Will Oil Go Down From Here? Any Bettors?

[jyl]

Yet another oil thread, I know. But I'd like to talk about something a bit different. Not about whether we should drill in ANWR, or the best long-term energy strategy, or why is gas $4/gal, blah blah.

I'd like to discuss one specific topic: In The Short-Term, Is Oil Px Going Up, Going Down, Or Staying The Same?

I'll start by saying that I am betting that oil goes down, in the short-term. I put some money behind the bet last week, on Wed and more on Fri. A risky bet, but I figured it is one worth trying.

Here is my reasoning.

First, the chart of crude oil price. It has gone parabolic, ballistic, whatever your term is for it. Every time I see this sort of chart, it blows up. It has never been "different this time". Chinese stock market, California houses, Internet stocks, individual stocks, etc - always ends badly. So, my instinct is to look for a reason to bet the other way. Of course, you can get flattened trying to bet against such momentum - but the oil chart is no longer soaring, it is gyrating in a range and trying to decide on the next move.

Second, the supply/consumption balance for oil looks fine to me. I've looked at the data for production by OPEC and non-OPEC, and consumption by OECD and non-OECD, both prior years and the consensus (EIA) forecast for 2008 and 2009. I've tried tweaking the model, being more negative on supply, also reflecting demand destruction from $135 oil. Result - I can't find a likely scenario for oil to be in shortage, or even for the excess of supply over consumption to get tighter, for this year or even next year. Of course, anything can happen - we could attack Iran, Chavez could embargo us, etc - but I think those are not likely scenarios in the near-term. I actually am more worried about hurricane threats to the Gulf.

Third, I think after a long period of bullish newsflow for oil, we could have a string of bearish newsflow.
- The biggest one, I think, will be demand destruction that is 2X worse than consensus. Here's some back-of-envelope stuff: US is 25% of global oil consumption. Appx 50% of US consumption is for driving cars. Miles driven are falling 3% to 4% now, and miles driven has got to be shifting toward small cars and away from SUVs. Appx 8% of US consumption is the airlines. US airlines are cutting 10% of capacity as we speak. We also stopped filling the SPR. That's been appx 0.3% of US consumption. So 0.5*0.04 + 0.08*0.1 + 0.003 = 0.031, i.e. US oil consumption should start declining >3%/yr. Maybe closer to 4% since the rest of the economy is seeing demand destroyed too. 3% to 4% decline in US consumption means 0.7% to 1.0% decline in global consumption. Demand is being destroyed in Europe and Japan too, and as subsidies are removed demand will start being destroyed in other countries. Globally, we might see 1.0% to 1.5% incremental decrease in consumption growth.
- The next biggest one, I think, will be increased supply for several reasons. The Saudis must be getting worried at the demand destruction they see. If they increase by 0.8MM bbl/day as reported (0.3MM before, plus another 0.5MM), that is 0.8% incremental increase in global production growth. Also the Nigeria strike could be settled, Russian could cut taxes on existing fields, and China could continue producing above expectations.
- The next one could be some action to reduce oil futures trading and speculation. The CFTC is under huge pressure to act, presumably the SEC is too. I am convinced speculation has played a major part in the run-up of oil and other commodity prices. When financial players pour $230BN into relatively small commodities markets in just a couple years, that's significant.

So, if we see demand growth reduced by 1.0% to 1.5%, and production growth increased by 0.8% to 1.0%, that'll push oil even further into oversupply, plus regulators raising the cost of owning oil futures - that would be bearish for oil.

Fourth, if you read the various oil blogs, investment websites, conventional news media, even the Wall Street reports, it is very hard to find anyone calling for an imminent decline in oil price. Almost everyone is saying oil will keep going up. And I think the large majority of investors are positioned bullish. Well, I usually look for the markets to do whatever causes the most pain to the most people. Right now, that would be for oil px and energy stocks to drop.

That's my reasoning. I may be right or wrong, but anyway I've made a bet. Obviously I have a stop loss in mind too.

So, I would be interested in discussing this bet. Do you think oil is heading higher, reversing, or what else - in the near term (talking trading, not investing). Why? Have you put money on it? What would it take for you to do so?

[svandamme]

btw, your whole reasoning does not mention the strong increase of oil consumption in China
newsflash, "China is big", and it's only beginning to use oil like US and Europe has been using it...

you just made a bet you'll regret making , oil is not going to become cheaper, we'll be lucky if it maintains the current prices

[speeder]

But China's consumption isn't rising by the day or even by the month in a way that justifies the increases in oil prices we are seeing right now. I think that oil is poised for a significant downward correction, but like housing it could stay high for a while.

I also think that we are poised for a worldwide recession that will hit China hard.

[Porsche-O-Phile]

I agree that crude is overvalued, especially in the short term. However, longer-term, I think that the prices that are being paid for crude will most definitely be supported by raw supply/demand forces (before the effects of manipulation by speculators/hedge fund managers are factored in). China (and India, eventually) are going to continue coming online and the U.S.'s portion of total global demand, even with our gluttonous appetite for the stuff, will be marginalized. As such, this will drive prices up.

In the short term I think a U.S. recession will have a somewhat adverse affect on China and their overall demand, but it will only slow it, not stop it and certainly not reverse it. China can export goods to other places that aren't in a recession until things heat up again - and when they do, it'll be another "boom" over there with consequent spikes in demand for oil, cars, western-style clothing, etc.

I predict that we'll see crude eventually fall to about $105-$110 a barrel, but that'll be the low point before a long and steady period of increases. Reasons:

1. Americans have very short memories.

If oil goes back to $110 or $100 (or less) and gas goes back to $3 or so, it won't take long for Americans to once again start driving around in Excursions and Navigators and H2s and similar gas-guzzlers. They'll go right back to the same unsustainable, short-sighted, lazy and gluttonous "default settings" that got us here in the first place. Some will cry about "learning from the past", but they'll largely be dismissed as naysayers, hippies, whiners or eco-nazis. . . until another runup occurs in a few years.

2. Refining capacity

The U.S. still has "NIMBY-itis" when it comes to increasing refinery capacity and as such, eventually we're going to "hit the wall" on the supply side, pushing the price for gasoline up, regardless of how much crude oil we can bring in.

3. Weakening dollar

The U.S. dollar is going to continue to plummet. As such, the price for foreign goods is only going to go up. As the government continues to print more money to fund wars in Iraq, bailouts for Wall Street banks in trouble due to bad investements, etc. I think we're only going to create more upward pricing pressure. The FED cannot and will not prevent this.

4. Inflation

See #3 - same issue. We're heading for double-digit inflation, if we're not already there (in terms of REAL inflationary effects, not the laughably skewed numbers the GAO reports)

5. Taxes

I guarantee that one thing that's going to come out of the current "gas crisis" is a bunch of blowhard, grandstanding politicians trying to spin it as an excuse to levy new taxes on fuel. I'm surprised we haven't heard these ideas floated yet (probably not only because it's an election year). They'll claim they want to tack on an extra $X.XX a gallon to go into a "rainy day fund" to help subsidize prices above a certain point somewhere in the future, or "for alternative energy research" or whatever else they think they can sell to the public. Then (predictably) they'll go blow it on unrelated pork projects. The net effect will be more expensive gas at the pump in any case.

[jyl]

China, that's an interesting topic. I don't know as much about what is going on as I wish I did. But here's some thoughts.

EIA forecast has China oil consumption growing +5.5% in 2008, similar in 2009. I assumed even higher growth, +6.5%. And still couldn't get the model to spit out shortage.

Is China's economy going to grow even more strongly that that this year, or will it slow down?

There's some signs of slowing down. China has developed a real inflation problem, 8% now. The govt has been tightening monetary policy, by raising bank reserve requirement. China export growth is slowing, a little anyway. Exports to US are hardly growing this year, though exports to Europe/rest of world are still growing well.

The Chinese stock market is down nearly 40% from its 2007 peak (using FXI). I know the peak was artificial, driven by retail investors and speculation, but even now FXI is rolling over again.

There's some talk that the Chinese consumer has slowed significantly due to the Chengdu earthquake, not so much people being directly hurt but sort of a national grief thing. I don't know if that's true.

Apparently coal supplies in China were disrupted by the earthquake, so diesel generator use soared. If so, that should be getting resolved as roads and rail lines are cleared.

Not sure what impact from the Olympics. Should improve the national mood. But if they shut down many factories and reduce driving around Beijing to clear the air, that could impact oil consumption.

Anyway, bottom line is, I don't see why I need to assume China oil consumption growth even higher than I already have.

FXI chart http://finance.yahoo.com/echarts?s=fxi#chart3:symbol=fxi;range=my;indicator =volume;charttype=line;crosshair=on;ohlcvalues=0;l ogscale=off;source=undefined

Bloomberg article on China http://www.bloomberg.com/apps/news?pid=20601080&sid=aVAHm9Hhv8SA&refer=asia

Originally Posted by svandamme

btw, your whole reasoning does not mention the strong increase of oil consumption in China
newsflash, "China is big", and it's only beginning to use oil like US and Europe has been using it...

you just made a bet you'll regret making , oil is not going to become cheaper, we'll be lucky if it maintains the current prices

[jyl]

If oil falls to $110, I'll be pleased. :-)

Originally Posted by Porsche-O-Phile

I predict that we'll see crude eventually fall to about $105-$110 a barrel, but that'll be the low point before a long and steady period of increases.

I'm a long-term bull on oil price too. This bet of mine is a short-term one.

[Porsche-O-Phile]

Yea, I have some refinery positions right now (which are scary to be holding especially if bombs start falling in Iran) but I think 0-6 months they'll make me some $$$ at which time I can go long (really long) on oil for a predicted extended and pretty much endless increase in prices.

[island911]

Let's see, Price has doubled (100%+ increase) and you say demand has gone down a couple percent....

I think that when a seller can double the price of a product and only lose a few percent of volume, that the seller is going to keep the price up.

[coldstart]

btw, your whole reasoning does not mention the strong increase of oil consumption in China
newsflash, "China is big", and it's only beginning to use oil like US and Europe has been using it...

you just made a bet you'll regret making , oil is not going to become cheaper, we'll be lucky if it maintains the current prices

I agree in the short term. However, after the Olympics, China will decrease their oil subsidies for the public like Indonesia, Malyasia and other countries are doing now. Their will be no demand growth in China come September.....

[BeyGon]

From an article I read yesterday in Newsweek, what the heck, I was at the hospital and it was there.

"Where on earth could we find enough oil to power 60 million cars for 60 years? And enough natural gas to heat 160 million households for 60 years?
You might be surprised to learn that the answer is right here, in America-112 billion barrels of oil and 656 trillion cubic feet of natural gas, just on federal lands."

"In fact, the U.S. government estimates that there are 30 billion barrels of undiscovered technically recoverable oil on federal lands currently closed to development."

energytomorrow.org

Do bad we can't get to it. Even if we started it would take 10 years to be able to use it. We have been asleep too long.

[Mule]

Wait until Captain Planet gets a hold of you! You carbon criminal!

[jyl]

Just using this thread as a notepad - ignore

UK gasoline sales down 20%.

Gasoline subsidies getting reduced, or govts talking about reducing them, in Egypt, India, Malaysia, Taiwan, Indonesia. Note: other countries with subsidies - Venezuela, Saudi Arabia, China, Mexico, Iran, central Asia, other Gulf states.

China demand growth still strong. But gasoline price controls mean refiners losing huge money. Sustainable?

[96740]

We need to pull our heads out of our a** and F*** this PC crap and utilize our own natural supply, period. After that, we can slowly transfer our need to the future energy sources.

[Gogar]

Your American Oilman Government is keeping the oil in the ground on purpose. When everyone else runs out in xx years and oil is the world's premier commodity (oh, it is already), they'll crack the safe and the USA will become one of the worlds' premier EXPORTERS of oil. And, the descendents of today's leaders will crack a smug smile and put their hands in their pockets and have a good laugh, at your expense.

[BeyGon]

Originally Posted by Gogar

Your American Oilman Government is keeping the oil in the ground on purpose. When everyone else runs out in xx years and oil is the world's premier commodity (oh, it is already), they'll crack the safe and the USA will become one of the worlds' premier EXPORTERS of oil. And, the descendents of today's leaders will crack a smug smile and put their hands in their pockets and have a good laugh, at your expense.

And there were four snipers on the grassy knoll in Dallas, Bush was going to fly one of the planes into the twin towers but had something else to do, the men in the moon are us, wow, great theories.

It doesn't seem to matter to you that is is always the lib/dem/green tree huggers that are making these rules we have to live by, NO DRILLING, NO NEW PLANTS, BUY GAS FROM SOMEPLACE ELSE. Even the oil we get from Alaska is sold because we can't refine it here.

Get your democrat Senate and House off their collective butts and get them to allow drilling and refineries. Even if they did it today we are ten years away from getting anything from it.

[Mule]

[jyl]

We have plenty of threads for the political side of oil. I'd like to keep this thread focused on the investment topic.

[widebody911]

Originally Posted by 96740

We need to pull our heads out of our a** and F*** this PC crap and utilize our own natural supply, period. After that, we can slowly transfer our need to the future energy sources.

Do you honestly think that if the world price is $150/bbl, domestic producers would bro' us up and sell it for $30/bbl?

[ckissick]

What do I know? I heard one highly qualified analyst on the radio say that oil is in a speculative bubble and will burst just after Labor Day as demand decreases. Then I heard another equally qualified analysts say gas could hit $15 per gallon by next summer.

While I'm no expert, the former sounds more likely to me.

[jyl]

more note-taking - ignore

Nigeria strike deadline 6/18, 350K to 480K bbl/dy risk (est vary)

Oil bulls says Saudis bluffing, new increase will simply be re-packaging of prev announced 300K bbl/dy incr which hasn't been done yet. Saudis say will start pumping Khursaniyah field in Jul not Dec

Lukoil says tax relief in Russia, approved last week, will trigger $3BN USD capex to stabilize Siberia production

Reports Chinese done w/ stockpiling fuel ahead of Olympics