Oil Bulls...

[haha]

Oil's "crashing" because most of the speculators have supposedly left. Or, so I heard on NPR. Didn't say where they went, where their money went, etc. The pundit didn't have trade volume or amounts of cap. being shuffled. So, the information was all speculative speculation? Too lazy to look for info. refuting or denying this.

This is how I see it. I don't know how many oil bulls with any brains tried to say that the price of crude would march uninterruptedly from the teens - low twenties to almost $80 ( momentarily) and then just hang there. How much sense does that make?

Near month crude futures started 2006 at about $62, worked irregularly higher to the high $70s, then back down to today’s $51-$52.

So it is down about $10, year over year, or roughly 15%. Big deal. It is still up a great deal from only a few years ago. One swallow does not make a spring, and the price of crude backing off as it has does not equate to a crash. Though it might seem so to leveraged speculators on the Nymex.

By the way, it might help to think a minute or two about these Private Equity speculators to whom Merrill Lynch so confidently has given credit for the whole oil boom. Where do they put their oil? Nowhere, that's where, because they don't have any. They have futures contracts and derivatives. What do they do with these? They roll 'em. That means in the case of futures, unless new long-side speculators are entering in larger $ then others are leaving, the buying pressure is quickly gone. They must sell an expiring contract to buy a more distant one, and they must pay contango for this privilege. Not a very compelling game, and therefore at least some of them will leave, though not the ETFs who have John Q. as their bankroll. But here again, there will be buying pressure for a while. which quickly becomes neutral.

Oil is volatile. Speculators enhance this volatility, up and down. They don’t create the underlying direction of movement, which is created by growing world demand and at best very slowly increasing world production.

 

[brewer12345]

Speculators enhance this volatility, up and down. They don’t create the underlying direction of movement, which is created by growing world demand and at best very slowly increasing world production.

Nicely put. The amazing thing is to watch the vast amounts of money that oil companies have put into exploration and production only to be lucky if they maintain existing production (let alone increase it).

 

[laurence]

Nice posts, interesting. Definitely above my game to try and speculate.

Brewer, I thought there had been virtually no exploration/expansion work for a couple of decades (largely due to $20/barrell prices making it not worth it)?

 

[brewer12345]

Brewer, I thought there had been virtually no exploration/expansion work for a couple of decades (largely due to $20/barrell prices making it not worth it)?

Not quite true. The oil majors (XOM, etc.) certainly curtailed their activity, but the large an midsized independents drilled when it made sense. Obviously in the last 3 or 4 years the independents have been drilling like crazy, mostly to no avail. The better companies have maintained and slightly increased their production capabilities, but they have been offset by declines at the majors.

 

[wabmester]

I think it's pretty clear that the price of oil became uncoupled from the supply/demand picture. But I have no idea what a fair price would be, or how much we'll undershoot that price during a correction.

I'd like to build up a position in oil stocks for the long-term, and I may slowly start acquiring at these prices, but I suspect we have a long way to go on the downside.

 

[haha]

I think it's pretty clear that the price of oil became uncoupled from the supply/demand picture.

Excellent chart.

There is a good article addressing this recent price drop here:

http://www.econbrowser.com/archives/2007/01/whats_bringing.html

 

[wabmester]

Hmm, I looked at the EIA data, and even with declining inventories, it looks like we still have the highest levels since 1994. I couldn't find historical data on days-of-supply, which would be more interesting.

 

[Gone4Good]

Speculators enhance this volatility, up and down. They don’t create the underlying direction of movement, which is created by growing world demand and at best very slowly increasing world production.

Sure, if you wait long enough - Nasdaq 5,000 anyone?

 

[haha]

Sure, if you wait long enough - Nasdaq 5,000 anyone?

 

[Gone4Good]

I was commenting on the idea that speculators don't change the overall trend of the market. In small doses that is true. But it is possible for speculation to get so out of hand (NASDAQ 5,000) that markets become completely disjointed from reality. In such cases it can take decades for the "fundamentals" to catch up.

In the case of commodities, I'm still waiting for someone to explain to me how I know whether a barrel of oil is rich or cheap at $50 (i.e. the fundamentals supporting the current price). Is it only cheap because it was $76 a couple of months ago? Is it rich because it was $30 a couple of years ago? I haven't a clue, and I suspect no one else does either. Which suggests that the entire corps of financial players in the market are speculators. Hold on to your wallets. Good luck to those who don’t.

 

[haha]

I was commenting on the idea that speculators don't change the overall trend of the market. In small doses that is true. But it is possible for speculation to get so out of hand (NASDAQ 5,000) that markets become completely disjointed from reality. In such cases it can take decades for the "fundamentals" to catch up.

In the case of commodities, I'm still waiting for someone to explain to me how I know whether a barrel of oil is rich or cheap at $50 (i.e. the fundamentals supporting the current price). Is it only cheap because it was $76 a couple of months ago? Is it rich because it was $30 a couple of years ago? I haven't a clue, and I suspect no one else does either. Which suggests that the entire corps of financial players in the market are speculators. Hold on to your wallets. Good luck to those who don’t.

I was talking about commodity markets.

As to everyone being a speculator, I too believe that is always true to a greater or lesser extent. Max speculation for the market participant is when there is no income or only small income generated, or in the case of a commodity market the participant is neither a producer or user engaging in pure hedging operations.

Even someone holding an index fund is a speculator, since he is hoping for a price increase. If he were not so hoping, he would sell his fund and get a CD or some other income producing asset.

That nevertheless doesn't mean that the price of a commodity is totally out of the sky. Supply and demand exert a very strong pull, as we have been discussing on this thread.

Ha

 

[Gone4Good]

Supply and demand exert a very strong pull, as we have been discussing on this thread.

I don't doubt that. But if I have money to invest, how do I know what is a good price for my barrel of oil? We can wax poetically about the industrialization of China and the decline rates of known reserves, blah, blah, blah blah. But the fundamental question alludes us - within $10, $20 or even $30 bucks, is the price of oil rich, cheap or fair? If I can't make a fundamental calculation that gets me within 60% of "fair value" I should be doing something else with my money.

Incidentally, the same "supply and demand" arguments were uses to justify $76 oil on these very boards. Now the same logic is being used by the same people to argue that a 34% decline doesn't mean they were wrong - just early.

 

[MasterBlaster]

If I can't make a fundamental calculation that gets me within 60% of "fair value" I should be doing something else with my money.

There is no "Fair value" price for oil. It's just what someone will pay for it and what someone else will sell it for. If you are trying to de-couple the price of oil from the world economy and world events and politics, then good luck with that !

 

[haha]

Incidentally, the same "supply and demand" arguments were uses to justify $76 oil on these very boards. Now the same logic is being used by the same people to argue that a 34% decline doesn't mean they were wrong - just early.

Well, more or less by definition prices are set by supply and demand, unless you are in a fiat economy, as in the USSR.

As to what arguments were or are being made here, I don't know. I don't speculate on the price of oil, though I do invest for the long term in this area. And if I was early, it was a good type of early, as I have taken off $100,000s, and still hold some.

It seems to me that many if not most people who post on this topic have been negative or very cautious from the early stages of the upsurge, and as we all know, even a stopped clock is right twice a day. These bears may turn out to be right after all. Isn't my concern.

Long ago I learned that I can concentrate on being right all the time, or making money overall. I chose the latter. There may be people who are always aligned with the short and medium term trends of a market. Most posters here don't even believe that overall judgments about value can be valid, so I doubt many would try the "I will always be right approach'. ( Except of course with their keyboards. )

Even if one were able to do it, it would be expensive in terms of taxes. I don’t try. For one thing, it would take a lot of sheer brainpower and data, and even given these I don’t know how likely it is. Just a few days ago 50 British economists were asked to predict the next move by the BOE. 49 said a rate cut; 1 said a rate rise. As you likely know, a rise it was!

I don't really understand what you are asking here. If you want to invest/speculate in O&G, step up to the plate; anyone's money is accepted long or short. If you don't want to participate in the market, what is the problem?


Ha

 

[2B]

We have a vast over supply of oil now. At the first sign of recession oil will fall to the 20's. That will be around 2010. I will then be either already ER'd or run off from yet another job.

 

[wabmester]

There is no "Fair value" price for oil. It's just what someone will pay for it and what someone else will sell it for. If you are trying to de-couple the price of oil from the world economy and world events and politics, then good luck with that !

I guess the same thing could be said for any asset. Tech stocks. Housing. Tulips.

Sometimes it makes sense to look at the historical foundations of value and the current and predicted supply/demand picture. I think the long-term picture looks pretty good for oil as an investment. Could be a rocky ride for a while, though.

 

[Gone4Good]

I guess the same thing could be said for any asset. Tech stocks. Housing. Tulips.

Tech Stocks - I can make a pretty good estimate as to what the present value of Microsoft's future cash flow stream is worth.

Housing - I can make a pretty good estimate as to what the present value of future net rental income (or avoided expense) is worth.

Tulips - Just like oil, I haven't a clue. But in theory the price of a commodity should set at the marginal cost of production. I don't know what that is for tulips but I've seen estimates ranging from $20-$30 for oil.

 

[CCdaCE]

Tulips - Just like oil, I haven't a clue. But in theory the price of a commodity should set at the marginal cost of production. I don't know what that is for tulips but I've seen estimates ranging from $20-$30 for oil.

I want to say that, for '05, in ND, the cost of production was a magic number like $36. I can't find a URL to confirm/deny. I'd assume it's higher now. It varies wildly depending on how you define some things.

Ew! Here's a link. Bad quality graph though.

Technically and economically recoverable.

No real explanation as to how this number is arrived at.

-CC

 

[Craig]

Guess I don't see it as a bottom falling out. Pretty minor correction to me.

Consider, as of 12/31/06, Vanguard's Energy Fund Investor (VGENX):
YTD Returns 1 Year 5 Year 10 Year Since Inception Inception Date 19.66%19.66%25.75%16.53%14.77%05/23/1984 (Today's close, it is down 5.82% vs. 12/31/06.)

And, regarding gold, Vanguard's Precious Metals and Mining Fund (VGPMX):
YTD Returns1 Year5 Year10 YearSince InceptionInception Date34.30%34.30%34.72%13.92%8.55%05/23/1984 (Down 2.30% on today's close, vs. 12/31/06.)

2007 has a long ways to go.

I never understand the aggravation with commodities ... seems like a perfectly respectable asset class. Hell, the S&P 500 is 8.34% over the last 10 years, 12.23% since inception (1976). They go up, they go down ... growing world economy, ain't making any more of the stuff, weakening dollar. Some investors cry all the way to the bank with these funds ... Wouldn't put 25% of my portfolio here, but ...

Tech Stocks - I can make a pretty good estimate as to what the present value of Microsoft's future cash flow stream is worth.

Really. What do you get for Google? Amazon?

Love the tulip reference. Now, if we can set up tulip mutual fund that performs like VGPMX or VGENX ... we've got a winner! Then, a South Sea REIT!