[smiley]

2005 has been an eventful year by all standards. Now it seems, at least for the moment, that we have reached a lull. Oil prices have stabilized, and supply is adequate to cover consumption.

It makes me wonder when will things start moving again and how?

The way I see it we have bumped our head hard against an invisible ceiling. This year for the first time consumption tried to overtake physical production. And predictably raw physics won over economics. For now we have reached some kind of standoff. Consumption has backed off a bit and the oil producers of this world have opened every spigot to accommodate demand.

But despite all the efforts of the oil producers, production growth has been anemic this year, even if you discards the hurricanes which were more or less a freak event. I don't think production can grow much further and certainly not fast. Next year's production may grow a bit or perhaps decrease a bit, but it really doesn't matter (barring any wild events of course).

IMO the great unknown for next year is the consumption. Will the consumers have learned, will they ever? It seems to me that the message that oil production is a physical boundary hasn't really sunk in yet.

For me the most likely option is that somewhere next year, people will have gotten used to these price levels and will come out in numbers. Probably in the second quarter at the start of the driving season. So we will hit the ceiling again. But this time harder, because whatever spare capacity we had at beginning 2005 is gone in 2006.

So my guess would be a price spike someway halfway 2006. A run-up during the second quarter, a maximum in the third quarter (>$100?), followed by a period of demand destruction and decreasing prices. About the same as we had this year, only more brutal.

Does this make sense? (thoughts, comments, alternatives?)

[Armageddon]

I am having a hard time trying to make sense out of things. Im not sure at what price will demand destruction occur. It seems people will drive no matter what , even if they have to cut other things out first. So demand destruction may not happen untill its way too late to make a difference. I think as long as oil stays under 100.00 per barrel, people will adjust. But, the important thing is when will demand outstrip supply and actual shortages occur ? Or a possible terror attack on a major refinery or possibly even saudi arabia. That is my main concern at the moment. We are definately entering unchartered waters.

[Revi]

I think you are right. Gas prices will stay around the same until the summer driving season. Heating oil will spike around February, and drop a bit. We were thinking it's like an all you can eat buffet. If the people who ran the buffet asked you to please hold back a bit, or the people at the end of the line won't have enough. Would you hold back, or would you heap your plate higher afraid that you would not get seconds?
If you knew for sure that you will not be able to fly next year, would you fly this Christmas to see people you may not get to see again?

This could be the last hurrah for the unimpeded consumtion of energy. I think the powers that be are trying to keep people from panicing and hoarding now. They are trying to keep up the facade of business as usual. Buy a new car, take that trip to Disneyland! Smart people are buying woodlots and putting solar panels on their roofs. It's always later than you think! 2006/7 could be even more of an eye opener. Next winter will be even worse, and this one is already shaping up to be a bad one for a lot of people.

[FireJack]

Right now I get the feeling prices are being kept artificailly low in order to bring about a good shopping season. 2006 really looks like the year peak oil will really begin to take off.
Im more concerned about 10-20 years though. Things like food production and electricity will really be affected by then and I imagine there will be a lot of suffering.

[gt1370a]

I think the housing market will start to decline. All associated industries - real estate, finance, construction, supply, bulk items, decorating, landscaping - will take a big hit. The trend that the airlines and automotive industries have started, with lay-offs, pay cuts, and reduced benefits, will spread to these other areas. There will be a lot of personal bankruptcies, as the US consumer is already at a negative savings rate. Since consumers will have less disposable income, demand for products, especially Chinese shit at Wal-Mart, will fall off. Prices will come down in response to decreased demand. In order to fight this deflation, the Fed will start printing the shit out of money, as Bernanke has written about at length. This will devalue the dollar, and gold will go up. The net effect of all this is that oil demand will drop, and if it drops enough then the price will go down. After a period of recession, with energy prices low again, there may be a new period of growth until the next catastrophe.

At least, that's one scenario. I know there aren't many other people on here who agree with that. Most people think demand for oil is simply inelastic, that supply is tight, therefore the price will go up. Also I have focused solely on the US. I did that because this is a global economy, with American consumer spending as a lynchpin holding everything together (there are other lynchpins but this is one and it seems particularly vulnerable to me). Without this, demand growth in China seems impossible, or at least pointless.

[strider3700]

I'm concerned that the powers that be aren't idiots and know perfectly well what is coming. I'm worried that they will just push this christmas as the last great money squeeze and then start trying to break the consumers to slow consumption. I've decided to run my savings down to 20% of what I normally keep spending on prep in the next month or so. If I'm wrong I'll have longer to rebuild the savings and prepair some more, if I'm right at least I'll have some solar panels, gold, food and shelter that should get me by awhile.

Unless some miracle discovery takes place and a mega project pops up real quick to use it things won't take long now.

[MrBill]

$this->bbcode_second_pass_quote('armegeddon', 'I') am having a hard time trying to make sense out of things. Im not sure at what price will demand destruction occur. It seems people will drive no matter what , even if they have to cut other things out first. So demand destruction may not happen untill its way too late to make a difference. I think as long as oil stays under 100.00 per barrel, people will adjust. But, the important thing is when will demand outstrip supply and actual shortages occur ? Or a possible terror attack on a major refinery or possibly even saudi arabia. That is my main concern at the moment. We are definately entering unchartered waters.

[Micki]

I agree with you gt1370a
Not necessarily on every detail but pretty close.

I don't believe much in elasticity of price in that people start taking the bus when oil hits $80/bbl but I thinks anything over $70 will impact transport costs = people do less business travel, more industry layoffs resulting in sluggish(er) retails sales and then somewhere along the way real estate and banking gets hit.
Not sure if we will so a lot of deflation as higher energy costs will force companies to raise prices or go bancrupt. I believe we are more likely to see the inflationary scenario first and then perhaps a deflationary scenarion at the other end when some SERIOUS demand destruction has taken place.

[falser]

I too am convinced that the real estate collapse will completely eclipse oil as the story of 2006. It'll take the US dollar down and a lot of the financial sector with it. Q4 2006 I wouldn't be surprised if we see oil at $80, gold at $750, Euro at $1.5, and DJIA struggling at 9000. That's completely a wild guess though, anybody's guess is as good as mine.

[gt1370a]

$this->bbcode_second_pass_quote('Micki', '
')Not sure if we will so a lot of deflation as higher energy costs will force companies to raise prices or go bancrupt. I believe we are more likely to see the inflationary scenario first and then perhaps a deflationary scenarion at the other end when some SERIOUS demand destruction has taken place.

[RacerJace]

I believe ever deepening cycles of recession are what's next. Each cycle would encompass multiple levels of rising prices followed by demand destruction and inventory gluts and slight drop in price followed shortly by another round of price rises etc. etc.

Each cycle would IMO get shallower in amplitude as the peoples/business' ability to absorb the change is striped away until a full decent into depression is reached. The obvious fallout of all this is rapidly increasing unemployment or, at best, reduced wages in the larger more staple manufacturing industries. All the nice to haves will disappear leaving only the barest of essentials. One upside might be the resurgence of local produce.

I can see two major drivers of these cycles. One is the obvious rising costs of living (doing business) from rising fuel costs; the other is a ratcheting up of inflation and interest. Wages would stagnate against inflation and ultimately drive the standard of living down. The recent royal accent of the industrial reform laws in Australia have paved the way for this to happen. And the anti-terror laws have provided some of the foundations for a police state when the workers start to rally.

Sorry to get side tracked but.. [conspiracy rant] this anti terror thing is such a croc.. It's obvious the government is using it as an excuse to prepare for rough times ahead. With benevolent intensions? ... I hope so, but probably more to protect the rich and powerful. It's got nothing to do with who you pray to (if anyone). I also think the religious radicals are just making use of it to express their disgust and fight back against the western consumerist ways. [/conspiracy rant]

One thing I'd like to understand/resolve is ... with all the throw away consumer crap out there now how long will it take to have real practical durable products become available.. I guess they're there already, just buried under tons of cheap Chinese crap. Hopefully people realise they need things that will last a lifetime before it's too late to make them.

[Kingcoal]

The American Police State is being formed now. Bush says that he needs to keep his emergency powers because we are at war. Five years from now, we will still be at war (the war on terror.) This is all described in the book 1984. A perminant state of war will allow the US federal government to dismantile the welfare state. Without marshal law, the welfare state will be imposible to do away with because of the mobs that will need to be appeased. Under marshall law, millions can be arrested and detained indefinately in concentration camps. Cutting off government aid will make "terrorists" out of the idle poor.

In my opinion this is the neocon plan. How else will America solve it's debt problems? As outlined in 1984, the real war is the war of the worlds leaders against their own lower class citizens. More specifically, against the unproductive citizens. Those who have a clue and manage to make themselves useful in the face of changing conditions will gain from this.

[MrBill]

$this->bbcode_second_pass_quote('falser', 'I') too am convinced that the real estate collapse will completely eclipse oil as the story of 2006. It'll take the US dollar down and a lot of the financial sector with it. Q4 2006 I wouldn't be surprised if we see oil at $80, gold at $750, Euro at $1.5, and DJIA struggling at 9000. That's completely a wild guess though, anybody's guess is as good as mine.

[drew]

Mr Bill, you are being EVIL lol

teasing an excellent prognosticator like that!!!

Shame.

He could be right...

I would have made a lot more last year if I had leveraged things too

Risky, risky

Drew

[MrBill]

$this->bbcode_second_pass_quote('drew', 'M')r Bill, you are being EVIL lol

teasing an excellent prognosticator like that!!!

Shame.

He could be right...

I would have made a lot more last year if I had leveraged things too

Risky, risky

Drew

[falser]

$this->bbcode_second_pass_quote('MrBill', 'W')ow, you'll be rich. Sell that $300.000 house. Invest $100.000 each in oil, gold and FX futures with 10% down and using your leverage you can earn $1.141.304 next year, except that will only be EUR760.869, but still not a bad return for one year's investment? Good luck. Let us know how it turns out?

[MrBill]

$this->bbcode_second_pass_quote('falser', '')$this->bbcode_second_pass_quote('MrBill', 'W')ow, you'll be rich. Sell that $300.000 house. Invest $100.000 each in oil, gold and FX futures with 10% down and using your leverage you can earn $1.141.304 next year, except that will only be EUR760.869, but still not a bad return for one year's investment? Good luck. Let us know how it turns out?

[RacerJace]

Seriously though Mr Bill. I myself am agonising over the idea that selling my one and only family house and investing what capital I can reap in hedging funds as the brightest path amoungst many murky ones. My wife hates the idea and I'm not to keen on it myself but when you sweep aside the emotion and hold up the knowledge of a "most probable prevailing downturn (contraction) in the housing market" the only option is to seek alternative ways of preserving wealth.

Of course I have considered fixing the interest on my home loan and just sitting tight - that's the back up plan if the CEO of domestic responsibilities (wife) does not concur. But then I'm stuck with the risk of unemployment and ultimately defaulting on loan repayments - even after some period of income protection insurance has lapsed.

From here on until we reach an economic equilibrium the family home/property will be a quick trip to poverty if it represent your most significant debt. I, like many people assumed 20 years of steady growth in the economy would allow us to pay off the debt with a bit of help from inflationary depreciation of the debt value.

FYI, I live in the outer north eastern suburbs of Melbourne, Australia. We have walking access to trains, markets, rural properties, comunity centres etc. If I do sell I will most probably try to remain here (rent) as long as possible until it is feasible to buy a property outright from, hopefully, increased wealth from wise investment in hedging funds, gold etc.

So tell me Mr Bill.. since you are one of the foremost posters on the subject of investments in these turbulent times what is your advice/opinion?

[MrBill]

Look all kidding aside. The short answer is there is no easy answer. I am just reading Market Masters in Bloomberg Magazine about The world's best performing hedge funds with combined trillions under management. The experts concur. The underlying similarities of the various investment strategies is that there is none. They are not correlated.

I think many professionals agree 2005 was a tough year to call. There were no obvious investment choices and favored money making strategies like falling interest rates of carry strategies that flattered bonds or cheap interest rates and high growth that helped domestic stocks. It is all painfully obvious now, but at the start of the year it would have been very difficult to forecast with any certainty where we are today.

I do not see 2006 as being any easier? Energy prices may well fall from the peaks we have seen this past 2-years. The US economy (the linch pin of the world economy) just grew 4.3% in Q4'05 defying gravity and the best wisdom of many. A $300 billion revision to the Chinese economy shines new light on the size and diversity of Asian growth. A weaker US dollar may help exporters as well as make commodities and energy cheaper for foreigners.

So long as there is no bird flu, terrorist attacks or new threats to stability 2006 should be relatively benign. That is a big if. But you may get another one year of stability in which to pay-off debt or make savings. I am always grateful for every 6-months gainfully employed with savings in the bank. It is easier to invest savings to hedge out perceived risks than make those savings in the first place.

I think so long as you have no choice take the conservative path. Save money, pay down debt, reduce your mortgage. Maybe even reassess and trade down to a smaller house. Living in Europe I have reduced my square footage needs drastically. When you live in European apartments you realize you don't need a lot of living room to store junk you will never use. Once you get rid of that junk you are less likely to buy it again. I am not going to preach, but we live on less than one salary in a smaller apartment and we really do not feel that we lack anything. I like to say, we can afford to do anything we want, but we cannot afford to do everything, so it is about choices. A year's net salary in the bank buys a lot of peace of mind. Just get out of debt. The rest is easy.

So in any case, my apologies. A lot of people in these forums have attacked me for my beliefs. Maybe I did get defensive. I have been called naive, dumb, a filing clerk, the coruncopia of stupid ideas, etc. Sure I have thick skin, but maybe I did not treat everyone's opinion with the respect that they deserved. I manage a lot of oil money and trade a lot of markets. I enjoy these forums for the chance to see and hear what other people think. I should treat the posters with the respect they deserve. Feel free to ping me anytime about new markets and ideas. Who knows, it might be the alpha idea of the year.

Cheers

[gt1370a]

$this->bbcode_second_pass_quote('MrBill', 'S')o based on The Efficient Market Theory we should expect gold to be $495, the euro to be $1.1885, crude to be $58.25, the DJIA to be 10.805 and housing prices to be approximately what they are today. They may not be in one year's time, in which case there is money to be made being a market contrarian and betting that your inside knowledge and skill as an investor is better than everyone else's?