[pup55]

Warning; I am not a professional. Do not accept investment advice from anyone who has a job. Do not believe everything you see on the internet.

Also, Mr. Bill follows this more religiously than I do so it would be delightful to hear from him as well.

I think the front end of the market is temporarily overheated. We talked some with Mr. Bill a while back, to the effect that when the current price exceeds the 20-day moving average by more than 2 standard deviations, it's time to take some money off of the table. .

According to my little spreadsheet, we are at that point right now, for the first time in a long time. WTI has come up something like $7 in the last two weeks, thus giving us the "overheat" signal. The last time this happened was at the end of February 2007, and at that time, the market went from 62 to 56 within 12 trading days.

Do not be surprised if a good inventory reports comes out, and the WTI close in months drop down to about 68. Then, your contango condition will be restored.

Fundamentally, nothing has changed about the market since the beginning of summer. So, if you are in it for the long haul, relax and have a margarita, or other suitable beverage.

Warning: Occasionally, the market runs right through the signal we described above, and goes on to new highs. If that happens, the out months will go upward, and the contango condition will be restored, but at a higher pricing level. This happens maybe 1/3 of the time. One example of this is in March of 2006, when the market got overheated due to the refinery situation, and it stayed there until basically mid-August when it became clear that we were not going to have any hurricanes. This is why it's a little dangerous to go short in this situation.

[DantesPeak]

$this->bbcode_second_pass_quote('pup55', '
')Also, Mr. Bill follows this more religiously than I do so it would be delightful to hear from him as well.

[Ming]

In addition to the previous reasons (and I fully agree with them):

Because of several technical reasons, the crude futures markets tend to be in backwardation (instead of contango).
The strongest of those reasons is that the biggest market participants are the IOCs, that tend to use futures (and options and forwards) to sell a part of their future production. That tends to create a downward pressure that lowers long term futures prices.

So, the existance of a strong contango (above the discount for the cost of keeping stocks and of the cost of the involved money) means the agregate of the market participants really believe that the production constraints will increase significantly in the apropriate time frame...

In short:
The present prices (still with some contango for the first 2 years, and without subsequent significant long term backardation) mean that the PO is already accepted by the agregate of the futures markets investors.
This is quite recent: Up to 1 or 2 years ago the curves of the futures prices showed that they still did not accept the reality of a near term PO...

[pup55]

Dantespeak is quite right. There has been a lot of funny stuff going on at Cushing all spring. First a glut, now a shortage, no telling what the quality situation is.

You have to go back and ask the questions we always ask in this situation:

a. Are we likely, in the upcoming 6 to 12 months, to use less oil? No, despite the quadrupling of prices in the last five years, we are using even more oil. No one, and I mean no one, actually believes people will drive less and use less oil. There was a global concert event this weekend, and there was a lot of cheap talk, but at the end, everybody got into their cars and drove home.

b. Is there any headline in tomorrow's paper that could happen that will make the price of oil much cheaper? No, in fact there are any of a dozen things that could show up in the paper tomorrow and make the price of oil skyrocket. War, Hurricanes, you know the list.

c. Is China going to use less oil? Hardly. They have adopted the "grow or die" strategy. Little do they know that this is actually the "grow and die" strategy, but for the time being, things are going to continue like they are.

d. Could there be a sufficient economic meltdown, in the US or elsewhere, to cause a big slowdown in oil consumption? I think as long as interest rates stay where they are, things are going to continue pretty much as they are, our momentum will carry us forward for a few more months. Keep in mind the two differences between now and 1980-81: In the 1980's we had a responsible policy of killing off inflation by whatever means necessary. This meant interest rates of up to 15% to slow the economy down. Now, Bernanke does not have the courage to do this, and in fact, does not believe that inflation is a problem. Since this is politically and economically the easiest way out, this is what will happen. So we will keep going like we are, thus making the problem even worse later on, but in the meantime, the dollar drift and inflation will also support the oil price.

Also, keep in mind that in the 80's we still had the 55 mph speed limit, and doubled the CAFE standards, in other words, we had a concerted national effort to get people to sacrifice. There is not even so much as a hint of this right now. The argument can be made that even if there is a recession (minor one like 1990) we will not reduce our oil consumption much, if any. A 1929 crash, well, all bets are off, but I have the bike oiled up just in case.

This is not to say that there might be some hellacious stock market correction or other financial screwup, like we have from time to time, but typically, even if this happens, the expert analysts will whine, but Joe Lunchbucket still gets into his car in the morning and drives to work. So, there might be some negative effects on stocks, etc. but in all likelihood, the oil sector will still stay pretty strong.

So, unless one of the four things above changes, there might be some minor fluctuations in oil pricing, but things are going to keep going on this trajectory. All of this is subject to change, the frequent viewers of PO.com will be ahead of the common man on these issues, as usual.

[Ming]

There is a strong reason for a limited short term price correction:

The agregate (non-IOC) long positions on Futures and Options (check them here, for example: COT ) are close to historical records, and point to being discounting an active huricane season in the GOM.
If that does not occour, say, by August, prices can very well tumble some $10 during a very short time frame (2 or 3 weeks)...

Then, of course, there are well known (and very good) reasons for prices to rise by October, or somewhat before the full winter HO consumption...

[DantesPeak]

Very good comments above.

I neglected to mention that there is also a very serious quality issue concerning Brent. While I don't remember all the details, it appears that shutting down some fields for maintenence has resulted in the overall decline in Brent quality. There is a possibly that some oil production in the Brent field area won't meet the quality standards - and therefore can not be sold as 'Brent' oil.

[pup55]

$this->bbcode_second_pass_quote('', 'a')gregate (non-IOC) long positions on Futures and Options

[Ming]

Well, this illustrates a little bit the process of progressive recognition...
(A first chart from the middle of 2004 would be spectacular, but i dont have data for it...)

[Bas]

Pup, where do you get those futures tables?

And ming, those are some very telling graphs, beautiful.

[pup55]

My bad. The source was www.nymex.com, current session overview.

[Bas]

$this->bbcode_second_pass_quote('pup55', 'M')y bad. The source was www.nymex.com, current session overview.

[Ming]

You should also check this place: Barchart
You can view the end of (the previous) day quotes, or the delayed (15 mins) intraday.
And you also have nice charts (link at the center in the rightmost column).

They also have the options prices (select the month/year on top): Barchart Opt.

HO: Barchart HO

Gas: Barchart RB

[Bas]

$this->bbcode_second_pass_quote('Ming', 'Y')ou should also check this place: Barchart
You can view the end of (the previous) day quotes, or the delayed (15 mins) intraday.
And you also have nice charts (link at the center in the rightmost column).

They also have the options prices (select the month/year on top): Barchart Opt.

HO: Barchart HO

Gas: Barchart RB

[Ming]

$this->bbcode_second_pass_quote('Ming', 'T')here is a strong reason for a limited short term price correction:

The agregate (non-IOC) long positions on Futures and Options (check them here, for example: COT ) are close to historical records, and point to being discounting an active huricane season in the GOM.
If that does not occour, say, by August, prices can very well tumble some $10 during a very short time frame (2 or 3 weeks)...

Then, of course, there are well known (and very good) reasons for prices to rise by October, or somewhat before the full winter HO consumption...

[pup55]

Hey, your're right (golf clap).

The frequent viewers of PO.com have been treated to yet another example of prodigious forecasting!

[vampyregirl]

USA. represents 25% of worlds oil demand. 22 million barrels per day. far out of proportion with its population.
Canada. per capita uses just as much energy as america.
Europe. burns more than 22 trillion cubic feet of natural gas per year and consumption is increasing. oil and gas demand about equal to north america.
Japan. wealthy country with high demand.
China. one of worlds fastest growing economies. increasing energy demand.
india. in same boat as china.
for sure supplying all this increasing demand is going to be tough. Royal Dutch Shell are doing our best

[Nicholai]

haha what is your mother language?
second, I would avoid making so many new threads

[ohanian]

to Vampire Gal

What is the point of this post?

[billp]

Hey.

Don't be so harsh.

http://www.peakoil.com/post575196.html#575196

[billp]

What are the points of these posts?

$this->bbcode_second_pass_quote('', 'P')osted: Thu Jan 03, 2008 10:53 am Post subject: Re: the markets

--------------------------------------------------------------------------------

to Vampire Gal

What is the point of this post?