[MrBill]

A place where people may talk about energy & commodity markets and what is driving them.

Just letting the old thread die and starting a new one here. A chance to ask a new poll question. However, the server only accepted part of my new Poll, so if the moderator would be so kind as to either edit or delete my Poll it would be much appreciated. Should read


less than $50?
around $55?
around $60
aournd $65
more than $70


thanks.



Caveat Emptor/ex-ante/post-ante/Code of Conduct/etc./
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[send_oil_please]

The Question I am asking is When Will the Markets Recognize the energy crisis?

There was an interesting article from the 2005 ASPO meeting that discussed this. Essentially, you look at the Distant Years Futures Contracts for whatever commoditie ~ gold, oil, natural gas, base metals etc, etc. You ask, "are prices for late years sloping up (above current prices), even with current prices, or sloping down (below current prices)?"

You can download the data from Ino.com weekly into Excel and do a quick plot, or just eye-ball the numbers on their site.

If you look now, it appears The Markets do in fact anticipate an imbalance in supply/demand for GOLD - it is sloping up for Delivery Contracts due out to the year 2012.

But OIL and Natural Gas Both show a flat or drooping slope suggesting The Market is NOT expecting any bottlenecks in Supply in the future, or that The Market is expecting a decrease in demand to offset any supply problems.

Unless "This Time is Different," I think the Market will eventually begin pricing the late-year Delivery contracts for Oil and Natural Gas the way it is now doing it for Gold (and may be also doing with other precious and/or base metals - I have not checked).

The question is more of "When" than "if" IMHO. The increasing inversion of the yield curve says the US will enter a recession w/i a year or so. So World demand will likely suffer too, since we are The World's Biggest Gut on the planet and everyone else needs to sell us their beer.

STILL --- there could be a delay in peak (~plateau) , possibly lasting a couple years, before The Market starts pricing in "Peak Energy Production Period." and the Gig is up, the News is out, They Finally Got It...

But, who can time these things ?!?!? I mean really...

Nature can be a Mother sometimes (I mean that in a Good Way)

[cube]

A new thread!...thanks Mr.Bill

The other thread was getting kinda long and I know for sure I'm not the only one here who wants to vote again.

So it seems things are heating up again in Nigeria after 4 weeks??? of relative calm, expats getting kidnapped and some stuff getting blown up. If anybody is curious as to why nobody wants to build an oil refinery in Nigeria I think this pretty much sums it up. Strange how some of the world's greatest oil exporters must import gasoline because of a shortage of oil refineries?

Anyways---Oil has been dropping like a lead weight for the past 4 weeks, is this a signal for a trend change?

[MicroHydro]

I voted $80+, not because of geological and economic fundamentals, but because of the numerous geopolitical problems. The odds of Iran AND Nigeria AND Venezuela staying peaceful in 2006 don't look that great to me. In a peaceful world with high enough US interest rates, under $50 is quite possible.

Maybe the ideal option straddle is to buy oil puts and Lockheed calls.

[donshan]

I saw an interview with Boon Pickens on CNBC last Friday, and he said he would "not short oil now " and expected prices in the 60s.

I think the most serious upside potential for oil in 2006 will be caused by Iran. I am more and more convinced that President Ahmadinejad is driven by religious ideology and not the economics of oil supply and demand or Western "free market" ideals. I won't elaborate the politics on this thread but I suggest all oil traders read up on the 12th Imam of Shia Islam (google 12th Imam or Muhammad al Mahdi)

Here are some reasons I voted for "over $80".
.

http://www.telegraph.co.uk/news/main.jh ... world.html[align=right]

$this->bbcode_second_pass_quote('', 'B')ut listen carefully to the utterances of Mr Ahmadinejad - recently described by President George W Bush as an "odd man" - and there is another dimension, a religious messianism that, some suspect, is giving the Iranian leader a dangerous sense of divine mission.
...skip

All streams of Islam believe in a divine saviour, known as the Mahdi, who will appear at the End of Days. A common rumour - denied by the government but widely believed - is that Mr Ahmadinejad and his cabinet have signed a "contract" pledging themselves to work for the return of the Mahdi and sent it to Jamkaran.

Iran's dominant "Twelver" sect believes this will be Mohammed ibn Hasan, regarded as the 12th Imam, or righteous descendant of the Prophet Mohammad.

He is said to have gone into "occlusion" in the ninth century, at the age of five. His return will be preceded by cosmic chaos, war and bloodshed. After a cataclysmic confrontation with evil and darkness, the Mahdi will lead the world to an era of universal peace.

This is similar to the Christian vision of the Apocalypse. Indeed, the Hidden Imam is expected to return in the company of Jesus.

Mr Ahmadinejad appears to believe that these events are close at hand and that ordinary mortals can influence the divine timetable.

...skip (to UN speech reference)
Western officials said the real reason for any open-eyed stares from delegates was that "they couldn't believe what they were hearing from Ahmadinejad".

Their sneaking suspicion is that Iran's president actually relishes a clash with the West in the conviction that it would rekindle the spirit of the Islamic revolution and - who knows - speed up the arrival of the Hidden Imam.

[MrBill]

RE the difference between gold and oil

Well, it is pretty simple, oil is burnt, while gold is held indefinately, not destroyed. Therefore, oil is subject to other supply & demand fundamentals than gold. It costs approximately $1 per month to hold physical gold in terms of insurance and storage. Therefore, gold will inevitably have a positive yield curve. Oil on the other side is subject to supply & demand and as at the moment, there is enough crude and products, the price is in carry, but longer term, no producers expect these high prices to last. Therefore, they are selling forward. They are hedging their forward production by selling at today's prices. I for one prefer to bet with the commercials than the speculators. The commercials may be wrong, but at least they have invested the time & effort to explore different scenarios before voting with their balance sheets.


If you think they are wrong, an out of the money call with a strike price of $250 and expiry in 2010 costs just $1.50 per contract. You can buy 1000 barrels of oil for delivery in March 2010 for just $1500 premium today.


p.s. my Moderator has added in

greater than $80?

not me. I would have then added in 'around $75?' as well, so as not to skew the curve? Just good quantitative methods instead of adding 'your bias' to the data and therefore invalidating the entire exercise. Garbage in, garbage out.

[kochevnik]

I would like to point out that I was one of only a handful of people who got the 2005 poll correct.

If there was an option for over $ 100 I would have taken it. I think the hurricaine season this year is going to be just as bad if not worse than last, plus things just get tighter and tighter as well as crazier and crazier as the demand gets closer to extraction. With so little room to maneuver, I think the volatility will be unprecedented.

[MrBill]

$this->bbcode_second_pass_quote('kochevnik', ':')!:

I would like to point out that I was one of only a handful of people who got the 2005 poll correct.

If there was an option for over $ 100 I would have taken it. I think the hurricaine season this year is going to be just as bad if not worse than last, plus things just get tighter and tighter as well as crazier and crazier as the demand gets closer to extraction. With so little room to maneuver, I think the volatility will be unprecedented.

[DantesPeak]

While not exactly saying so, the Federal Reserve points to long term futures contracts, being about the same as current pirces, as meaning inflation expectations are low.

Not a futures trader like Mr. Bill, but I think the out year contracts don't reflect the high oil price because of techincal forces - i.e. oil companies may want to lock in expected future production at today's prices, since they are already profitable.

Speaking of profitable, buying out month contracts has been a very good strategy over the last year (again speaking from the sidelines only).

[send_oil_please]

Re - similarities of gold and oil ??

First, I agree about siding with commercials as a rule in the markets, they deal in the stuff and have the best handle on the "current" market. But I think they clearly have Not priced in any sort of Peak Production in the distant year contracts for Oil and Natural Gas.

Peak Oil Production = Peak A-Lot-of-Other-Things Production.
Without Fossil Fuels, the supply of virtually all Mined minerals and metals, including gold will also Peak. So will Supply of virtually everything that requires a lot of digging and a lot of energy to produce... food comes to mind... plastics... medicines, pesticides... we all know the cracks and crevices in our civilization that oil seeps into, but the average person seems only aware of the price of gas and heating their home... oblivious.

Also, some gold is "consumed" by industry etc, and the rest will almost certainly be used as currency post-peak, so it will not be readily available - it will be in those vaults along side a lot of useless, old fiat paper.

[MrBill]

$this->bbcode_second_pass_quote('DantesPeak', 'W')hile not exactly saying so, the Federal Reserve points to long term futures contracts, being about the same as current pirces, as meaning inflation expectations are low.

Not a futures trader like Mr. Bill, but I think the out year contracts don't reflect the high oil price because of techincal forces - i.e. oil companies may want to lock in expected future production at today's prices, since they are already profitable.

Speaking of profitable, buying out month contracts has been a very good strategy over the last year (again speaking from the sidelines only).

[Doly]

My prediction is around $70-$75. Volatility being what it is, it could be $65-$80. I know that's a wide margin, but one can't realistically make a more accurate prediction.

My method is eyeballing the trends. Not very scientific, I know. But it's eyeballing done by a mathematician, if that gives it any more credence.

[DantesPeak]

$this->bbcode_second_pass_quote('MrBill', '
')By the way, if anyone is interested, stochastics have performed very on the Goldman Sachs Commodity Index if you back test it for two years. Basically, if you were a buy & hold investor you would have had a 50% return in the past two years, but using stochastics a 104% return. Stochastics work best in a range trading market. Apparently, despite trending up, there were enough sideways moves so that the stochastics could work their magic?

My models for crude are based on short, medium and long-term moving averages, plus RSI and other indicators of being oversold or overbought, like trading envelopes that are based on 2 standard deviations from the mean. It is not rocket science, but it takes a lot of discipline. However, I am pleased with the results, even though I often loathe myself for not following it closer (like over this weekend). If someone can tell me how to paste an image, like an Excel spreadsheet, I can post the model. If anyone is interested?

Take care and have a good week ahead.

[smiley]

I find this year particularly hard to call. It depends on three factors I guess, demand, production and the dollar.

1) What is the dollar going to do?

The dollar is now suspended by rate hikes or rather the FED hiking with the rest of the world standing by.

This situation cannot go on indefinitely. Japanese GDP grew by 5.5% last year, so I expect the BOJ to start raising rates. European growth is picking up and so are the inflationary forces. This will probably lead to a few cautious hikes by the EB. And of course the FED cannot continue raising their rates.

The twin deficits will thus continue to take a bite out of the dollar.


2) What is the production going to do?

Well barring some unforeseen catastrophes: nothing. There is not much room for growth, and there is not much reason for decline.

3) What is the demand going to do?

This really is the interesting part. Last year saw a considerable drop in demand. This is the reason why stocks are building in the US at the moment, even though imports and domestic production are below last year's levels. It is hard to disseminate to what extend the hurricane damage contributed to this drop. But if consumption doesn't pick up, it is going to put a constraint on the prices.

Overall I think that the driving factor for the oil price will be the dollar this year. If the Euro/dollar ratio heads back to 1.35 this year the it would mean a 10% increase of the dollar price. From current levels that would point to an oil price of $70, but I guess that a range between $60 and $80 would be a good bet.

[cube]

$this->bbcode_second_pass_quote('smiley', '.')..This really is the interesting part. Last year saw a considerable drop in demand. This is the reason why stocks are building in the US at the moment, even though imports and domestic production are below last year's levels.
...

[MrBill]

Quite a jump in prices over the weekend, a little higher yesterday during the London sesssion, but so far no follow through now that Access is trading. This does not preclude some follow through buying once NY comes in and assesses the Nigerian situation. So far I have not heard any news about outcome between Russia and Iran's talks, but I didn't expect Tehran to give up their enrichment research program. The war of words between Chavez and Rice is still going on. Just background noise, but for oil traders a reminder that trouble is always just around the corner.

Take evenly balanced global supply & demand and a few hundred thousand barrels one way or the other makes quite a difference. Especially with refiners taking badly needed down time, while Shell is evacuating workers from Nigeria, and Chavez has threatened to shut down its Citgo refineries. Maybe hollow talk, but it gives one an uneasy feeling that all is not right with the world.

To be fair, traders do focus on other sources of information, like OPEC and IEA supply & demand forecasts, and not just DOE inventory numbers in the US on Wednesdays. However, as oil is fungible, and as most oil benchmarks are traded at a spread to the futures market, knowing what US inventories are is an important piece of the puzzle. Just like watching the Fed for signals on global interest rates interests a lot of central bankers and not just US investors. They are a benchmark and all other national interest rates will be compared against the US standard. And adjusted to local needs balanced against external stability.

RE lies, damn lies & statistics. Most statistics are in any case estimates based on a sampling of data. Thus they have built in biases or sampling errors. However, without them we would really be flying in the dark. We may not trust the numbers, but we then compare the hard data to anecdotal evidence which either supports or refutes it. It is funny how some use statistics when it supports their argument, but when it doesn't it must be because the data is wrong?

I had dinner on Saturday night with Minister of Finance in Pafos at an event sponsored by the Cyprus Stock Exchange. He talked about Cyprus joining the euro in 2008 and about all sorts of nice things like an economy growing based on R&D and other economic drivers. Anecdotally, if you look around at the constuction zone that Cyprus has become, you have to reach the conclusion that the economy is being driven by buying & selling real estate, building & selling houses and all the trades that support those industries. Nevermind that the island is short on water in their resevoirs and will have to start rationing this summer or desalienating seawater.

However, I did some back of the envelope calculation based on GDP and what the mean price of a house should be based on local incomes and was quite surprized. I calculated an average price of a home should be around CYP90.000 when in fact you can hardly find a two bedroom apartment for that price. Many apartments start in the CYP150.000 range and houses are around CYP250.000 and up. Not expensive by international standards, but high relative to Cypriot incomes.

The difference is being financed by hot money flowing in from Russia, the Middle East and parts of Europe & the UK, but I doubt that it is sustainable. Greece had to devalue their dracma by about 40% before they joined the euro. I think the Cyprus pound is at least 25% overvalued at the moment. I think that if Cyprus joins the euro at these levels that the economy will come down with a thud when inward investment slows. On the otherhand, they have large untapped deposits of natural gas sitting offshore between Cyprus, Syria, Isreal, Lebanon and Egypt, and if I was an offshore oil company, I know where I would sooner locate my infrastructure and staff. Not Syria for sure.

Whew, what was my point? Oh ya, the Minister of Finance is working with the numbers he has, even though I may disagree with them based on my own observations, but mitigating circumstances like having a nice pool of natural gas handy might smooth the transition from pound to euro and ease the pain. On the otherhand, a strong currency keeps inflation down and forces domestic industry to become more competitive in the long run, so perhaps not so dumb afterall. But they still do not have any water. Bad for a country that needs lots of it for tourism and to run those airconditioners all summer long.

[cube]

$this->bbcode_second_pass_quote('MrBill', 'I') had dinner on Saturday night with Minister of Finance in Pafos at an event sponsored by the Cyprus Stock Exchange.

[MrBill]

$this->bbcode_second_pass_quote('cube', '')$this->bbcode_second_pass_quote('MrBill', 'I') had dinner on Saturday night with Minister of Finance in Pafos at an event sponsored by the Cyprus Stock Exchange.

[smiley]

Well I mentioned the US demand but the same goes for the European demand.

$this->bbcode_second_pass_quote('', 'W')hile European gasoline demand is generally in decline due to tax policies favouring diesel use, the price increases associated with Hurricanes Katrina and Rita in the US appear to have contributed to unusually large declines of 6.5% and 6.7% in September and October respectively. In November the year-on-year contraction in gasoline demand is estimated to have returned to a more ‘normal’ 3.7%. Note that in September and October 2006, European gasoline demand is projected to decline by less than 1.0% as the 2005 baseline is abnormally low in this period. On the whole, regional gasoline demand is projected to decline by 2.5% in 2006, less than the 4.3% decline witnessed in 2005.

[joewp]

$this->bbcode_second_pass_quote('smiley', '
')I think prices have reached a level that consumers start thinking about curbing their consumption. That is going to dampen price gains in the coming period.