Oil Bubble, or Bubble Babble?

Hurricane · 05-30-2008, 09:13 AM

Investing for the oil price collapse
Commentary: The question is not if, but when prices will come down
By Michael Lynch
Last update: 7:02 a.m. EDT May 30, 2008

BOSTON (MarketWatch) -- Although a number of books and many articles have been written describing how to profit from ever-higher oil prices, not much has been said about what will happen when prices come down, as they are all but certain to do.

Certainly, a political disruption of oil supplies -- civil war in Nigeria, major fighting in southern Iraq, attacks on Caspian pipelines -- could occur and would send prices sharply higher, but overall there is a greater likelihood that prices will drop in the next few years, and perhaps sharply.

Oil is a mean-reverting commodity. Since the industry's early days, price revolved around a mean of less than $25 a barrel for over a century, despite world wars, the market monopoly of Standard Oil, the cartelization by the Texas Railroad Commission and finally the U.S. import quotas in the 1950s and 1960s. Only OPEC was able to raise it above those levels.

Others have made the very pertinent point that oil production seems to be increasing only slowly of late, while demand continues to grow and the booming economies of Asia are creating new, wealthy consumers in large numbers, suggesting a 'new oil market paradigm' where prices will not retreat cyclically.

However, these arguments represent the typical characterization by analysts of a cycle (or a bubble) as a permanent change, not unlike what was heard in the late 1970s, when nearly everyone studying the oil industry -- except for a few contrarians -- predicted ever rising prices. Oil companies diversified away from their areas of expertise (Mobil bought Montgomery Ward, and Exxon bought Reliance Electric, as two of many examples), car companies tried to accommodate the shift towards efficiency (GM) introduced the diesel Oldsmobile, while Chrysler briefly abandoned its large car lines), and investors searched for the silver bullet that would be the foundation of the next new energy industry.

The situation is roughly the same this time. Global demand growth has been slightly over 1% the past several years, even when the global economy was strong, down from the nearly 2% growth seen in the mid-1990s. Serious conservation has been slow to appear but all signs are that it is arriving and gathering strength, just as it did in the 1980s.

And while it is true that the supply side suffers from various problems, none of these are permanent. The loss in oil production from Hurricane Katrina alone would be enough to take OECD inventories to near-record levels, and supply losses from Iraq, Nigeria, and Venezuela have meant an ongoing loss of between 2 and 3 million barrels a day. Without these transient events, the market would be in glut.

Tipping point

What could cause oil prices to fall? A variety of short-term and longer-term factors can suggest an impending drop in prices, based on the recent explanations by traders for the perceived value of oil.

Given that the weak U.S. dollar has been cited as a major reason for the recent run-up in oil prices, signs that the U.S. economy is bottoming out, that the U.S. Fed is planning to cease cutting interest rates, that inflation in Europe is moderating and/or the European Central Bank is planning to cut interest rates, would tend to discourage oil price bulls and see some weakness.

More immediately perhaps, the likely rise in 2nd quarter OECD oil inventories -- which due to data lag won't be apparent until mid-summer -- should cause the market to move to contango, which eliminates profits from a rollover strategy. U.S. inventories have already begun to rise notably, reflecting a likely increase (globally) of about 1 million barrels a day.
Longer term, concerns about oil demand, particularly in China and India, would be assuaged by signs of weaker demand in response to higher prices; not shrinking demand, but slower growth which would suggest long-term trends would be below the bulls' expectations. And, of course, a recovery in supply would do much to deflate the bull market, whether from resumption of production in Nigeria (possible but unpredictable), strong increases from Iraq (likely in the next year or two), or improved performance from other non-OPEC sources (likely but of uncertain timing).

More here: http://www.marketwatch.com/news/stor...&dist=printTop

Hurricane · 05-30-2008, 09:20 AM

Don't Believe Oil-Bubble Babble
Martin T. Sosnoff 05.30.08, 6:00 AM ET

When I jotted down all the bubbles I experienced over the past 50 years, I was surprised how long the list ran.

Why not throw oil on that list of bubbles? After all, some of us remember when oil sold at $3 a barrel scarcely more than 30 years ago.

Bubble, bubble, toil and trouble. The market is saying don't pay attention to oil commodity futures spiking. Energy-related stocks just shaded their highs by 5 to 10%. A Goldman Sachs analyst broke into print with a $200 a barrel call on oil, but Goldman maybe talks its own book. They run commodity funds and are a major operator in oil futures trading.

The bears on oil point to short covering by traders and energy producers who sold far out futures, which spurted $10 and put the oil market close to a contango position where long futures trade above spot market quotes.

Meanwhile, oil equity analysts choose to stay behind the curve on current oil prices. At year end their earnings models carried oil at $85 a barrel for 2008. At the end of the March quarter, they moved to $95 a barrel and currently $100, far below the $130 spot price. Many analysts are modeling oil at $85 next year and beyond. The upshot of all this gamesmanship is that if oil holds above $125 a barrel, the Street's earnings projections could be 20% too low for major energy properties.

But macro thinking on oil is changing. There is no longer just one lonesome bear on energy supply, Matt Simmons in Texas. The scarcity scenario for oil is taking shape in think tanks around the world. Lukoil believes oil reserves are peaking in Russia. Satellite photography of the Saudi elephantine fields confirms more pressure pumping activity to maintain current production levels.

The developing world is using more and more oil. Even if China's monetary authorities kill off an inflationary economy with high interest rates, their gross domestic product (GDP) isn't going to zero from the present 10%-a-year growth rate.

The near-term test for oil is the U.S economy. If we sink into a deep recession, oil demand sloughs off. So far, with GDP near zero, daily oil imports are down just 200,000 barrels on an 11 million barrel base. Demand destruction is coming with diesel at $5.19 a gallon.

Pickup trucks stay parked in driveways. Ford Motor just owned up to falling demand for pickups and SUVs, always the most profitable models in their line. They no longer see any daylight for earnings this year. Our airlines just sank into the sunset with share prices down to low single digits for Delta, U.S. Airways and American Airlines. They are largely un-hedged in jet fuel, burning 500 million or more gallons, quarterly.

While oil stocks the past 12 months showed buoyancy, they've underperformed recent futures market fireworks. Refining and marketing profits are shrinking with no low-cost heavy oil to refine at wide crack spreads. The golden age of refining is history. There's no price gouging at the pump; refining margins stand paper thin.

Energy stocks do not meet my criteria of a bubble. The sector peaked above a 25% weighting in the S&P 500 Index more than 25 years ago. Today, energy is a 14% weighting in the index, up from 6% a couple of years ago. A year from now, I expect energy to approach 20% of the index and to give the tech sector a good run for market primacy.

Reservations center on rapidly rising operating costs for all producers, minimal refining margins and cyclically vulnerable chemicals earnings. Everyone's drilling and exploration activity needs to step up. This will boost depreciation expense for years to come.

More here: http://www.forbes.com/2008/05/29/ene...off_print.html

Smaart Aas Saabr · 05-30-2008, 03:52 PM

If US goes into big recession well China isn't going to keep growing.

gardnet1 · 05-30-2008, 05:15 PM

Every year about 4 million trucks and suvs are replaced 25%. They are being replaced more and more with cars and smaller crossovers. Now only about 15% of the market is trucks and traditional suvs. That translates into about 1.4 million buyers a year downsizing. Then you throw in scooters and motorcycles and demand for gas will go down slightly for Americans. It's like taking the composite CAFE of the nations vehicles and increasing it from say 21 to 23/24 mpg. Doesn't sound like much but percentage-wise it is 9-12% increase as these vehicles filter into the market. I think in 3 years, Americans will be using about 15% less fuel than we do today.

It will make a big difference but it won't make up for supply increases, especially with the $2500 car on the way.

member12 · 05-30-2008, 09:30 PM

It's a bubble.

Hopefully for America's sake, oil prices will drop to and stay between $60 and $90 a barrel.

nphillips · 05-31-2008, 12:08 AM

OK. So it's a bubble and the bubble bursts. The value of oil slams to the ground, which causes us to sink into a deep recession. Interest rates are cut, deflating the value of the dollar and causing oil prices to surge to all time highs.

PA Dweller · 05-31-2008, 01:06 AM

I hope so, would love to see gas at $2.00 again.

AMERICA 123 · 05-31-2008, 01:37 AM

Quote:

Originally Posted by member12

It's a bubble.

Hopefully for America's sake, oil prices will drop to and stay between $60 and $90 a barrel.

Only way we see 200.00/bbl soon is an unforeseen disaster or, an attempt by our current record holder to beat his own mark - raise the bar a bit - go out with a bang for

Quote:

- the greatest strategic blunder in the history of the United States.

. Chinese demand is now weakening - for the year worldwide total we'll end up plus 1 to 2% - or less.

AndrewGS · 05-31-2008, 02:42 AM

I call bubble as well. We'll never see $50/bbl. oil again, even if the US Dollar rebounds, but it will settle under $100. I don't see gasoline being less than $2.50/gal. again either, but it should settle under $3.

**paul8488** · 05-31-2008, 02:50 AM

Cool. So people should go buy more SUVs.

AndrewGS · 05-31-2008, 03:13 AM

Quote:

Originally Posted by paul8488

Cool. So people should go buy more SUVs.

NO!!!

Unless they need them or can afford the gas bill as even at $2.50/gal. it's a costly proposition.

**paul8488** · 05-31-2008, 03:23 AM

Quote:

Originally Posted by AndrewGS

NO!!!

Unless they need them or can afford the gas bill as even at $2.50/gal. it's a costly proposition.

Oh, but gas should go back even lower than that. No, I'd say people have nothing to worry about. It's silly to buy economical vehicles today since the cost of gas is going to go down very soon.

AndrewGS · 05-31-2008, 03:44 AM

Quote:

Originally Posted by paul8488

Oh, but gas should go back even lower than that. No, I'd say people have nothing to worry about. It's silly to buy economical vehicles today since the cost of gas is going to go down very soon.

Sure.

PA Dweller · 05-31-2008, 10:38 AM

Quote:

Originally Posted by paul8488

Cool. So people should go buy more SUVs.

People should buy what they want, and what they can afford. Not everyone can feel comfortable in a Smart. A Buick Enclave or GMC Acadia is a good trade off for a full size, traditional SUV.

**paul8488** · 05-31-2008, 10:50 AM

Quote:

Originally Posted by PA Dweller

People should buy what they want, and what they can afford. Not everyone can feel comfortable in a Smart. A Buick Enclave or GMC Acadia is a good trade off for a full size, traditional SUV.

You're right. And since the price of fuel is no longer a concern, many more people can afford to buy SUVs.

05-30-2008, 09:13 AM	#1 (permalink)
Hurricane 6.0 Liter Vortec V8 Join Date: Sep 2003 Posts: 1,548	Investing for the oil price collapse Investing for the oil price collapse Commentary: The question is not if, but when prices will come down By Michael Lynch Last update: 7:02 a.m. EDT May 30, 2008 BOSTON (MarketWatch) -- Although a number of books and many articles have been written describing how to profit from ever-higher oil prices, not much has been said about what will happen when prices come down, as they are all but certain to do. Certainly, a political disruption of oil supplies -- civil war in Nigeria, major fighting in southern Iraq, attacks on Caspian pipelines -- could occur and would send prices sharply higher, but overall there is a greater likelihood that prices will drop in the next few years, and perhaps sharply. Oil is a mean-reverting commodity. Since the industry's early days, price revolved around a mean of less than $25 a barrel for over a century, despite world wars, the market monopoly of Standard Oil, the cartelization by the Texas Railroad Commission and finally the U.S. import quotas in the 1950s and 1960s. Only OPEC was able to raise it above those levels. Others have made the very pertinent point that oil production seems to be increasing only slowly of late, while demand continues to grow and the booming economies of Asia are creating new, wealthy consumers in large numbers, suggesting a 'new oil market paradigm' where prices will not retreat cyclically. However, these arguments represent the typical characterization by analysts of a cycle (or a bubble) as a permanent change, not unlike what was heard in the late 1970s, when nearly everyone studying the oil industry -- except for a few contrarians -- predicted ever rising prices. Oil companies diversified away from their areas of expertise (Mobil bought Montgomery Ward, and Exxon bought Reliance Electric, as two of many examples), car companies tried to accommodate the shift towards efficiency (GM) introduced the diesel Oldsmobile, while Chrysler briefly abandoned its large car lines), and investors searched for the silver bullet that would be the foundation of the next new energy industry. The situation is roughly the same this time. Global demand growth has been slightly over 1% the past several years, even when the global economy was strong, down from the nearly 2% growth seen in the mid-1990s. Serious conservation has been slow to appear but all signs are that it is arriving and gathering strength, just as it did in the 1980s. And while it is true that the supply side suffers from various problems, none of these are permanent. The loss in oil production from Hurricane Katrina alone would be enough to take OECD inventories to near-record levels, and supply losses from Iraq, Nigeria, and Venezuela have meant an ongoing loss of between 2 and 3 million barrels a day. Without these transient events, the market would be in glut. Tipping point What could cause oil prices to fall? A variety of short-term and longer-term factors can suggest an impending drop in prices, based on the recent explanations by traders for the perceived value of oil. Given that the weak U.S. dollar has been cited as a major reason for the recent run-up in oil prices, signs that the U.S. economy is bottoming out, that the U.S. Fed is planning to cease cutting interest rates, that inflation in Europe is moderating and/or the European Central Bank is planning to cut interest rates, would tend to discourage oil price bulls and see some weakness. More immediately perhaps, the likely rise in 2nd quarter OECD oil inventories -- which due to data lag won't be apparent until mid-summer -- should cause the market to move to contango, which eliminates profits from a rollover strategy. U.S. inventories have already begun to rise notably, reflecting a likely increase (globally) of about 1 million barrels a day. Longer term, concerns about oil demand, particularly in China and India, would be assuaged by signs of weaker demand in response to higher prices; not shrinking demand, but slower growth which would suggest long-term trends would be below the bulls' expectations. And, of course, a recovery in supply would do much to deflate the bull market, whether from resumption of production in Nigeria (possible but unpredictable), strong increases from Iraq (likely in the next year or two), or improved performance from other non-OPEC sources (likely but of uncertain timing). More here: http://www.marketwatch.com/news/stor...&dist=printTop __________________ 2007 Yukon XL Denali 2006 Chevrolet Corvette

05-30-2008, 09:20 AM	#2 (permalink)
Hurricane 6.0 Liter Vortec V8 Join Date: Sep 2003 Posts: 1,548	Oil Bubble, or Bubble Babble? Don't Believe Oil-Bubble Babble Martin T. Sosnoff 05.30.08, 6:00 AM ET When I jotted down all the bubbles I experienced over the past 50 years, I was surprised how long the list ran. Why not throw oil on that list of bubbles? After all, some of us remember when oil sold at $3 a barrel scarcely more than 30 years ago. Bubble, bubble, toil and trouble. The market is saying don't pay attention to oil commodity futures spiking. Energy-related stocks just shaded their highs by 5 to 10%. A Goldman Sachs analyst broke into print with a $200 a barrel call on oil, but Goldman maybe talks its own book. They run commodity funds and are a major operator in oil futures trading. The bears on oil point to short covering by traders and energy producers who sold far out futures, which spurted $10 and put the oil market close to a contango position where long futures trade above spot market quotes. Meanwhile, oil equity analysts choose to stay behind the curve on current oil prices. At year end their earnings models carried oil at $85 a barrel for 2008. At the end of the March quarter, they moved to $95 a barrel and currently $100, far below the $130 spot price. Many analysts are modeling oil at $85 next year and beyond. The upshot of all this gamesmanship is that if oil holds above $125 a barrel, the Street's earnings projections could be 20% too low for major energy properties. But macro thinking on oil is changing. There is no longer just one lonesome bear on energy supply, Matt Simmons in Texas. The scarcity scenario for oil is taking shape in think tanks around the world. Lukoil believes oil reserves are peaking in Russia. Satellite photography of the Saudi elephantine fields confirms more pressure pumping activity to maintain current production levels. The developing world is using more and more oil. Even if China's monetary authorities kill off an inflationary economy with high interest rates, their gross domestic product (GDP) isn't going to zero from the present 10%-a-year growth rate. The near-term test for oil is the U.S economy. If we sink into a deep recession, oil demand sloughs off. So far, with GDP near zero, daily oil imports are down just 200,000 barrels on an 11 million barrel base. Demand destruction is coming with diesel at $5.19 a gallon. Pickup trucks stay parked in driveways. Ford Motor just owned up to falling demand for pickups and SUVs, always the most profitable models in their line. They no longer see any daylight for earnings this year. Our airlines just sank into the sunset with share prices down to low single digits for Delta, U.S. Airways and American Airlines. They are largely un-hedged in jet fuel, burning 500 million or more gallons, quarterly. While oil stocks the past 12 months showed buoyancy, they've underperformed recent futures market fireworks. Refining and marketing profits are shrinking with no low-cost heavy oil to refine at wide crack spreads. The golden age of refining is history. There's no price gouging at the pump; refining margins stand paper thin. Energy stocks do not meet my criteria of a bubble. The sector peaked above a 25% weighting in the S&P 500 Index more than 25 years ago. Today, energy is a 14% weighting in the index, up from 6% a couple of years ago. A year from now, I expect energy to approach 20% of the index and to give the tech sector a good run for market primacy. Reservations center on rapidly rising operating costs for all producers, minimal refining margins and cyclically vulnerable chemicals earnings. Everyone's drilling and exploration activity needs to step up. This will boost depreciation expense for years to come. More here: http://www.forbes.com/2008/05/29/ene...off_print.html __________________ 2007 Yukon XL Denali 2006 Chevrolet Corvette

05-30-2008, 03:52 PM	#3 (permalink)
Smaart Aas Saabr 7.0 Liter LS7 V8 Join Date: Oct 2003 Location: Montréal, Québec Posts: 8,706	Re: Oil Bubble, or Bubble Babble? If US goes into big recession well China isn't going to keep growing. __________________ What will destroy our country and us is not the financial crisis but the fact that liberals think the free market is some kind of sect or cult...That’s not what the free market is. The free market is just a measurement, a device to tell us what people are willing to pay for any given thing at any given moment. The free market is a bathroom scale. You may hate what you see when you step on the scale. ‘Jeeze, 230 pounds!’ But you can’t pass a law making yourself weigh 185.

05-30-2008, 05:15 PM	#4 (permalink)
gardnet1 3.6 Liter V6 Join Date: Nov 2006 Location: Colorado Springs, CO Drives: 2008 Ford Escape Limited 2006 Ford Focus ZX4 Posts: 1,105	Re: Oil Bubble, or Bubble Babble? Every year about 4 million trucks and suvs are replaced 25%. They are being replaced more and more with cars and smaller crossovers. Now only about 15% of the market is trucks and traditional suvs. That translates into about 1.4 million buyers a year downsizing. Then you throw in scooters and motorcycles and demand for gas will go down slightly for Americans. It's like taking the composite CAFE of the nations vehicles and increasing it from say 21 to 23/24 mpg. Doesn't sound like much but percentage-wise it is 9-12% increase as these vehicles filter into the market. I think in 3 years, Americans will be using about 15% less fuel than we do today. It will make a big difference but it won't make up for supply increases, especially with the $2500 car on the way.

05-30-2008, 09:30 PM	#5 (permalink)
member12 7.0 Liter LS7 V8 Join Date: Jun 2003 Location: Atlanta Drives: pickup truck Posts: 5,372	Re: Oil Bubble, or Bubble Babble? It's a bubble. Hopefully for America's sake, oil prices will drop to and stay between $60 and $90 a barrel. __________________ Answer Toyota's FJ and 4Runner...BRING BACK A ZR2 BLAZER!!!!

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05-31-2008, 12:08 AM	#6 (permalink)
nphillips 2.0 Liter Supercharged ECOTEC Join Date: Jan 2003 Location: Houston, Texas Posts: 167	Re: Oil Bubble, or Bubble Babble? OK. So it's a bubble and the bubble bursts. The value of oil slams to the ground, which causes us to sink into a deep recession. Interest rates are cut, deflating the value of the dollar and causing oil prices to surge to all time highs.

05-31-2008, 01:06 AM	#7 (permalink)
PA Dweller 5.3 Liter LS4 V8 Join Date: Oct 2006 Location: Lords Valley, PA Posts: 3,561	Re: Oil Bubble, or Bubble Babble? I hope so, would love to see gas at $2.00 again. __________________ *Optional: Possible but not necessary; left to personal choice.* MEANING YOU DON'T PAY FOR IT IF YOU DON'T WANT IT. SO GET OVER YOURSELF. Learn the definition.

05-31-2008, 02:42 AM	#9 (permalink)
AndrewGS 7.0 Liter LS7 V8 Join Date: Apr 2004 Location: Spring, TX, MX (Houston) Drives: 1986 Ford RS200 EVO Posts: 6,933	Re: Oil Bubble, or Bubble Babble? I call bubble as well. We'll never see $50/bbl. oil again, even if the US Dollar rebounds, but it will settle under $100. I don't see gasoline being less than $2.50/gal. again either, but it should settle under $3. __________________ Andrew - MySpace - KD5FHW 1995 Buick Roadmaster Limited - LT1, 4L60E, 2.93 Gears, 260HP, 4,200LBS, 15.4SEC 1/4-MI, 21MPG 2005 Chevrolet Silverado C1500 LS - LM7, 4L60E, 3.73 Gears, 300HP, 4,200LBS, 15.0SEC 1/4-MI, 19.0MPG "Gas mileage is fine, but keep in mind, the first question any car buyer asks themselves is, 'Will this get me laid?'"

05-31-2008, 02:50 AM	#10 (permalink)
paul8488 GMI Staff Member Join Date: Jul 2003 Location: France Drives: 2007 MBK Flipper Scooter Posts: 13,352	Re: Oil Bubble, or Bubble Babble? Cool. So people should go buy more SUVs. __________________ *The department of redundancy department.*

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