Why $65/barrel oil could be coming (Great Article)
08-16-08, 11:41 AM
#1
Why $65/barrel oil could be coming (Great Article)
If you're frustrated over the high cost of gasoline at the pump, don't trade in your Hummer for a Vespa just yet: A leading energy analyst is telling clients these days to prepare for crude oil to retreat back below $65 per barrel over the next three years.
How could it happen? He says conservation, new drilling, efficient new vehicles, alternative energy sources, a rising dollar and a global recession will combine to blast prices back to the Stone Age -- or at least to last year's levels.
"The match has struck, the fuse has been lit, and four or five years from now OPEC producers are going to be drinking their own oil and choking on it," says Tony Kolton, the founder and president of Logical Information Machines, a provider of research to most of the world's major energy-trading companies for two decades.
Plenty of smart analysts disagree with this point of view, figuring that emerging-market demand will pump up fossil-fuel prices and that Americans will blithely forget all about conservation if gasoline prices trend lower. But since Kolton's view is deeply out of consensus and at least minimally plausible, it does deserve our attention.
Speculators unmasked
Kolton, a specialist in the history, composition and psychology of the energy market, believes that speculators were without question behind the run-up of prices to $147 per barrel in July and that government threats to expose and punish their behavior spooked them out of their positions in a hurry.
He says his data on open interest of noncommercial positions in crude trading, as well as conversations with professional traders at big oil companies, clearly show that speculators, and not rising demand from Asia, pushed the market to extremes.In contrast to people who say the oil market is too big to be pushed around by hedge funds, Kolton counters that in fact it is much smaller than the bond, currency or equity markets. The oil market "can be easily manipulated," he says.
The reason for the misconception is that while the market is large in dollar terms, most of the oil companies' hedging positions are pointed the same direction and set for months at a time. So marginal new positions that point the opposite way can have an outsize impact, much like a 5-foot rudder can change the direction of a 500-foot ship.
"I would ask all the fundamental guys why oil was $147 a month ago and $114 today," Kolton says. "Their opinion that crude moves purely on real demand is BS. When the fast money comes out, there's a giant sucking sound."
The swift exit of the fast-money crowd has pushed oil back down to its March level, around $110. Kolton's research on seasonality and demand suggests oil prices will rebound back to the $125 area and then resume their crash. The $100 level will be hard to crack, but he expects energy bears to prevail over bulls within six months and launch crude on a journey below $65.
"You had a perfect storm of pre-Olympics demand in China, a plunging dollar, speculation, cold weather and fear of supply disruptions in Nigeria and Iran pushing it up, and now they've all swung around on a dime," Kolton says, observing that recession and conservation are gutting demand, Iran is at the negotiating table, the dollar is soaring against the euro in reaction to the worsening European economy, and the summer has proved milder than normal, sapping the use of air conditioning nationwide.
"People who don't trade the futures markets don't realize that this is typical for commodities, which always trade on emotion. Look at silver in the late 1970s, which went from $4 to $50 and back to $4 in two years," Kolton says.
Diminished demand
What about all that talk of how supply is running out? Well, it's funny: The spike to $147 seems to have really got people thinking about scarcity, and they've started making plans that could be very long-lasting.
It's sort of like the day a person realizes it's time to stop smoking -- a light-bulb moment of alertness to a long-simmering crisis. Oil bears now think the $147 level was a slap in the face that made major corporate users consider changing their behavior in persistent and fundamental ways.
Hybrids
Auto companies became focused on creating smaller hybrid cars; individuals are discovering the joys of public transportation, car pools and bicycles; churches are lecturing on the need to turn out the lights in vacant rooms; and presidential candidates are debating the merits of inflating tires. And perhaps most importantly, going green appears to have emerged from fad to lifestyle as the cool dads now drive Mini Coopers instead of gas-guzzling Suburbans to their kids' soccer practices.
Big private-equity and venture-capital funds, and industrial titans such as General Electric (GE, news, msgs), are throwing billions of dollars into creating better batteries, advanced materials and vehicles that run on plug-in electric power and plentiful U.S. natural gas. Meanwhile, oil giants from Brazil to Beijing are exploring for new oil and finding it offshore a lot more easily than expected, with payoffs to come a lot sooner than most skeptics now believe possible.
All of this is coming at a time when a credit drought has seriously impaired economic growth and blunted employment levels in developed nations in Europe and the Americas, and threatens to spread to Australia and much of Asia. When people are commuting and consuming less, and when companies are making less, they collectively use less energy. The U.S. Energy Information Administration reported Tuesday that oil demand during the first half of 2008 fell by an average 800,000 barrels per day compared with the same period a year ago -- the biggest volume decline in 26 years.
Bad news and other views
Of course, we should probably be careful about what we wish for. While stock prices have risen smartly as energy prices have cracked in the past month, stocks are likely to fall steeply along with oil prices if a global recession is the major driver behind demand destruction. Just in case you're wondering, Kolton's historical and economic research and his gut instincts as a veteran trader lead him to think that the Dow Jones Industrial Average ($INDU) will sink to the 9,500 level next year -- retracing the 2003-07 bull market -- before the bear has had its fill.
Opposing point of view? Yeah, I've got that. David Anderson, an energy portfolio manager at Palo Alto Investors, who has been my go-to guy for years on the subject, thinks the idea of crude oil falling below $65 per barrel is ludicrous. And, frankly, he says he doesn't even care when it comes to his energy-industry positions."We never base our view on energy-industry stocks on the direction of oil prices," he says. "We are buying growth companies in a growth industry and always have at least a five-year horizon. The fundamentals of the business -- increasing demand and decreasing supply over the long term -- favor higher stock values over time."
Anderson says energy bears are just not facing reality. He points to U.S. Department of Energy research that forecasts global growth in demand rising to at least 110 million barrels of oil per day in a decade from the current level of 85 million. "To get to that level while supply from the best and biggest fields in the Middle East, North Sea and Gulf of Mexico is shrinking will be very tough," he says. "Oil prices are going up to ration supply, short of a total global economic meltdown."
How could it happen? He says conservation, new drilling, efficient new vehicles, alternative energy sources, a rising dollar and a global recession will combine to blast prices back to the Stone Age -- or at least to last year's levels.
"The match has struck, the fuse has been lit, and four or five years from now OPEC producers are going to be drinking their own oil and choking on it," says Tony Kolton, the founder and president of Logical Information Machines, a provider of research to most of the world's major energy-trading companies for two decades.
Plenty of smart analysts disagree with this point of view, figuring that emerging-market demand will pump up fossil-fuel prices and that Americans will blithely forget all about conservation if gasoline prices trend lower. But since Kolton's view is deeply out of consensus and at least minimally plausible, it does deserve our attention.
Speculators unmasked
Kolton, a specialist in the history, composition and psychology of the energy market, believes that speculators were without question behind the run-up of prices to $147 per barrel in July and that government threats to expose and punish their behavior spooked them out of their positions in a hurry.
He says his data on open interest of noncommercial positions in crude trading, as well as conversations with professional traders at big oil companies, clearly show that speculators, and not rising demand from Asia, pushed the market to extremes.In contrast to people who say the oil market is too big to be pushed around by hedge funds, Kolton counters that in fact it is much smaller than the bond, currency or equity markets. The oil market "can be easily manipulated," he says.
The reason for the misconception is that while the market is large in dollar terms, most of the oil companies' hedging positions are pointed the same direction and set for months at a time. So marginal new positions that point the opposite way can have an outsize impact, much like a 5-foot rudder can change the direction of a 500-foot ship.
"I would ask all the fundamental guys why oil was $147 a month ago and $114 today," Kolton says. "Their opinion that crude moves purely on real demand is BS. When the fast money comes out, there's a giant sucking sound."
The swift exit of the fast-money crowd has pushed oil back down to its March level, around $110. Kolton's research on seasonality and demand suggests oil prices will rebound back to the $125 area and then resume their crash. The $100 level will be hard to crack, but he expects energy bears to prevail over bulls within six months and launch crude on a journey below $65.
"You had a perfect storm of pre-Olympics demand in China, a plunging dollar, speculation, cold weather and fear of supply disruptions in Nigeria and Iran pushing it up, and now they've all swung around on a dime," Kolton says, observing that recession and conservation are gutting demand, Iran is at the negotiating table, the dollar is soaring against the euro in reaction to the worsening European economy, and the summer has proved milder than normal, sapping the use of air conditioning nationwide.
"People who don't trade the futures markets don't realize that this is typical for commodities, which always trade on emotion. Look at silver in the late 1970s, which went from $4 to $50 and back to $4 in two years," Kolton says.
Diminished demand
What about all that talk of how supply is running out? Well, it's funny: The spike to $147 seems to have really got people thinking about scarcity, and they've started making plans that could be very long-lasting.
It's sort of like the day a person realizes it's time to stop smoking -- a light-bulb moment of alertness to a long-simmering crisis. Oil bears now think the $147 level was a slap in the face that made major corporate users consider changing their behavior in persistent and fundamental ways.
Hybrids
Auto companies became focused on creating smaller hybrid cars; individuals are discovering the joys of public transportation, car pools and bicycles; churches are lecturing on the need to turn out the lights in vacant rooms; and presidential candidates are debating the merits of inflating tires. And perhaps most importantly, going green appears to have emerged from fad to lifestyle as the cool dads now drive Mini Coopers instead of gas-guzzling Suburbans to their kids' soccer practices.
Big private-equity and venture-capital funds, and industrial titans such as General Electric (GE, news, msgs), are throwing billions of dollars into creating better batteries, advanced materials and vehicles that run on plug-in electric power and plentiful U.S. natural gas. Meanwhile, oil giants from Brazil to Beijing are exploring for new oil and finding it offshore a lot more easily than expected, with payoffs to come a lot sooner than most skeptics now believe possible.
All of this is coming at a time when a credit drought has seriously impaired economic growth and blunted employment levels in developed nations in Europe and the Americas, and threatens to spread to Australia and much of Asia. When people are commuting and consuming less, and when companies are making less, they collectively use less energy. The U.S. Energy Information Administration reported Tuesday that oil demand during the first half of 2008 fell by an average 800,000 barrels per day compared with the same period a year ago -- the biggest volume decline in 26 years.
Bad news and other views
Of course, we should probably be careful about what we wish for. While stock prices have risen smartly as energy prices have cracked in the past month, stocks are likely to fall steeply along with oil prices if a global recession is the major driver behind demand destruction. Just in case you're wondering, Kolton's historical and economic research and his gut instincts as a veteran trader lead him to think that the Dow Jones Industrial Average ($INDU) will sink to the 9,500 level next year -- retracing the 2003-07 bull market -- before the bear has had its fill.
Opposing point of view? Yeah, I've got that. David Anderson, an energy portfolio manager at Palo Alto Investors, who has been my go-to guy for years on the subject, thinks the idea of crude oil falling below $65 per barrel is ludicrous. And, frankly, he says he doesn't even care when it comes to his energy-industry positions."We never base our view on energy-industry stocks on the direction of oil prices," he says. "We are buying growth companies in a growth industry and always have at least a five-year horizon. The fundamentals of the business -- increasing demand and decreasing supply over the long term -- favor higher stock values over time."
Anderson says energy bears are just not facing reality. He points to U.S. Department of Energy research that forecasts global growth in demand rising to at least 110 million barrels of oil per day in a decade from the current level of 85 million. "To get to that level while supply from the best and biggest fields in the Middle East, North Sea and Gulf of Mexico is shrinking will be very tough," he says. "Oil prices are going up to ration supply, short of a total global economic meltdown."
08-16-08, 11:56 AM
#2
Lead Lap
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I dont care if oil is a dollar or free in a year. Im still doing what I can to stick it to those damn arab princess! When the money there runs out lets see how far their little jihad continues.
08-16-08, 12:34 PM
#6
I am more inclined to believe the latter for two reasons:
1) world economies are slowing and conserving oil, not eating as much up as possible like speculators were saying... thus curbing the global appetite for oil more than before. Speculators spoke like the world was consuming just as much oil as we were before it doubled in price...whoops not the case at all.
and 2) Americans, the most oil hungry of them all, have been shown just how weak and vulnerable we really are when it comes to the black gold. Yes, it's possible to think that if gas goes down full size SUV and truck sales could just shoot right back up, but for the most part I think we have been taught a lesson about energy use and the importance for domestic, sustainable energy sources i.e. nuclear, solar, wind, water, etc.
3) Additionally there WILL come a day where oil runs out (and granted that day is far off), but towards that date don't think that OPEC won't be charging $15-20+ a gallon and $400 a barrel because it's the ONLY resource they have. Once the wells run dry that part of the world is going to be in for a very, very rude awakening. I don't think the American people and government want to be caught with their pants down again when that day comes.
Last edited by MPLexus301; 08-16-08 at 12:42 PM.
08-16-08, 01:37 PM
#7
Not going to happen.... at least for any length of time. As soon as the price of oil goes too low OPEC will surely cut production and the price will then go back up. They wil milk their oil production for as long as they can for as much as the market will bear.
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08-16-08, 01:42 PM
#8
I think the oil speculation thing has been divided into two main camps- those who say its going to just keep going up with world demand, and those who believe that just like all things speculative, at some point the bubble will pop and prices go back down.
I am more inclined to believe the latter for two reasons:
1) world economies are slowing and conserving oil, not eating as much up as possible like speculators were saying... thus curbing the global appetite for oil more than before. Speculators spoke like the world was consuming just as much oil as we were before it doubled in price...whoops not the case at all.
and 2) Americans, the most oil hungry of them all, have been shown just how weak and vulnerable we really are when it comes to the black gold. Yes, it's possible to think that if gas goes down full size SUV and truck sales could just shoot right back up, but for the most part I think we have been taught a lesson about energy use and the importance for domestic, sustainable energy sources i.e. nuclear, solar, wind, water, etc.
3) Additionally there WILL come a day where oil runs out (and granted that day is far off), but towards that date don't think that OPEC won't be charging $15-20+ a gallon and $400 a barrel because it's the ONLY resource they have. Once the wells run dry that part of the world is going to be in for a very, very rude awakening. I don't think the American people and government want to be caught with their pants down again when that day comes.
I am more inclined to believe the latter for two reasons:
1) world economies are slowing and conserving oil, not eating as much up as possible like speculators were saying... thus curbing the global appetite for oil more than before. Speculators spoke like the world was consuming just as much oil as we were before it doubled in price...whoops not the case at all.
and 2) Americans, the most oil hungry of them all, have been shown just how weak and vulnerable we really are when it comes to the black gold. Yes, it's possible to think that if gas goes down full size SUV and truck sales could just shoot right back up, but for the most part I think we have been taught a lesson about energy use and the importance for domestic, sustainable energy sources i.e. nuclear, solar, wind, water, etc.
3) Additionally there WILL come a day where oil runs out (and granted that day is far off), but towards that date don't think that OPEC won't be charging $15-20+ a gallon and $400 a barrel because it's the ONLY resource they have. Once the wells run dry that part of the world is going to be in for a very, very rude awakening. I don't think the American people and government want to be caught with their pants down again when that day comes.
as to the oil rich countries, a lot of them are being smart and investing in other resources for the time oil runs out.
08-16-08, 01:52 PM
#9
Lexus Fanatic
Correct....and THAT's why we need to start our own drilling.....and more refinery construction. The more we do now, the better it will be for us in the future. The question is not IF, but WHEN; and the answer is NOW. But oil alone is not the answer either........eventually, like it or not, we will have to convert to other fuels.
08-16-08, 02:21 PM
#10
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08-16-08, 02:28 PM
#11
Out of Warranty
The so-called "energy experts" of Wall Street have been horribly wrong on almost every pronouncement they have made in the past thirty years. While they cut their teeth on conventional stock and commodity trading, oil is an entirely different animal. For the past few years the major oil operators have built their long-range planning on $70-$80 oil. That's survival level. They would prefer a price slightly above the $100 level to produce the revenue they need for expansion of drilling an refining here at home.
The problem here in the US is that we farmed out our energy industry to OPEC just as we farmed out manufacturing to China. The reasons are simple and identical: NIMBY. We pollute their air, take advantage of their cheap labor and lack of regulation, while our politicians congratulate themselves on making the US a better place to live. Meanwhile they have driven strategic industries offshore and into the hands of potential enemies. That's OK, it's more important to be re-elected than actually ensure the security of this nation. After all, power pays off today.
The oil price bubble has burst. As prices fall back to sustainable levels, we need to understand that this was an object lesson. Without domestic production and refining, we are at the mercy of whoever controls the oil tap. We also need to understand just how tenuous the grip is on that oil tap. Middle Eastern kingdoms seem stable, but they are rigid dictatorships enforced by an oligarchy of feudal princes whose loyalty is usually for sale. Friendly governments can change overnight.
There are a number of choke points in the world's energy delivery system, notably the Strait of Hormuz at the entrance to the Arabian Gulf. Whether controlled by Iranian gunboats or Somali pirates, choke points like the Strait of Hormuz, the Bosporus, at Istanbul and the entry to the Black Sea oil ports, and every major pipeline in the Near East could separate consumers in Europe and the US from vital energy supplies for weeks.
In that time, Europe could sputter to a halt and the US, thanks to a combination of our meager domestic production and our strategic petroleum reserve might stagger on for 60 to 90 days beyond Europe and a good part of the Far East, but we too would soon be burning the furniture to stay warm. We would have a choice in that interim - to succumb to our folly or to take back the choke points and re-open the flow of oil by military force. Neither is a good choice for the long term. Let's hope that the power-hungry politicians in Washington who treat energy policy as a test of political strength, understand just what choices they are really facing. They won't be pretty.
The problem here in the US is that we farmed out our energy industry to OPEC just as we farmed out manufacturing to China. The reasons are simple and identical: NIMBY. We pollute their air, take advantage of their cheap labor and lack of regulation, while our politicians congratulate themselves on making the US a better place to live. Meanwhile they have driven strategic industries offshore and into the hands of potential enemies. That's OK, it's more important to be re-elected than actually ensure the security of this nation. After all, power pays off today.
The oil price bubble has burst. As prices fall back to sustainable levels, we need to understand that this was an object lesson. Without domestic production and refining, we are at the mercy of whoever controls the oil tap. We also need to understand just how tenuous the grip is on that oil tap. Middle Eastern kingdoms seem stable, but they are rigid dictatorships enforced by an oligarchy of feudal princes whose loyalty is usually for sale. Friendly governments can change overnight.
There are a number of choke points in the world's energy delivery system, notably the Strait of Hormuz at the entrance to the Arabian Gulf. Whether controlled by Iranian gunboats or Somali pirates, choke points like the Strait of Hormuz, the Bosporus, at Istanbul and the entry to the Black Sea oil ports, and every major pipeline in the Near East could separate consumers in Europe and the US from vital energy supplies for weeks.
In that time, Europe could sputter to a halt and the US, thanks to a combination of our meager domestic production and our strategic petroleum reserve might stagger on for 60 to 90 days beyond Europe and a good part of the Far East, but we too would soon be burning the furniture to stay warm. We would have a choice in that interim - to succumb to our folly or to take back the choke points and re-open the flow of oil by military force. Neither is a good choice for the long term. Let's hope that the power-hungry politicians in Washington who treat energy policy as a test of political strength, understand just what choices they are really facing. They won't be pretty.
08-16-08, 04:02 PM
#13
Correct....and THAT's why we need to start our own drilling.....and more refinery construction. The more we do now, the better it will be for us in the future. The question is not IF, but WHEN; and the answer is NOW. But oil alone is not the answer either........eventually, like it or not, we will have to convert to other fuels.
2 of top 3 exporters of oil to the usa are not even in the opec - they are canada and mexico.
08-16-08, 04:23 PM
#14
How so? Efficient new engines and technologies will have our vehicles consuming less gas than they currently do, which is, in effect, conservation. Not to mention that a lot of people have changed how much they drive and also HOW they drive to conserve gas.
As dumb as it sounds...Paris Hilton said it better than Barbo or Johnny. We need to invest in drilling at home as a short term fix and security, but we also need to look in the long term for things like nuclear, wind, solar, and water power as well as investing in things like hydrogen technology for cars. It would be expensive, long, and hard, but we COULD be an oil free nation if we needed to be. As long as gas is reasonable we don't need to worry as much, but once we get choked back into $4 or $5 gallon gas, the oil dependent nations need to have a way to stick it to OPEC.
As dumb as it sounds...Paris Hilton said it better than Barbo or Johnny. We need to invest in drilling at home as a short term fix and security, but we also need to look in the long term for things like nuclear, wind, solar, and water power as well as investing in things like hydrogen technology for cars. It would be expensive, long, and hard, but we COULD be an oil free nation if we needed to be. As long as gas is reasonable we don't need to worry as much, but once we get choked back into $4 or $5 gallon gas, the oil dependent nations need to have a way to stick it to OPEC.
08-16-08, 07:54 PM
#15
The so-called "energy experts" of Wall Street have been horribly wrong on almost every pronouncement they have made in the past thirty years. While they cut their teeth on conventional stock and commodity trading, oil is an entirely different animal. For the past few years the major oil operators have built their long-range planning on $70-$80 oil. That's survival level. They would prefer a price slightly above the $100 level to produce the revenue they need for expansion of drilling an refining here at home.
The problem here in the US is that we farmed out our energy industry to OPEC just as we farmed out manufacturing to China. The reasons are simple and identical: NIMBY. We pollute their air, take advantage of their cheap labor and lack of regulation, while our politicians congratulate themselves on making the US a better place to live. Meanwhile they have driven strategic industries offshore and into the hands of potential enemies. That's OK, it's more important to be re-elected than actually ensure the security of this nation. After all, power pays off today.
The oil price bubble has burst. As prices fall back to sustainable levels, we need to understand that this was an object lesson. Without domestic production and refining, we are at the mercy of whoever controls the oil tap. We also need to understand just how tenuous the grip is on that oil tap. Middle Eastern kingdoms seem stable, but they are rigid dictatorships enforced by an oligarchy of feudal princes whose loyalty is usually for sale. Friendly governments can change overnight.
There are a number of choke points in the world's energy delivery system, notably the Strait of Hormuz at the entrance to the Arabian Gulf. Whether controlled by Iranian gunboats or Somali pirates, choke points like the Strait of Hormuz, the Bosporus, at Istanbul and the entry to the Black Sea oil ports, and every major pipeline in the Near East could separate consumers in Europe and the US from vital energy supplies for weeks.
In that time, Europe could sputter to a halt and the US, thanks to a combination of our meager domestic production and our strategic petroleum reserve might stagger on for 60 to 90 days beyond Europe and a good part of the Far East, but we too would soon be burning the furniture to stay warm. We would have a choice in that interim - to succumb to our folly or to take back the choke points and re-open the flow of oil by military force. Neither is a good choice for the long term. Let's hope that the power-hungry politicians in Washington who treat energy policy as a test of political strength, understand just what choices they are really facing. They won't be pretty.
The problem here in the US is that we farmed out our energy industry to OPEC just as we farmed out manufacturing to China. The reasons are simple and identical: NIMBY. We pollute their air, take advantage of their cheap labor and lack of regulation, while our politicians congratulate themselves on making the US a better place to live. Meanwhile they have driven strategic industries offshore and into the hands of potential enemies. That's OK, it's more important to be re-elected than actually ensure the security of this nation. After all, power pays off today.
The oil price bubble has burst. As prices fall back to sustainable levels, we need to understand that this was an object lesson. Without domestic production and refining, we are at the mercy of whoever controls the oil tap. We also need to understand just how tenuous the grip is on that oil tap. Middle Eastern kingdoms seem stable, but they are rigid dictatorships enforced by an oligarchy of feudal princes whose loyalty is usually for sale. Friendly governments can change overnight.
There are a number of choke points in the world's energy delivery system, notably the Strait of Hormuz at the entrance to the Arabian Gulf. Whether controlled by Iranian gunboats or Somali pirates, choke points like the Strait of Hormuz, the Bosporus, at Istanbul and the entry to the Black Sea oil ports, and every major pipeline in the Near East could separate consumers in Europe and the US from vital energy supplies for weeks.
In that time, Europe could sputter to a halt and the US, thanks to a combination of our meager domestic production and our strategic petroleum reserve might stagger on for 60 to 90 days beyond Europe and a good part of the Far East, but we too would soon be burning the furniture to stay warm. We would have a choice in that interim - to succumb to our folly or to take back the choke points and re-open the flow of oil by military force. Neither is a good choice for the long term. Let's hope that the power-hungry politicians in Washington who treat energy policy as a test of political strength, understand just what choices they are really facing. They won't be pretty.
. And so utterly and completely true. We have farmed out our oil industry and manufacturing industry to the point that we do not possess the ability to function independently as a country. It has provided cheap products and oil for us to buy (until now), but at what cost in the long run? This is just the beginning of a whole new era of change in our country, and the world. Will our politicians be up to the task? God help us if they are not.