Oil Bubble, or Bubble Babble?

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Thread: Oil Bubble, or Bubble Babble?

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    News Contributor Hurricane's Avatar
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    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
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    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
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    Re: Oil Bubble, or Bubble Babble?

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



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    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.

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    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.

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    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.

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    Re: Oil Bubble, or Bubble Babble?

    I hope so, would love to see gas at $2.00 again.
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    Re: Oil Bubble, or Bubble Babble?

    Quote Originally Posted by member12 View Post
    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
    - 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.
    Last edited by AMERICA 123; 05-31-2008 at 12:45 AM.
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    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.
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    Re: Oil Bubble, or Bubble Babble?

    Cool. So people should go buy more SUVs.
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    Re: Oil Bubble, or Bubble Babble?

    Quote Originally Posted by paul8488 View Post
    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.
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    Re: Oil Bubble, or Bubble Babble?

    Quote Originally Posted by AndrewGS View Post
    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.
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    Re: Oil Bubble, or Bubble Babble?

    Quote Originally Posted by paul8488 View Post
    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.
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    Re: Oil Bubble, or Bubble Babble?

    Quote Originally Posted by paul8488 View Post
    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.
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    Re: Oil Bubble, or Bubble Babble?

    Quote Originally Posted by PA Dweller View Post
    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.
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