[halfin]

Hi, I am a new subscriber to this board, trying to get more information about Peak Oil.

I've read a couple of books on the topic and there does seem to be good evidence that a peak is approaching and could have serious consequences. But I keep running into one strong piece of evidence against it: why are oil futures prices so low?

Take a look at http://futures.tradingcharts.com/market ... ?market=CL as one sample site. Today, you can buy oil for delivery in 2010 for just $46/barrel. Most Peak Oil authors predict that oil is likely to be much higher than that in that time frame.

Commodity futures traders eat, drink and breathe this stuff. They are extremely competitive and will do anything to beat the market. They look at every scrap of data they can get their hands on. They subscribe to expensive industry reports and analysis newsletters that cost thousands of dollars a year to receive, and study every possible factor that could influence future prices.

So the question is, if Peak Oil and its problems are as obvious as most supporters seem to believe, why are the professionals not being swayed by this data? These traders bet their livelihoods, their kids' educations, everything they have on the outcome of their predictions. Why would they close their eyes to the evidence for Peak Oil? If you and I are able to read it and see that the Saudis are near their maximum and many other countries are on the decline, it doesn't seem like it takes great brilliance to see that major problems are ahead. Yet the futures markets blithely predict nothing but stable and gently declining prices for at least the next six years.

I have trouble believing that I, a dilettante, a casual reader who is just learning about this, am smarter or more knowledgeable about the oil market than traders who spend every waking hour on it and who have everything to lose if they are wrong. Is it possible that they know about Peak Oil claims but don't believe in them, because their detailed, expert knowledge of the subject has given them reason to discount these predictions? What other explanation is there?

[khebab]

$this->bbcode_second_pass_quote('halfin', 'I') have trouble believing that I, a dilettante, a casual reader who is just learning about this, am smarter or more knowledgeable about the oil market than traders who spend every waking hour on it and who have everything to lose if they are wrong. Is it possible that they know about Peak Oil claims but don't believe in them, because their detailed, expert knowledge of the subject has given them reason to discount these predictions? What other explanation is there?

[ubercynicmeister]

$this->bbcode_second_pass_quote('khebab', '')$this->bbcode_second_pass_quote('halfin', 'I') have trouble believing that I, a dilettante, a casual reader who is just learning about this, am smarter or more knowledgeable about the oil market than traders who spend every waking hour on it and who have everything to lose if they are wrong. Is it possible that they know about Peak Oil claims but don't believe in them, because their detailed, expert knowledge of the subject has given them reason to discount these predictions? What other explanation is there?

[basketballjones]

here's a great explanation on why oil prices this week have declined sharply.


$this->bbcode_second_pass_quote('', '
')Through the paper Mr. Casey details the three phases of a secular bull market: the Stealth Phase, the Wall of Worry, and finally the Mania Phase. The easy money was already made in the Stealth Phase and we are now in the Wall of Worry. Just listen to the popular media talk down the commodity markets…today will be easy with the decline of $1.77 a barrel for crude today with the close at $47.20. Two things have happened to get oil down in price: first they ramp the “petro-dollar” higher and voila…lower crude price. Second, oil inventories have been growing for 13 out of the last 14 weeks. If they thought crude would be moving so much lower in price (some say going to $35), why have they been building so much inventory with the price was above $50 a barrel? I have heard some analysts suggest they have to top off the tanks if we are going to war with Iran in a month or two…or possibly Syria. They have been pumping oil and importing at breakneck speed to get these inventories higher. High energy prices are taxing the global economy. They needed to get oil lower to avoid choking off more discretionary spending. As we get closer to the driving season we’ll see how much of a choke point there is on global refining capacity.

[gt1370a]

Read some of Matthew Simmons' presentations. He says most of the "common knowledge" in the industry over the last 30 years has been dead wrong.

Also, there is a huge amount of uncertainty in the timing of the peak. At least one study has shown that varying the assumed reserves by 1% can change the peak date by 6 months. Using different fits for a constant reserve value can vary it by 10 years. No one knows for sure if what we've seen over the last year is symptomatic of the peak or just a combination of factors.

Plus, most futures traders are probably afraid they'd get fired if they bought $46 oil for 2010 based on some "crackpot" peak oil theory. Think about it....

[MicroHydro]

The brief answer is that long term oil contracts are fairly new, and lightly traded. Most active traders have a seasonal outlook, and would not think of tying up money for years at a time. (Go to NYMEX and you can view the open interest at various futures dates.) So the long contracts are just a mirror of the recent time averaged spot price rather than actual predictions. The bond market works in a similar fashion.

I purchased 2010 and 2011 oil on NYMEX. This was a long term investment, a redeployment of my retirement life savings. So, I don't care about short term volatility. I am very comfortable with a 2:1 leverage, there is no serious risk of $23 oil generating a margin call. And, I have other assets to call on if a margin call happened.

If one does believe in PO at all, the long oil futures are an excellent investment. Unfortunately, the contracts are 1000 barrels and you need 10% equity plus 10% margin to stay in the game. So, a minimum of $10,000 is required to play this game at all, preferably the full $46,000 if you do not want to worry about margin calls at all.

Man Futures is a reputable broker.

[aahala]

The reason long term oil futures aren't a lot higher, is that there are
insufficient people who are convinced oil will get alot higher willing
to put their money where their mouth is.

When you see some expert predicting oil at $100 a barrel in three years,
ask yourself how much of their own money is placed on such a prediction.

Predictions about the future can be interesting, but if the predictor is
not willing to be on the hook as to its eventual accurarcy, why should
we place more faith in it than they do?

[FatherOfTwo]

$this->bbcode_second_pass_quote('MicroHydro', '
')I purchased 2010 and 2011 oil on NYMEX. This was a long term investment, a redeployment of my retirement life savings. So, I don't care about short term volatility. I am very comfortable with a 2:1 leverage, there is no serious risk of $23 oil generating a margin call. And, I have other assets to call on if a margin call happened.

If one does believe in PO at all, the long oil futures are an excellent investment.

[heyhoser]

Wow, basketballjones quoted an intersting artile from financialsence. This is the point I picked up on the most- If everyone believes that oil prices will indeed be going lower, then why did the US build up it's inventory at current prices?

[Doly]

I wonder how the futures trade actually works. What kind of returns do you get for
a) being dead right
b) being approximately right
c) being dead wrong?

Also, can you change your mind as often as you want?

The attitude of the traders may make sense if being conservative is generally a good stategy for whatever reason.

[big_rc]

$this->bbcode_second_pass_quote('Doly', 'I') wonder how the futures trade actually works. What kind of returns do you get for
a) being dead right
b) being approximately right
c) being dead wrong?

Also, can you change your mind as often as you want?

The attitude of the traders may make sense if being conservative is generally a good stategy for whatever reason.

[bobcousins]

$this->bbcode_second_pass_quote('halfin', '
')Commodity futures traders eat, drink and breathe this stuff. They are extremely competitive and will do anything to beat the market. They look at every scrap of data they can get their hands on. They subscribe to expensive industry reports and analysis newsletters that cost thousands of dollars a year to receive, and study every possible factor that could influence future prices.

[MicroHydro]

$this->bbcode_second_pass_quote('FatherOfTwo', '')$this->bbcode_second_pass_quote('MicroHydro', '
')I purchased 2010 and 2011 oil on NYMEX. This was a long term investment, a redeployment of my retirement life savings. So, I don't care about short term volatility. I am very comfortable with a 2:1 leverage, there is no serious risk of $23 oil generating a margin call. And, I have other assets to call on if a margin call happened.

If one does believe in PO at all, the long oil futures are an excellent investment.

[goldmund52]

$this->bbcode_second_pass_quote('halfin', ' ')But I keep running into one strong piece of evidence against it: why are oil futures prices so low?

[goldmund52]

$this->bbcode_second_pass_quote('MicroHydro', '
')I purchased 2010 and 2011 oil on NYMEX.

[bobcousins]

$this->bbcode_second_pass_quote('MicroHydro', 'C')ommodities trading is not for people with compulsive gambling issues. Amateurs who try short term or (god forbid) day trading lose money on commisions and end up broke. Commodities are ok for me because I do not have a gambling problem and am willing to sit on my positions for years. In the unlikely event that 100 million drivers suddenly decided to bicycle to work, and the price of oil fell to $25 this summer, I would not experience any anxiety, confident in the fundamental soundness of my long term positions.

[MicroHydro]

$this->bbcode_second_pass_quote('goldmund52', '')$this->bbcode_second_pass_quote('MicroHydro', '
')I purchased 2010 and 2011 oil on NYMEX.

[halfin]

Another source of upward pressure on futures prices is the counterpart to the speculator, the hedger.

Imagine a purchasing manager for a company that relies heavily on oil for its business. It might be an oil-fired electrical generating plant; a chemical and plastic manufacturer; a maker of fertilizer. Whatever the situation, the business relies crucially on being able to purchase oil, and will be adversely affected by rising oil prices.

Wouldn't you think that such a purchasing agent would study the oil market carefully, would look at trends in demand and supply that would affect oil prices in the next few years? Wouldn't they be at least as conversant with the data regarding a possible oil crunch as people on this board? This would be their job, their business. The company's very survival would depend on knowing everything about the future price of oil; every bit of extra information could confer a competitive advantage that would make the difference between business success and total failure.

If the data on Peak Oil is so convincing, then these businesses and their agents would see, as clearly as people do here, that they face serious problems in the near future. And yet, there is a way they can protect themselves. They can buy oil futures and lock in today's prices (and sometimes even less than today's prices) for several years in the future. They will be protected against price rises, although they will face the risk that if the price of oil falls, they won't benefit and will be stuck with a loss relative to their competitors.

These effects should put enormous upward pressure on long term oil futures prices, if companies that rely on oil truly foresee a major oil crunch. They would all be scrambling to lock in today's favorable prices. Yet, oil futures are not high. There is no such effect. This indicates that business hedging against the risk of future oil price increases is not playing a major role in the market.

Again it comes down to the same thing. The evidence from the financial markets, where traders have every incentive to make themselves the greatest experts in the world at future trends in oil prices, suggests that they don't foresee a price crunch.

Most of the public figures who are predicting disaster are making a living off of their predictions. They are selling books and giving speeches talking about all the problems that are to come. Their financial incentive is to make things sound bad. This will sell more of their books and get them more money in speaking engagements. I'm not saying they're lying, but the truth is that this is how the incentives work.

But in the markets, the financial incentive is to be right. You make money if you guess right and you lose money if you guess wrong. To me, that is a more reliable place to look to see what experts honestly believe about oil prices. It is, as others have noted, where you put your money where your mouth is. And it seems that the message from the markets is that they expect prices to stay about the same as today.

[MicroHydro]

$this->bbcode_second_pass_quote('', 'A')nd it seems that the message from the markets is that they expect prices to stay about the same as today.

[pea-jay]

Here is a fear I have about those long term post peak contracts:

What assurance will you have in collecting? I mean if the whole economy collapses or hyper inflates-will the investment be collectable? Then what about government interference? Could the government(s) out of desperation seize those barrels? I am not too knowledgeable about the workings of futures beyond the basics.