Commodity bubble proponent
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Latest Comments44 Comments
IEA Report Predicts Oil Supply Crunch
I am Exxon Mobil and I just invested 4 billion in a new oil field. Prices plummet and my oil field development is 75% done. I will do:
A. Stop building out my infrastructure and do nothing. All of my 4 billion has gone down the toilet
B. Finish the development program. Yes I lose some money but I lose alot more by stopping work.
Hmmm...I'd pick B.
Ok...time for scenario 2....
I am Venezuela and I need $90 oil to survive. It is now worth $55. I do:
A. Cut my oil investments back and watch my govt revenue go down the toilet even more than what has happened from the market.
Or...
B. Invest in new production. Yes I might not make a big profit, but at least I have money flowing into the system.
The point of this analysis is that lower prices is NOT going to stop investment but will intensify investment in already existing projects. Exploration will probably slow down but NOC and IOC are going to be desperate to develop resources to at least capture some of the losses in price appreciation through VOLUME.
In other words for those of your who are looking for a reflation....LOOK OUT BELOW
Options Trader: Tuesday Outlook
Long time no speak. Glad to see that you were right on this horsecrap that was the oil market.
My real comment was on the wonderful "objective" CNBC. Oil corrects 50% and production is slated to increase 5-7% over the next two years and CNBC is hooting their peak oil horn and running their ads that likens oil to the Dodo Bird and the dinosaurs in that oil will soon be extinct and that its a certainty.
I'm seriously considering filing a lawsuit against NBC Universal over representing an unproven theory as fact and using their access to the markets to manipulate prices
Commodity Prices: Are Speculators to Blame?
www.businessweek.com/t...
I have more of a moderate view of this. The bubble exists, but speculation (not speculators) is definitely inflating this thing. There is more demand for financial derivatives related to oil than there is for the actual commodity (this is why there are 10-15x more oil contracts traded than oil that actually exists).
While I am not for position limits (if Goldman/Morgan want to speculate themselves out of business, be my guest), the lack of clarity in the oil market and the clear breach of investment banks now playing in the physical market (Morgan is the largest heating oil distributor in the US) is a signficant problem. Will these measures bring down the price? I'm not really sure, but we need to know what's going on.
One of the biggest bull arguments posited is that it is increasingly more expensive to find oil now than before. I disagree from a technical standpoint. What has gotten more expensive is oil services because there are now more people trying to drill for oil than service operators. This is a condition that will improve over time b/c service operators (like contractors during the housing bubble) will expand their fleet of rigs/boats/etc, driving the cost of equipment and eventually the replacement cost for oil down.
As for the "Wall of Worry" comment, I heard that same bunk 10 months ago when the Dow hit 14,000.
As Global Demand Rises, Oil Production Remains Flat
www.eia.doe.gov/emeu/s...
Figure 3a: International Supply and Consumption.
Bodman needs to go read the statistcal informtion produced by his own agency.
Supply is up about 2% year over year from last year. So before you go publishing your bs about how oil production is flat and no new supplies are coming,go get educated smart guy.
Even the Gas Crisis Needs a Culprit
1. CFTC data is incomplete and does not include the people that have actually left the NYMEX to go trade on the ICE.
2. Speculation is a problem because there is no incentive for people to actually purchase the oil.
What needs to happen (in order to get rid of this) is 4 things:
1. Have recourse for cancelling or rolling forward all oil contracts. So if you decide to cancel your August contract and move it to september, you lose your margin. Similar rules should be put in on the short side too (I'm not one sided about this).
If this was employed, it would really change the risk/reward ratio of oil investing without taking delivery. So if you're on the long side and your contract comes due and you decide to roll it forward, you just lost your initial investment. If you decide to take delivery, more power to you.
2. Any publicly traded company or pension fund that clears OTC swaps in the US that gets caught on an unregulated exchange faces fines of millions of dollars/day/violation. If the ICE was regulated, its still ok to trade on the ICE.
3. Separate the functions of clearing a transaction from loaning money to an investor to go bet on oil futures. What Goldman and Co. do is lend money to the investor to take the long side, clear the OTC derivative trade, and then take the short side themselves. This enables the i-bank to win b/c they know that these guys can't actually take delivery of the oil.
This can be stopped by requiring that the guys who clear the contract can't loan the investor money. So, I don't have a problem with the above transaction taking place if Goldman was clearing the swap, JP Morgan was lending the investor the money to invest, and Morgan Stanley took the short side of the deal.
But to have the same investment bank do all three things is a tradgedy.
Options Trader: Tuesday Outlook
Just a few thoughts on some of your earlier posts.
The whole point of oil futures, like options, is to allow for producers and consumers to come together and trade oil.
In a contract in any other industry, when you enter into a contract, one person buys oil, the other person sells. If one party defaults on the agreement (which is basically what rolling the contract forward is), then they owe the other side of the transaction their entire deposit. If the producer defaults on the deal, then they are responsible for paying recourse to the buyer. End of story.
This is how real estate, buying a car off of a factory line, major purchases by industrial users, and conceptually how a futures contract should work. If there is no recourse (penalties for breaching a contract), the entire market is a complete fraud because both sides of the transaction could be lying through their teeth.
The game is completely disconnected from economic reality. It's basically like me selling you a 5 star hotel I don't own that you won't buy, and then the entire hotel industry uses that pricing as a basis to set the rents on their buildings. This game would work for awhile until all of the sudden supply and demand catch up to you. Sound familiar?
The Enron loophole allowed parties to enter into bilateral agreements between parties that don't have any crude oil between them which have then been used as market comparables for the pricing services(Platts, etc.).
These issues are easily regulated without really impacting the "free market", margin requirements, position limits, etc.:
1. Recourse for the other party in a cancelled future contract. If buyer rolls the contract, seller gets his margin. If the seller cancels out of their deal to sell oil, buyer gets a recourse fee.
2. Any publicly traded company that clears OTC trade swaps on a non-approved market will face fines of several millions of dollars/transaction per dayl.
3. The buyer and seller must use an independent clearing house for oil futures transactions. This would stop the conflicts of interest where goldman acts as the seller, takes a fee for clearing the contract, and then loans the money to the buyer for the contract.
4. The independent clearing house can not loan money to either party to complete the transaction.
These are pretty simple benign changes, but it would fix the issues of non-recourse contracts.
Crude: Where's the Demand Destruction?
1. China is building a very large SPR system like we have here
2. They are trying to increase their forward cover ahead of the Olympics.
I don't think that the Chinese drivers are using 25% more than last month. It has more to do with inventory accumulation and less with increased demand
Options Trader: Monday Outlook
Oil: This Isn't a Bubble
omrpublic.iea.org/
IEA said that in the most recent quarter, OECD supplies fell by approximately 8 million barrels with a 53.4 day cover. Inventory levels are ABOVE AVERAGE.
If we had this structural shortage that Wall Street and this guy thinks actually exists (like a 1.7 million barrel/day shortfall), our inventory levels would be down nearly 30-60 million barrels/month. Sorry man, nice try.
Options Trader: Monday Outlook
-China's runaway demand: I don't see how a country (who even with subsidies has prices at $2.80/gal) where " upper middle class" is defined as $1,000/month can afford to spend that kind of coin on gasoline to exponentially grow the automobile market (that works out to about 10% of pre-tax income on gasoline at those prices for the rich chinamen, compared with 4-5% for the poor American shlub). The Chinese miracle is about to be completely undone by their manipulation because they are in a lose-lose scenario with their currency for two reasons:
1. If they keep the yuan artificially low, they will have inflation rates that exceed the nominal GDP growth (which they already have at 10% inflation and 9% growth). This creates major instability in the poorer regions as workers demand higher wages to compensate, thereby decreasing profitability of outsourcing.
2. If they let the yuan appreciate, then they become too expensive to be used as exporters. Since the Chinese do not have the education system (they have NO top universities by most measures) and protection of IP to transform to a high tech society, they lose their major employment base. High unemployment leads to the unwinding of the Chinese miracle.
Historically, during commodity booms, the bulls underestimate the supply response from producers. This time is not different in that there is a MASSIVE resource base in a diverse area to accomodate supply growth (Brazil, Ghana, India's Rajasthan field, China's Bohai Bay, Mexico's Chicanotepec, US's GOM & Bakken, Canada's Artic zone, Eastern Russia, Lukoil's 4 billion barrel discovery in the Caspian, new recent finds in the North Sea from the UK and Norway, Saudi Arabia's recent discovery this year adjacent to Ghawar as indicated in Aramco's annual report, supermajor fields in Iran and Iraq that are known but not yet tapped). I know I'm missing a few more. Even Goldman Sachs super-spike guys do not subscribe to the peak oil theory per the Barron's article.
We have not dealt with the real drivers of this market and until we do nothing will change:
1. Fed's cheap money policy
2. Reckless speculation: It's not surprising that as soon as the CFTC even started to look into the ICE, Goldman & co. threatened to move to Dubai. That could be shot down real fast with a few simple measures like huge fines ($100,000,000 per day per violation) for any company doing business in the US that trades on unregulated trading platforms. The game would be over real fast if that happened.
Options Trader: Thursday Outlook
I'm a little bit confused. Help me out here.
Jim Rogers (one of my favorite commodity perma bulls b/c of the bowtie that makes him look like pee-wee herman) is on the rampage about how oil's record run is years away from ending. Ok typical bs out of that guy.
But literally in the next sentence, this dorkhead then said that he's purchasing airline stocks all over the world because they can't go down any farther since they are basically bankrupt.
www.bloomberg.com/apps...
Now, I'm a little bit of an amateur market watcher but how in the hell is the airline industry supposed to survive in an oil market that goes up up and up forever??? If $125 oil is a crisis to the airline industry, what do you think 200 or 300 dollar oil would do to it?
The bullshit train just keeps going
BTW...since all of the developing world economies can afford oil at $125 as the oil bulls so proudly complain, then why is Pakistan buying oil on a deferred payment plan?
www.bloomberg.com/apps...
Options Trader: Monday Outlook
His comments are about as unbiased/meritless as George Bush saying that Iraq has weapons of mass destruction.
Options Trader: Friday Outlook
When they decide to actually discuss speculation in the oil market, they brought in Hirsch of the Hirsch report in 2005 that warned of impending peak oil. With all due respect to him, if you look up his bio (former Exxon Mobil guy, now with "Management Information Services", a company that doesn't have any profile whatsoever) you'll realize that he's part of "Dick Cheney oil fraternity", which also happens to include our good friend Matt Simmons (who's wonderful investment bank has never represented an oil major in any transaction in it's 3 decades of existence), Boone Pickens (who was such a shitty oil man that he decided to start his own hedge fund), and the other "Peak oil prognosticators". This clearly detracts from the discussion about what is really going on in the oil market and how the hedge funds are operating (and they never talk about this ever).
Matt "There's no speculation in the oil market" Simmons clearly demonstrates with the following article that he is a complete hypocrite who's opinion should not be trusted.
www.simmonsco-intl.com...
Here's the cliff notes version:
In the late 1990s, the price of oil was tanking with ample supply. Matt Simmons, in his ultimate wisdom, argued that speculators basically were artifically pushing down the price of oil and were more important as price determinants than fundamentals b/c of their large sums of money.
Fast forward to today, there's now ALOT more money from hedge funds, large investors, investment banks trading the physical oil and purchasing tanks to manipulate supply/demand data for futures trading, and at least two new deregulated dark trading platforms in the oil market, but in Mr. Simmons mind there is less speculation now than there was in 1998? I guess he's totally missed the boat on the following energy trading scandals in the last 5 years (and these are the ones we know about:
Enron
El Paso
Amaranth
BP's cornering of the propane market
Two other hedge funds getting busted for manipulating the gasoline market
And while this one wasn't illegal:
Goldman Sachs' rebalancing of it's Commodity Index that tanked the price of gasoline overnight.
Options Trader: Wednesday Outlook
The Oil Shortage, and Other Fairy Tales
User 199286, since you're such a data driven person, I'll be happy to connect the dots for you with evidence, as you so eloquently put it.
Much of the declines in the non-OPEC areas (Norway, US, Mexico) can largely be attributed to a lack of investment in oil infrastructure b/c oil was really really cheap back then. I'm not advocating $10 oil again, but $135 is a HUGE stretch given the fundamentals
1. The US has the Gulf of Mexico, Bakken, ANWAR and the Continental Shelf. While ANWAR and the Continental Shelf are off limits, the other two are certainly not. These fields are currently being developed.
2. Norway: Statoil has made several discoveries in the past couple of years in the North Sea but b/c of a lack of equipment has not been able to develop them. Also, major exploration has begun in the Barents Sea.
3. Mexico: While Cantarell is declining, much of the decline is due to a lack of investment in the field. In addition to that field, Pemex is increasing production at a field called Ku-Maloob-Zeep and they have another gigantic field called Chicanotepec with nearly 139 Billion barrels of oil. Once again, this is an investment issue NOT a reserves issue.
One of the points of evidence that peak oil proponents use to show that Saudi Arabia is in trouble is that they have increased their oil rig count by a third in the last few years. HOWEVER, what these folks forget to mention is that the Saudi's are developing the 500k/day Kurais field and the 1.2 mb/day Kursanyah field RIGHT NOW as well as several other development projects to increase their productivity to 12.5 million/day. Combine those two projects with increased exploration and I think the rig count increase makes complete sense.
As for the 2 million barrel shortfall that doesn't exist...I suggest you go take a look at the IEA's latest production figures that show a total production of 87.3 million barrels/day since Q12008 with demand for the year of 86.8 million. This makes alot more sense given that there are oil tankers sitting around all over the world waiting to unload crude and that there isn't a supply shortage anywhere.
As for the peak oil oracle Boone Pickens, I'd be happy to send you links from major news outlets him claiming that we hit peak oil in 2001, 2002, 2003, 2004, 2005, etc.
And for the other peak oil oracle Matt Simmons and how he doesn't believe that speculators influence the price of oil, I suggest you go take a look at this article he wrote in 1998 talking about how hedge funds in Europe deliberately ran down the price of crude oil and how they were more powerful forces than supply/demand. If you read this, you'll see that he's a complete hypocrite. In his world, when the price falls its speculation and when the price goes up its supply and demand.
www.simmonsco-intl.com...
Mr. Davis- I agree with you and your points about the NYMEX. However, I'm afraid to say that we can't undo opening the Enron loophole in 2000. Dubai and other countries will just set up new exchanges offshore if we try to regulate oil market speculation here. We can't stop the oil bubble unless we stop the underlying reasons for people to speculate in oil futures.
Even given all of this fundamental information that suggest we are not on the precipice of an oil shortage, we have not yet hit the top of the oil bubble yet.
Every other bubble bursting (NASDAQ, housing, the 2006 oil correction) was preceded by a significant increase in the federal funds rate that wiped out the overly cheap money. We don't have that going right now. When you see the Fed Funds rate above 5%, expect a major correction in oil within 3-4 months, but not before then.
Unfortunately, when this bubble bursts, the consequences will not be pretty. Goldman, Merril, and others are counterparties to TRILLIONS of dollars of unfunded commodity derivatives. If any of their hedge/pension fund pals walk away from their highly leveraged bets on crude oil in significant numbers, the collapse of these structured investments will make the subprime/credit bubble explosion look like a cherry bomb in a toilet.
The commodity bubble of the last 6 months has everything to do with the Fed's reckless policy of trying to save the investment banking community at the expense of everyone else. "Peak everything" is too simplistic of an explanation for what is going on right now.