moment this is the standard--I gather, for reasons that I find a bit confusing, that this deal will apply to all customers that buy steel from Rio Tinto and BHP, including US and European purchasers.   

DrH  

 

I agree with some of the sentiment expressed here but isn't the salient fact that as of now this 97% increase is the best deal Baosteel could cut? Dr. H -- I believe it applies to other buyers because Baosteel is the biggest buyer of iron ore and if they didn't have the leverage to get a better price how can a smaller buyer demand to pay less successfully? The smaller buyers can try but why would Rio give them a better price than their best customer? I notice that a major Japanese steel company quickly also accepted the agreed upon price. That I believe is the relevant fact for investors today. In short the suppliers continue to control the market as of now -- it seems to me this agreement is definitely not evidence that the iron ore market has topped. Someday it will change  ....

"But not today" .......Hannibal Lechter.

AKHalea:

MP : A few answers to your question. 

• Thus, Saudis may have a problem of not enough buyers for their additional production. This will hopefully bring down the price of heavy sour grads in relation to lighter grades. That. hopefully is how we may get a start towards lower crude prices.
  

Thanks Anil.  Off the top of your head, do you know of a site that gives those prices?  If not, no big deal.  Will probably be an easy enough search on Google.   

As for the Chinese ore situation...one thing that hasn't been mentioned here is that when prices get too high, that can force economic change.  There is some talk that China may go back into it's own mines and ramp up production. Not likely since they have a lesser grade of ore.  But if push comes to shove...

But a new and REAL development is happening in the shipping market... Involving the producers who are shipping this iron ore.  In the past, they (Vale, Rio, BHP etc.)  relied on external shipping fleets, but now that the price of freight has gone sky-high, some of the iron ore producers are developing their own fleets.  If enough of them do it, that can change the dynamics of the shipping market. That can force rates down and Australia will be less compelled to charge China a "freight premium".  That in turn will bring iron ore prices down.

So again, high prices can be the mother of invention...  

Not sure there's a bottom-line point here for commodities.  Just saying that looking at one change in the system isn't necessarily meaningful.  For every action, there's a reaction.  Eventually, the supply-demand balance gets back into equilibrium.