Wednesday, November 24, 2010

Oil prices and inventories

Oil prices continue to disassociate itself from the U.S. inventory picture... Despite an unexpected rise in Oil inventories, Oil is up over $2 as I write this.

The "recovery" might be anemic, but so are any increase in Oil production.  I spoke at length with The Mad Scientist last night (he thinks I am all wet and Oil will hit $60 before $100... and he may be right... that's why we have buyers AND sellers... if there were only buyers, oil would already be over $100), and while there are a number of dangers to this "long oil" hypothesis of mine, the European debt crisis, a recession in China... it is my assertion is that spare capacity is NOT one of these dangers.

You see, I think the producers are producing FLAT OUT.  I don't think that there is a single drop of "Shut In". Not F%^$#ing one (and if I am wrong I will be gone... eventually I will catch this thing, and until then my mentality is to NOT LOSE). If I am correct, then any further stimulus in the world economy (hint, hint.... QE2) will drive Oil prices higher - perhaps much higher.  The world  economy has been able to absorb $80+ oil for months now... the temptation to produce at these prices is simply too great to be passed on by the producers... ESPECIALLY since these VERY attractive prices have not cut into demand... it would appear to me that oil price elasticity is falling... my bet is that it appears that way to Saudi Arabia, Russia, Iran, the UAE..., too.

I have NO OTHER EVIDENCE other than the price mechanism... its not like I have friends with Aramco... and of course no big producer or big importer is going to say anything truthful... why would they?  Both sides are in a "don't make waves" standard program of denial... and I don't fault them for this in any way.  What should the POTUS do?  Walk up to a microphone and say Oil supplies are going to continue to decline for the U.S.? If he did, Oil would be at $120 and never look back... with all of that outcome's concomitant effect on the U.S. economy and employment.  And the producers?  They never had it so good!

This cannot be analyzed using the disinformation coming out of the big exporters and importers.


bureaucrat said...

The information we do have, correct it may not be, is from the EIA. And the EIA charts continue to show we are awash in oil (way above the 5-year average band) and .. hey, here's some bad news ... gasoline supply has finally returned to the 5-year average band after being way above it for a year. At least we can take comfort in the fact that gasoline supply is right where it should be .. horror of horrors!! :)

The local media here keeps mentioning that gasoline prices are up for this Thanksgiving season. They must mean compared to last year, cause I just did my "gasoline price walk," and all the prices were either the same or down.

Crybaby said...

The main reason for the continuation of quantitative easing by the Fed is high unemployment. This week we got a little good news - claims for unemployment insurance were way down, and employment is up in 41 out of 50 states. If this trend continues ( last month's job creation numbers were higher than expected at 150,000 jobs created) then the markets will expect less QE which would be dollar bullish. So maybe there's just a little good news on the horizon, with our fellow Americans going to work instead of sitting around eating potato chips and watching TV all day.

Dextred1 said...


Bur does the same thing at work, watch tv, computer porn and eating chips. :)

PioneerPreppy said...

Just like all the other job reports and initial claims the adjustment next week won't be published but will be much worse.

Government smoke is all that is.

Anonymous said...

The denial game is why we will run full throttle until we hit the wall. At that time the doomers get their wish.


bureaucrat said...

Dex, you barely know me. :) There's no TV to watch at work, but I did watch the "Big Boss's" TV when the towers both came down -- how did he get one? I've seen enough porn to know I don't need to see much more. And my stomach can't take fatty things like chips.


The mellowing of the oil prices in the last year seems to mean we are back on the course we were on before so much cheap (borrowed) money was available for speculators to buy oil contracts. Take away the juice and perhaps real money is chasing real oil now. The fact that it is $84 a barrel today goes to show that oil demand worldwide is still high, and supply is flattening.

westexas said...
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westexas said...

To the extent that there is any excess productive capacity worldwide, I suspect that it consists of what Matt Simmons called "Oil stained brine."

The US is gradually being outbid for a (so far) slowly declining volume of global net oil exports, and we are well on our way to becoming "free" of our dependence on foreign sources of oil.

bureaucrat said...


Who else, exactly, are Mexico, Canada & Venezuela (our biggest suppliers) going to cost-effectively sell their oil (albeit less of it) to? Rising prices (bunker/ship fuel specifically) makes shipping that oil by tanker long distances kinda prohibitive, no? Pipelines and short distances make for cheap international shipping. :)

Stephen B. said...

One thing I think about China, India, and other developing nations when it comes to oil is that they still use relatively little oil per capita, that they can afford to pay more per barrel than a country like the US can, even though it's the US that is thought of as "rich." That is, when a person, or family is only using say, on average, 10 gallons of gas or diesel a month, they can pay more for it per gallon, than can a person or family that is using 120 gallons a month. A $1.00 price increase won't affect the former as much as the latter.

Then too, one is willing to pay more for a gallon of oil product when previously using so little (or none previously) because the marginal benefit from that added gallon is so much greater than is the case with the 120 gal/month person buying their 121st gallon.

(Something similar happens with other forms of energy too. Think of an African village family hut. They suddenly get wired into a small solar system that several families share and perhaps each family enjoys 1 or 2 KWh a day - enough to run a light or two, plus maybe a computer or small fridge shared between a family or two. Then think of the typical American home, crunching through 20 KWh a day or more. Once one already has the TVs, fridges, stove, washer, and 10 Ipods powered, what really is the added utility and life enrichment value of that 21st KWh?)

Keeping the above in mind and then recalling how much the population of Chindia outnumbers that of the US tells me the latter is going to suffer a whole lot more in a bidding war for a declining oil supply.

Dan said...
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Dan said...


The report is bull s#$%. Just look at the last unemployment report from the Ministry of Truth, then apply what you learn to this report. Mish has the details here.

Anonymous said...

Just a little perspective ie Stephen's post. Converting gallons into weight gives an interesting figure-

He notes that the average US family might use 120 gallons of a month.

If you figure that one gallon of gas weighs 7 pounds-

120g/month X 7 = 840lbs gas/month

840lb/month X 12 = 10,800lbs/year.

That's right- an average US family can use over 5 tons of refined gasoline a year. That's a HUGE amount and does not even count all of the other petroleum products used in the whole US social infrastructure, ag, military, etc.

You can double that number ie 21,600lbs or 10.5 tons, if you want to convert those numbers into greenhouse gas emissions/year per US family.


westexas said...

Re: Our nearby sources of imported oil

I don't think that the differences in shipping costs between the US and China will have a material impact.

Here are the two sets of numbers that suggest continued big problems for the oil importing OECD countries:

(1) The oil exporting countries' consumption to production ratio rose from 26% in 2005 to 29% in 2009;

(2) Chindia's net oil imports as a percentage of global net oil exports rose from 11% in 2005 to 17% in 2009.

If the oil exporting countries consumption continues to increase at their current rate out to 2015, and if their 2015 production is about 5% less than their 2005 level, then the total volume of global net exports in 2015 will be 14% below the 2005 level. If Chindia's current rate of increase in net oil imports continues out to 2015, then the supply of "available" net oil exports in 2015, i.e., the volume not taken by Chindia, will be 33% below the 2005 level.

Joseph said...

Things continue to get interesting:
China, Russia quit dollar [for bilateral trade]
source: China Daily

bureaucrat said...

Ok, I'll throw another dart hoping that something sticks :) ..

I wasn't old enough to bet against the Japanese economic juggernaut in 1990, which is now in its 3rd decade of "recovery," but I can bet against China, India, and all the other places ("BRICs") that are supposed to explode in growth and commodity extraction and consumption.

It is just as likely that the world could be headed for a 30 year malaise, caused by this worldwide debt bomb, with all commodities, especially oil, dropping in demand, deflating "peak oil."

It is nice that the fall of communism (for now) makes everyone now want to become an American, and have a car and an air conditioner. But I don't think that is how the real world works. Trees don't grow to the sky.

Stephen B. said...

It is just as likely that the world could be headed for a 30 year malaise, caused by this worldwide debt bomb, with all commodities, especially oil, dropping in demand, deflating "peak oil."

I don't get what you mean by "deflated."

If oil production never gets back to its earlier highs, then Peak Oil is a fact, not to be "deflated" regardless of what the economy does, as Peak Oil is nothing more or less than world production hitting a certain high bbl number, never to be attained again.

bureaucrat said...

If your supply drops but your demand drops faster, there is no peak oil.

Stephen B. said...

Bur, there's still "peak oil" as long as the amount produced never exceeds the peak. Now there may not be major social and/or economic problems if demand substantially drops off, but as M. King Hubbert described it, peak oil still exists by definition.

bureaucrat said...

The "peaking" of oil production is "peak oil" I suppose, but we've had lots of "peaks" in everything, and the world continues to turn and make substitutions. The future relief, which is what we're all hoping for (more Iraq oil, electric cars, etc), does come if supply always leads demand, for whatever reason. Too bad it means a withdrawal of our living standards (less oil & transportation) to make it happen. :)