[falser]

I'm not a trader and I doubt many here are either, and I don't think anybody is arguing the 'sell the news' mantra. You could have made money yesterday in oil futures either selling or buying, but you would have made even more by just holding. No doubt there will be a pullback, but I wouldn't stake my life savings on oil falling RIGHT NOW. The refinery problems could have long term impacts that aren't exactly clear at the moment.

[Eli]

I am not really into conspiracys. But the way the news is coming out right now it has the feel that we are being slowly told piece by piece that NO is fucked.

I think the Fed is asking the news media not to show all that is going on right now. Which makes senses you do not want panic on the streets of LA because of what has happened in the Gulf.

[smiley]

$this->bbcode_second_pass_quote('', 'T')he point I was trying to bring out was that his is going to be a major top out in the energy markets and we'll see crude back to $50 soon enough.

It's the same with stocks, google brings out record earning and you'd expect prices to run, instead they drop like a rock as people take profits, expectations already being built into the market.

Same with oil, bad news has already been built into the prices, the run from $50-67 was basically an anticipation of supply disruptions. Oil investories consitently increased there was no reason for the run, except for speculation on supply disruptions. Now the disruptions have arrived we can expect to see prices topping out.

[Eli]

psst. I heard a rumor that oil might go up because of some bad weather down in LA and Mississippi. I think that Oil might go up.

[sjn]

I think the spread is also very significant with the run up in prices. There is no question that the quantity of light/sweet on the market is reducing and has probably peaked permanently. It only makes sense that the price should rise since the demand for light/sweet isn't going to reduce unless people stop demanding gasoline.

[gt1370a]

$this->bbcode_second_pass_quote('richardmmm', '
')Same with oil, bad news has already been built into the prices, the run from $50-67 was basically an anticipation of supply disruptions. Oil investories consitently increased there was no reason for the run, except for speculation on supply disruptions. Now the disruptions have arrived we can expect to see prices topping out.

[richardmmm]

if you look at an intraday chart you'll see there was a huge spike from friday close to sunday night open, which came back again to friday's close. and friday's close was already $2 below the high of the week.

it's a tricky business, but i am more comfortable going against the trend at this moment in time.

ass chewed on paper for a few hours doesn't necessarily = ass chewed in cash.

they are also paying silly money for calls. You can sell high out of the money calls for a nice premium and you are playing on the side of market makers doing that.

there are political reasons why oil ran up so high and there are political reasons why oil will come back down again.

just as everyone has been harking on about supply shortages (wich so far never materialised), they are going to be harking on about economic effects etc etc. The indonesian currency collaspsed this week because the government subsidises oil so much, less than 80cents a gallon at the pump in Indo. and they are going broke paying for it.

What is not mentioned much (until just recently) is that all the Asians countries and India do not have GOV taxes on oil and oil products, they have subsidies to keep the price cheap. After sustained high prices they can't manage to support these any longer. Gas prices in Asia have been totally protected. Of course they are having a boom, they haven't even felt the wind on their cheek from this storm yet.

What has also not been discussed much is the amount of hedging going on. Airlines, Trucking companies, refineries etc. all have themselves hedged 2-3 years out at least (that's why it's called futures).

After sustained prices then you can't rehedge and suddenly the oil prices are going to hit the economy like a hammer. If you bought yourself 5 years supply of crude or gas at $25 a barrel, and you are locked in and hedged, then suddenly your hedge comes to the end of the time period and you are paying $70 what happens is you go bankrupt over night.

Even Intel a chip manufacturer a most unlikely hedger, actually makes about 20-25% of it's bottom line pre-tax profits from it's hedging operation.

OF course Greenspan can say that oil prices haven't effected the national and global economy much, because they have hardly effected it at all. Until recently wholesale price of crude from the Saudis was below $40 a barrel. Most product is presold between governments and corporations years in advance on contracts at fixed prices. The prices on NYMEX and quoted on the evening news are not the prices that are being paid. Just the contract futures prices.

Time has gone by and now the absolute price is hitting hard into the economy. Not because of consumers, but because the hedging and contracts have come to the end of the line.

Delta's fuel costs for example only increased by 22%, yet futures prices of oil in the same period have increased by over double.............the disparity is caused by hedging. Once the hedging dries up as time passes, then huge hits start arriving and it is no longer sustainable in any way at all.

The global consumption of oil has only risen from 79.8M barrels in 1997 to 83.8 million barrels in 2005. Mostly in Asian on fixed prices and government subsidies. It's not a huge increase and once the corporate hedges run out and the asians start feeling the pain, it's all over. There will be a collapse in consumption back to 70+ M barrels a day.

The whole global economic setup is about creating this big booms and busts, this is just another one in a long line.

Notice that in every single boom and bust situation people always think that it will go on for ever, and in every single case they have a myriad of reasons why it can't possibly come back down. Why it is different this time etc etc etc.

It doesn't matter whether it is tulip bulbs in 1600s Amsterdam, NASDAQ stocks or crude oil. At one point prices become unsustainable and everybody gets a rude surprise.

Don't forget that the current administration are all oil men. They are very aware of the business of oil. The run in prices is happening for geopolitical reasons. They have an idea of what they are upto. Asian countries are being shaken out of subsidies, a major pinch and inflation is being put on everyone (the equivalent of raising taxes). There is a big scramble for small exploration companies to hunt new resources. Huge amounts of speculation going on.

Then whammo, economy starts to feel the pain, the prices tumble back, all the little Oil startups fold up and get snapped up by the majors. It's a nice little shake down operation.

I am over simplifying things here, but just remember in every single price run there are always concrete reasons as to why people think prices cannot go lower and yet in every single case so far prices have crashed and ended up sitting at a low with no interest. It's human nature to go fro elatation, panic, hysteria to the complete other end of the spectrum.

There is absolutely no reason why this is going to be any diffferent.

[richardmmm]

straight out of ft.com this morning.

it's all there is you want to see it, just not on foxnews and cnbc


Read up on George Soros's theories. Markets always move too far due to irrational exuberance. Because it goes up too high then it ends up going down too low.

Soros fund closed most of their energy stocks last week. The boom is over. There might be a final insane spike, but that won't last for long. It's over. It's been 5 years of madness and now we are on the way down.....

I remember a friend of mine calling the bottom in the DOW in 2002 and no one woud believe him. It;s very hard to call and see major turning points in the markets. But this is one.

Whether we run out of oil and prices goto a gazillion dollars a barrel in the future is more a question of semantics than real hard fact.

from 97-2005 consumption of oil increased by a few million barrels, no big deal really.




Market Insight: Huricane highlights refining shortcomings
By Kevin Morrison, FT.com, Aug 31 2005 15:45


Philip Verleger, an independent petroleum economist, said the $40 rise in oil prices since the end of 2002 represents a bubble that is going to burst as energy costs will account for a greater slice of disposable income, which in turn will reduce demand and eventually prices.

He said energy costs accounted for seven per cent of household income in 1960, nine per cent in 1980 during the second oil crisis, and were about 4 per cent last year. He said petrol, power and natural gas prices, had doubled since last summer, and were taking a larger share of household spending.

Mr Vergeler said US retail petrol prices would have to rise to about $5 a gallon, up from about $3 at present before they will really start to lower demand.

"If we didn't have a housing price boom, we would not have had a oil price boom because US demand would have been a lot lower than current levels," Mr Verleger said. US oil demand growth has averaged 1.6 per cent over the past four years, one of the highest growth rates in developed countries.

"The oil price bubble will burst when the US housing market either slows down dramatically or collapses," Mr Verleger said.

Jim Steele, a commodities analyst with Refco in New York, said the oil market is now at a tipping point, with greater attention paid to alternative fuel sources and energy efficiency.

"No longer do you have oil ministers talking about oil prices, but finance ministers, prime ministers and presidents and when that starts to happen, it means people are worried and we can start to see policy changes that will eventually lead to a lowering in the rate of demand growth," said Mr Steele.

[richardmmm]

Click

Could Katrina mark oil's peak?
Commentary: Lack of further price surge is telling

SAN FRANCISCO (MarketWatch) -- What, no superspike?

[Jaymax]

Richard,

would you accept that *IF* the run-up in oil prices over the past 2 to 4 years is a correlated effect of approaching peak to oil production, then the picture is different to the one you outline above - which seems predicated on the increase in crude being totally unrelated (at least geologically, if not in hype terms) to peak oil?

I acknowledge that's a big *IF* for you, and that you've previsouly stated that you don't forsee oil production peaking, and that the increases are not due to peak (and that those of us betting that it might be are making a costly mistake).

--J

[Z]

$this->bbcode_second_pass_quote('richardmmm', 'T')he boom is over. There might be a final insane spike, but that won't last for long. It's over. It's been 5 years of madness and now we are on the way down.....

from 97-2005 consumption of oil increased by a few million barrels, no big deal really.

[CARVER]

Won't the big oil companies make more money because of that? State oil companies are the big producers of oil. But companies like Exxon, BP and Shell are the big refiners of oil and sellers of refined products (figures like: produces 2 mbpd, refines 4 mbpd, sells 8 mbpd of refined products).

What we see now is oil going down a bit, but gasoline and the other refined products are still on their highs (and going up), and the gas stations are selling it for even higher prices. So I would think this would be great news for those big oil companies. So I think their stocks might go up for a while longer, unless the market only looks at the price of light sweet. What do you think? Am I right? And is it likely the market will see it that way too?

[fossil_fuel]

i just bought some september dow put options. There's no sense in the fact that a major US city was just destroyed, gas prices have surged to a level which will seriously hurt consumer spending, and yet the DOW remains relatively unchanged from the level it was at before the hurricane.

[richardmmm]

largest oil shock in the last 25 years and oil manages to close only $1.30 higher on the week with a reversal of nearly $4 from the high. Key support / pivot at $68 has been broken before the weekend........it's not looking like a happy story for the bulls.

I wouldn't be shorting the stock market either. Housing is going to fizzle now and all the smart players are pumping money into stocks. The return on bonds after tax is less than the rate of inflation, therefore the only place for the fund managers to dump their money is into stocks. Certain sectors will do very well and probably hold the whole market up. Stock markets are very fickle to disaster situations. Look at a chart of what happened a month after 9/11.

Remember the market is about anticipation, it is NEVER about current events. It is about future events. That's why it often does the opposite thing to what you'd expect. Reminisance of a Stock Operator is the classic for getting a handle on this.

Consumption in 1997 = 79.8 MB/d. Consumption is 2005 = 84MB/d.

I should think the number of people saving gas right now already knocks 1MB/d off the total. We could be back to 1997 consumption levels in a flash, never to be fooled again by complacency and economising. Pressurising car makers to build more efficient cars, public opinion swayed to go more nuclear, etc. etc.

Price of Crude in 1998 was $10 a barrel.

It's not out of the question, unlikely we'll ever get that low, but downside risk right now is enormous.

Look at a long term chart of oil, pinpoint every terrorist attack, huge decline in oil prices............why ? because of fears of economic decline. If Katrina was a member of Al Queda, we'd have already seen a $10 drop.

Stocks rise in the mid term, people pump money into mutual funds and hedge funds. Recession looms, housing falls apart, oil consumption drop dramatically with more efficient useage after the Katrina scare and also due to increasing economic decline. Oil goes to $35. It's easy to see it happening.

It's actually worse for the industry really because it is all the crazy volatility in oil prices that stops the companies from making large investments.

[richardmmm]

you also gotta figure the $5 a gallon price that was quoted is a throw away figure. It doesn't have to be the national average for 5 years running before people react. We already saw over $6 in Atlanta this week. National prices are way over $3. It's enough to give people a real shock. If you fuel up even a mid size car, you are looking at spending nearly $100. That's gotta sting, even if you earn $50k a year before tax.

Everyone I have called is talking about gas prices, people are stocking up, the consumer is getting cleaned out and is also economising.

Check this out for a pat on the back from the government.

Exxon borrows 6MB of oil, which it would otherwise need to pay $70 for.

Exxon refines the oil to gasoline, which is sells for whopping profits at record ever prices.

Oil falls to $40 a barrel and Exxon repays the government with oil. Saving $30 a barrel ($180M) plus gouging the gas market at record prices. Exxon walks away with a quick $300M profit from the government handout.

Don't be fooled by all the scare stories. Whilst a million people have no home Dubbya and his buddies are still milking it for all they're worth.

All this shortage is a lot of nonsense...........sure there is some short term disruption. Disruption is different to an actual physical shortage. The US has 320MB in domestic stocks, plus 194MB of gasoline. Exxon of all people does not need to be borrowing 6MB of oil. It just doesn't feel like paying full price right now, that's all.

This hurricane is a dream come true for the oil majors. They are going to clean up. Sit their selling gasoline for twice the ususal price. Borrowing oil and paying back later for cheap prices. Then sweep out the little guys as the price of oil falls (wathc for larger merger operations next year and Shell, Exxon and BP buy out all the little explortation companies). Huge profits, lots of taxes and election campaign donations for the govenrment.

Everyone's happy. It's breeze. It's all so convenient I wouldn't be surprised if the stories of weather engineering are true, but that's getting a little crackpot really.

[RiverRat]

richardmmm ...
$this->bbcode_second_pass_quote('', 'I') should think the number of people saving gas right now already knocks 1MB/d off the total. We could be back to 1997 consumption levels in a flash, never to be fooled again by complacency and economising. Pressurising car makers to build more efficient cars, public opinion swayed to go more nuclear, etc. etc.

[smiley]

$this->bbcode_second_pass_quote('', 'D')on't forget that the current administration are all oil men.

[richardmmm]

yes, i am sure people would rather pay $20 a gallon for gas than suffer a protracted recession.

fact remains that most people are mortgaged to the hilt, if not past it and with the current level of prices, airlines, logisitcs, farmers etc etc etc are all bleeding to death.

therefore no matter what some schumck economist has to say, the prices are not sustainable at these levels...........the reason effects have not been seen more widely is because of hedging.

once the hedges unwind so does the economy, you can't rehedge once the prices have risen.

it was the same when gold started moving higher. many gold mining companies were hedged at $270-$290/oz. It took many months for the hedges to unwind and they had an incentive to do so. Then Gold Stocks started to rise more rapidly.

With Oil prices rising, companies like Fedex, Delta, just about anyone that relies on moving anything from A to B has been hanging on for grim death. Problem is when you hang on for grim death then it ususally arrives.
(unless you are a hiker that doesn't mind hacking your own arm off with a blunt pen knife - you read the story right ?).

But of course most people can't cope with confronting the situation, they rather just hope it passes.

It's not just about moms and pops filling up the SUV. It's about every single item on the supermarket shevles. Every single day to day item you can possible imagine, that are delivered using pertroleum. It's about the cost of fuel to airlines. Heating costs for hotels and office, the cost of doing business for every company.

Most of that has been hedged. Of course oil wasn't hurting the economy much, the damage was almost entirely contained. Time is running thin for the hedges and now it will show up directly and immediately into prices on shelves, job losses, company earnings etc etc etc

The the state of national debt, and personal credit, the whole deal gets shakey pretty fast.

[wildwest1941]

To heck with gold, silver, and oil, invest in toilet paper. With all the crap going around this is where everyone's money will be most useful in the years to come.

[Sgs-Cruz]

Richardmmm, you've made a really good case, and I am starting to believe you that we're headed for an oil price crash.


The only problem (and I know you've addressed this, I just want to say this clearer) is that the economic crash that will bring the prices down is precisely what everyone's afraid of! Millions of people out of work, probably some starvation, these things are exactly the things that everyone here knows are coming but are terrified of.

Remember: lower energy inputs to society ---> lower standard of living. The nominal price of oil doesn't really matter in the end. You can't buy a barrel of oil at $10 if you don't have $10!