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The linked article elaborates on how there are many factors affecting today's oil prices, such as rising demand, limited supply, speculation in oil markets, fear of future shortages, falling value of the dollar, and foreign energy subsidies. According to the article, the oil markets are unpredictable to the point of having no precedent right now.
........"There are a lot of cross currents making it almost impossible to say where prices are going to go, or where they should be, based on demand and supply," said Dan Rice, a portfolio manager at BlackRock, a large asset management firm.......
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People were saying the exact same thing in July of 2007. We have reached peak oil, oil is only going to go higher from here, welcome to a new paradigm. Guess what happened? Oil prices plummeted nearly 50 percent.
It seems a odd to be rallying against people who called last year peak oil, considering that prices are now, what, 30% higher than this time last year. It's not a convincing argument at all. While I agree with you that one goal of the US government is to convince the Saudis to export more oil, I think you are ignoring the total situation here. We are pestering the Saudis, and not OPEC or anyone else, because they are just about the only organization left with excess capacity.
Until you show me actual supply and demand data right now that shows that the current supply is not adequate to meet the demand, I don't buy it.
Sorry, I don't have any. I would also be thrilled to see it if anyone knows where it can be found. I tried Google, but it's difficult to find an up-to-date and unbiased report. Regardless, you seem to be falling into the fallacious argument - shared by many Americans - that there exists some small group of organizations who are gouging consumers. I think this is because people just want a simple target to blame, and they'd rather not blame themselves and their neighbors for buying SUVs and living 40 miles from work.
JIDDAH, Saudi Arabia --Saudi Arabia is willing to produce more oil if customers need it, the kingdom's oil minister said Sunday without citing any specific output increase......
.......It was unclear if Oil Minister Ali al-Naimi's remarks Sunday at a high-level oil summit in the port city of Jiddah would quell concerns.
Mr. Naimi, who was expected to formally make the announcements in a speech later Sunday, reiterated his government's position that the recent run-up in prices has not been caused by a shortage of supply. But he said he also believes each country must do what it can "to alleviate these difficult conditions."......
.......Earlier Sunday, King Abdullah also said Saudi Arabia was not to blame for soaring oil prices and instead pointed his finger at speculators, high fuel taxes in consuming countries and increased oil consumption in developing economies.
"There are several factors behind the unjustified, swift rise in oil prices and they are: Speculators who play the market out of selfish interests, increased consumption by several developing economies and additional taxes on oil in several consuming countries," the king said........
........Earlier Sunday, U.S. Energy Secretary Samuel Bodman again called on Saudi Arabia to increase production, saying it has not kept pace with growing demand.
Mr. Bodman said world oil consumption growth has averaged about 1.8% per year since 2003 with the largest share of that growth coming from developing countries like China, India and countries in the Middle East, he said.
But for the past three years, global oil production has remained constant at roughly 85 million barrels a day, and OPEC production has remained largely flat, he said in a written statement.......
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WASHINGTON -- Speculative traders' interest in crude oil has grown to the point that they now account for roughly 70% of all trading in West Texas Intermediate crude on the New York Mercantile Exchange, compared with 37% in 2000, according to an investigation by a congressional subcommittee that forms part of an escalating political assault on Wall Street's role in the run-up in oil prices.
The subcommittee's findings, based on data obtained from federal commodity-futures regulators, are the latest sign that Washington is gearing up to try to limit the role of hedge funds, investment banks and other speculative traders in the oil markets........
.....The House Subcommittee on Oversight and Investigations, which conducted the inquiry into the oil futures markets, has scheduled a hearing for Monday to call attention to the increasing role that financial investors are playing in the oil futures market. The investigation was led by the subcommittee's chairman, Rep. Bart Stupak, and senior Democrat, Rep. John Dingell, both of Michigan. In the coming weeks, Congress is expected to consider legislation to set strict limits -- or in some cases, an outright ban -- on trading in energy futures in some markets.
Bush administration officials, Wall Street banks and federal regulators have taken the position that speculation has played a minimal role in the recent surge in oil prices. But a diverse chorus of institutions and politicians is taking a different view, including the International Monetary Fund, the Saudi Arabian government, some big oil companies and both major presidential candidates.
The main targets of critics of speculative oil trading are pension funds and investment banks that never take physical custody of oil, but instead invest in oil futures contracts as a way to hedge against inflation and diversify their portfolios. In recent weeks, the federal agency charged with regulating commodity trades -- the Commodity Futures Trading Commission -- has begun to gather more data on unregulated trading of oil. Last week, it announced it would require the London-based ICE Futures Europe exchange to adopt limits used in the U.S. for trading positions in the West Texas Intermediate crude-oil contract......
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June 25 (Bloomberg) -- Crude oil fell more than $2 a barrel after record fuel prices cut consumption, causing U.S. inventories to rise for the first time in six weeks.
Stockpiles gained 803,000 barrels to 301.8 million last week, the Energy Department said. A 1.1 million-barrel drop was forecast by analysts in a Bloomberg News survey. Fuel demand averaged 20.2 million barrels a day in the past four weeks, down 2.3 percent from a year earlier, the report showed.....
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Oil down more than 40 bucks from its peak, gold below 900 an ounce, soy and corn way down and the dollar is at 7 month highs vs. yen.
Can you say bursting bubble? Looks like I was right. Too bad I'm not a commodity trader.
Thanks for the update Matthew. I think these are all separate markets that only seem to be moving together.
I believe I agreed that some part of oil prices were probably bubblishish, but you also need to look at the significant decline in demand. US demand is like 25% of global demand, and US consumption is down I think about 4% year over year. A 1% decline in a commodity where demand always goes up 2% a year is pretty significant.
I don't really know much about soy/corn. I can only hope the drop is also related to dropping fuel prices though. A) cheaper to grow/ship corn. reduced demand for ethanol. Plus, I imagine the backlash against ethanol might be helping.
Regarding gold, I think that's more a market to measure total fear. People buy gold when worried about total economic collapse, so people are less worried about that than they were in Feb when BSC was shutting their doors. That seems reasonable. If something real scary and unexpected comes out again gold should go back up.
Oil down more than 40 bucks from its peak, gold below 900 an ounce, soy and corn way down and the dollar is at 7 month highs vs. yen.
Can you say bursting bubble? Looks like I was right. Too bad I'm not a commodity trader.
Oil, right now, is at about $118. It peaked at a closing price of $147 on July 11th. While I don't disagree that the commodity bubble seems to have popped, I think your numbers may not be entirely accurate. Maybe next week you'll be right.
Personally, I think it will only continue to come down as the world-wide economy slows, and everyone realizes that there aren't enough non-poor people in China to buy all the crap they're making.
My bad, 30 bucks, not 40. And yes, commodities are all independent markets, but they are tied to one thing:
The dollar. But isn't that the deflation theory? The dollar will rebound when everyone is aware that decoupling is a myth and the rest of the world is as bad off if not worse than us? Seems to be playing out that way.
. Burst Bubble: Energy or Speculator?
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by Doug Noland - portfolio manager and financial markets strategist at David Tice & Associates, has eighteen years short-side investment experience as a trader, analyst and portfolio manager.
. .....Here's how I see it. Many are rejoicing the bursting of the energy/commodities Bubble. Rapidly declining oil and resource prices are now expected to alleviate inflationary pressures, while bolstering household purchasing power. There'll be no pressure on the Fed to raise rates, while their global central bank compatriots can soon begin cutting. The consensus view is that this is bullish for the U.S. economy and stock market and, if nothing else, market action did take attention away from troubling financial and economic news.
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I am not one to easily dismiss notions of bursting Bubbles, and perhaps there is something to the energy bust thesis. I'm just skeptical of the idea that a slumping global economy is behind recent stunning price declines. Examining the global market backdrop, I sense different dynamics at play – important dynamics. And I tend to believe rapidly retreating commodities markets should be viewed in the context of a Bursting Leveraged Speculating Community Bubble.....
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So there you have it. Commodity markets are being manipulated by LEVERAGED SPECULATORS !
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Aug. 13 (Bloomberg) -- Crude oil futures rose more than $2 a barrel after a U.S. Energy Department report showed a bigger- than-forecast decline in inventories of gasoline as refiners shut units and imports fell...
Gasoline supplies dropped 6.39 million barrels to 202.8 million barrels last week, the biggest decline since October 2002 when Hurricane Lili and Tropical Storm Isidore disrupted output along the Gulf of Mexico. Stockpiles were forecast to decrease 2.15 million barrels, according to a Bloomberg News survey.
``Refiners are cutting runs and imports plunged because demand is so weak,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``Refiners weren't making money so it made sense to shut units.'' ....
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No, that's not right. Increased commodity prices are due to INCREASED DEMAND !
. Nickel, Wheat Lead Biggest CRB Commodity Index Gain Since June
. Aug. 13 (Bloomberg) -- Surging prices for nickel, wheat, corn and crude oil sent the Reuters/Jefferies CRB Index of 19 commodities rebounding to its biggest one-day gain since June.
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The CRB index rose 9.16, or 2.4 percent, to 393.16 in New York, after dropping yesterday to a four-month low. The UBS- Bloomberg Constant Maturity Commodity Index rose 2.9 percent, the most since June 6.
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Buyers returned to futures markets today on speculation that slumping raw-materials prices, which sent copper, oil and corn into bear markets, were overdone, given demand from China and other emerging economies. Chinese consumption will rebound starting next quarter, analysts at Goldman Sachs JBWere Pty and Citigroup Inc. said this week......
.....``We believe that the key structural themes behind the commodities and resources boom of the past five years are very much intact,'' Goldman's Malcolm Southwood in Melbourne said yesterday in a note.
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``Across the commodities sphere the fundamentals are still very supportive,'' Abah Ofon, a commodities analyst with Standard Chartered Plc in Dubai, said today in a Bloomberg Television interview. ``We're still seeing increasing demand in some of the major consumers.'' ....
People were saying the exact same thing in July of 2007. We have reached peak oil, oil is only going to go higher from here, welcome to a new paradigm. Guess what happened? Oil prices plummeted nearly 50 percent.
Peak oil doesn't claim that oil prices will only go higher.
Peak oil claims that there will be an ultimate limit to supply in terms of total aggregate pumping capacity. If the prices goes high enough to reduce demand, or alternative energy/conservation reduces demand, then prices may fall even as oil is peaking.
Even if we hit $60/bbl oil that doesn't invalidate peak oil unless it happens on the back of something like 85-90 Mbd of supply.
I'll go on record for this. Keep in mind, I'm not Lamont and I'm not an expert. Here's a few qualifiers to start with. There are many kinds of hydrocarbons and it's possible that we could use others after peak oil is reached to still increase gasoline supplies (coal->gas for example). Also, there are several grades of oil, and light crude (the most useful kind) will (or has) peak(ed) first.
So, I think the world is pretty much at the peak. Several of the largest oil wells are now in decline, and several major producers are at or very near peak oil today. Here's a handy list (I know it's wikipedia but it's easy to read at least). You'll notice that some major producers like USA, Venezuela, Russia, Australia, and Norway have hit peaks. Also notice that it's possible (like with Russia) to peak and then later come back to an extent as political or technical changes make higher production possible. Also note that Saudi Arabia and Kuwait are predicted to peak in the next 5 years.
Anyways, I think sometime between 2007 and 2012 will like turn out to be the peak for global production.
I'll go on record for this. Keep in mind, I'm not Lamont and I'm not an expert. Here's a few qualifiers to start with. There are many kinds of hydrocarbons and it's possible that we could use others after peak oil is reached to still increase gasoline supplies (coal->gas for example). Also, there are several grades of oil, and light crude (the most useful kind) will (or has) peak(ed) first.
So, I think the world is pretty much at the peak. Several of the largest oil wells are now in decline, and several major producers are at or very near peak oil today. Here's a handy list (I know it's wikipedia but it's easy to read at least). You'll notice that some major producers like USA, Venezuela, Russia, Australia, and Norway have hit peaks. Also notice that it's possible (like with Russia) to peak and then later come back to an extent as political or technical changes make higher production possible. Also note that Saudi Arabia and Kuwait are predicted to peak in the next 5 years.
Anyways, I think sometime between 2007 and 2012 will like turn out to be the peak for global production.
I think we've either hit peak oil or we're within a few Mbd of it. I mentioned 85-90 Mbd as a threshold that I doubt we'll see exceeded (85Mbd is a pretty reasonable peak, we might hit 86 or 87 Mbd, but I seriously doubt we'll see capacity exceeding 90Mbd). Agreed that 2007-2012 is probably the peak.
And we aren't likely to hit "peak hydrocarbon" anytime soon because of coal where there is still a lot more coal in the ground than has been already mined. Coal gasification is highly carbon-emissions-intensive, however, and carbon sequestration of coal gasification is unlikely to be competetive -- nuclear is probably a more scalable than CCS coal gasification. Coal gasification without CCS would take us to 2000 ppm of CO2. That would be catastrophic to the climate.
Oil now at 104 and dropping... Could we see 80 dollar a barrel oil and a repeat of last year's paranoia by the peak oil theorists?
Prepare for deflation America! OPEC was actually talking about CUTTING production this week!
Regarding oil prices, if I remember correctly it was only about 18 months ago that most experts thought it would take a war with Iran to push prices above $100. It seems to me that celebration over "low" oil prices is premature.
We can hope that declining oil usage is due to improved conservation (people driving fewer miles), but I suspect it's due to a nearly global recession in the pipes. </sigh>
Prepare for deflation America! OPEC was actually talking about CUTTING production this week!
Saudi Arabia is pumping in excess of their OPEC specified capacity. They will likely cut back to that capacity, which will take about 1 million bbl/day off the market.
In my marginally educated opinion, what we're seeing is trimming of the speculative fat and the impact of recession. The oil producing nations will begin trimming back production if prices go significantly below $80/bbl, or even $100/bbl (depends on the country). The Saudis have implied they'd like a floor price below $100/bbl, but have never really said what they'd like it at. Remember, OPEC tried to keep prices at or around $20/bbl through most of the 90s.
I think OPEC will begin to push the issue and keep a floor in the $60-80 range.
I don't necessarily disagree with either of the last two posts. My initial point was that commodities (to include oil) were a speculative bubble that was about to burst due to deflationary (decrease in demand/money supply) effects.
It just seems that every year, the peak oil theorists argue that the new oil highs are due to a new paradigm in the oil market. While I don't fully discount the peak oil theory, I believe that it is premature and that the world markets are currently well supplied with oil.
BTW, oil is hovering at a huge resistance point at 100/barrel. If we plunge below 100, ROOK OUT BEROW!
I don't necessarily disagree with either of the last two posts. My initial point was that commodities (to include oil) were a speculative bubble that was about to burst due to deflationary (decrease in demand/money supply) effects.
It just seems that every year, the peak oil theorists argue that the new oil highs are due to a new paradigm in the oil market. While I don't fully discount the peak oil theory, I believe that it is premature and that the world markets are currently well supplied with oil.
BTW, oil is hovering at a huge resistance point at 100/barrel. If we plunge below 100, ROOK OUT BEROW!
I'm a firm believer of peak oil in its properly stated form - that being that eventually oil will be too difficult and too costly to extract to justify its use as it is today. The nimrods in the MSM continue to paint it as "running out of oil" which won't happen anytime soon (and probably not in the time frame of Humanity). The peak oil theory is still valid on the supply side - all new supplies have a low EROEI and the oil producers of the world can not quickly increase supply as they once could.
You (Matthew) hit the nail on the head with respect to the demand side. It, like housing, stocks, and gold, is bubble driven. But the bubble showed the chinks in the armor. China and India will still continue to increase global demand, albeit at a slower pace, and the US demand will begin creeping up after the benefits of moving to higher MPG vehicles are realized over the next year or two.
OPEC doesn't seem ready to cut back production yet. We will break the $100 barrier and I think OPEC will balk at that and begin trimming production. What remains to be seen is if the members abide by the lower numbers or continue pumping while trying to line their coffers.
An $80 floor value should hold gas prices around $3-3.25/gallon and jet fuel around $2.50. I don't think either number is low enough to get people to resume their guzzling ways.
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Our very own Maria Cantwell is mentioned.......
. Lawmakers Seek to Curb Speculators
. Three members of Congress, armed with a new report that they say proves that excessive oil speculation is distorting consumer energy prices, are renewing their efforts to exclude many institutional investors from the nation's commodity markets.
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The report was released Wednesday by Senators Byron L. Dorgan, Democrat of North Dakota, and Maria Cantwell, Democrat of Washington, and Representative Bart Stupak, Democrat of Michigan.....
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Personally, I wouldn't call oil dropping back to a more demand-based price "deflation" at this point.
Deflation = a reduction in the general level of prices sustained over several months, usually accompanied by declining employment and output.
Perhaps one sign of it coming, but if lower oil prices work to spur more economic activity I think there is an argument it could also work against it. Our economic engine runs as much on energy as it does on anything else, and when the price of that drops it may make up a bit for disappearing credit.
Oil prices dropped precipitously off a short term peak in the early 80's to no ill effects.
So, have you guys heard any suggestions that all economists believe deflation is bad? One of the most vibrant growth industries in the last 20 years has been personal electronics, which is also the domain feature the most reliable deflation over time (if measuring performance per $).
So, have you guys heard any suggestions that all economists believe deflation is bad? One of the most vibrant growth industries in the last 20 years has been personal electronics, which is also the domain feature the most reliable deflation over time (if measuring performance per $).
I think deflation in assets/durable goods is generally a bad thing. People will postpone purchases because they believe prices will be lower in the future. And if factories choose to slow down because they believe components will be cheaper - I think you get where I am going. When this mindset gets well established it is hard to turn it around.
But oil and other commodity prices are by their nature volatile - and the run up in prices was pretty brief - so I don't think it changed the fundamental underlying behavior. It's a 3 sigma event, but not a 6 sigma event.
The commodity bubble bursting is one of the first signs of deflation. We already have increased unemployment nationwide, as well as destruction of wealth in equities, energy, and home values.
Falling oil prices are not deflationary because with a limited tank size, you won't put off your purchase of gas waiting for the price to fall. The few cents you would save aren't worth the hassle.
Failing electronics prices are to a greater extent deflationary, but it is offset by rapidly improving capabilities, which makes older units functionally obsolete because they won't run new software that is geared towards more recently built machines. Eventually you do run into the same situation that you do with gasoline, where you just have to buy a new one.
When capital equipment prices start to fall, that's when the economy goes into a severe downturn. Manufacturers lay off workers because customers can't make a profit if their competitors waited a little longer and got a better price on the same equipment. The falling demand then leads to lower prices and thus feeds on itself.
Prices are falling for almost every commodity and asset these days. Stocks are falling. Real estate is falling. Soybeans, corn, wheat, and rice are falling. Oil and natural gas are falling. Lumber and cement are falling.
Looking at charts of prices for all the items mentioned, it almost looks as if they have been jumping off a cliff in the last month.
Prices for finished goods always take longer to decline than the underlying materials. For example, it now costs more to build a house than to buy an existing one. This works on the way up to. It took quite some time before consumers saw the price increases in milk, wheat, and other items show up on the store shelves, even though the underlying goods had been getting more expensive for quite a while.
Eventually we will start to see the price of capital goods fall, now that the underlying materials are getting cheaper (even the energy the plants use is getting cheaper now). Further, the higher unemployment rates will lead to downward wage pressure which will further reduce the costs of manufacturing. We are already seeing how construction contractors are unilaterally making 20% or 30% reductions in the rates they pay to tradesmen in markets like California and Florida.
We are entering a deflationary depression and can expect to see ALL prices continue to decline in the next couple years.
Comments
The linked article elaborates on how there are many factors affecting today's oil prices, such as rising demand, limited supply, speculation in oil markets, fear of future shortages, falling value of the dollar, and foreign energy subsidies. According to the article, the oil markets are unpredictable to the point of having no precedent right now.
Why Is Oil So High? Pick a View
........"There are a lot of cross currents making it almost impossible to say where prices are going to go, or where they should be, based on demand and supply," said Dan Rice, a portfolio manager at BlackRock, a large asset management firm.......
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It seems a odd to be rallying against people who called last year peak oil, considering that prices are now, what, 30% higher than this time last year. It's not a convincing argument at all. While I agree with you that one goal of the US government is to convince the Saudis to export more oil, I think you are ignoring the total situation here. We are pestering the Saudis, and not OPEC or anyone else, because they are just about the only organization left with excess capacity.
Sorry, I don't have any. I would also be thrilled to see it if anyone knows where it can be found. I tried Google, but it's difficult to find an up-to-date and unbiased report. Regardless, you seem to be falling into the fallacious argument - shared by many Americans - that there exists some small group of organizations who are gouging consumers. I think this is because people just want a simple target to blame, and they'd rather not blame themselves and their neighbors for buying SUVs and living 40 miles from work.
Saudis Consider Oil Output Increase
JIDDAH, Saudi Arabia --Saudi Arabia is willing to produce more oil if customers need it, the kingdom's oil minister said Sunday without citing any specific output increase......
.......It was unclear if Oil Minister Ali al-Naimi's remarks Sunday at a high-level oil summit in the port city of Jiddah would quell concerns.
Mr. Naimi, who was expected to formally make the announcements in a speech later Sunday, reiterated his government's position that the recent run-up in prices has not been caused by a shortage of supply. But he said he also believes each country must do what it can "to alleviate these difficult conditions."......
.......Earlier Sunday, King Abdullah also said Saudi Arabia was not to blame for soaring oil prices and instead pointed his finger at speculators, high fuel taxes in consuming countries and increased oil consumption in developing economies.
"There are several factors behind the unjustified, swift rise in oil prices and they are: Speculators who play the market out of selfish interests, increased consumption by several developing economies and additional taxes on oil in several consuming countries," the king said........
........Earlier Sunday, U.S. Energy Secretary Samuel Bodman again called on Saudi Arabia to increase production, saying it has not kept pace with growing demand.
Mr. Bodman said world oil consumption growth has averaged about 1.8% per year since 2003 with the largest share of that growth coming from developing countries like China, India and countries in the Middle East, he said.
But for the past three years, global oil production has remained constant at roughly 85 million barrels a day, and OPEC production has remained largely flat, he said in a written statement.......
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Panel Cites Surge in Speculative Oil Trades
WASHINGTON -- Speculative traders' interest in crude oil has grown to the point that they now account for roughly 70% of all trading in West Texas Intermediate crude on the New York Mercantile Exchange, compared with 37% in 2000, according to an investigation by a congressional subcommittee that forms part of an escalating political assault on Wall Street's role in the run-up in oil prices.
The subcommittee's findings, based on data obtained from federal commodity-futures regulators, are the latest sign that Washington is gearing up to try to limit the role of hedge funds, investment banks and other speculative traders in the oil markets........
.....The House Subcommittee on Oversight and Investigations, which conducted the inquiry into the oil futures markets, has scheduled a hearing for Monday to call attention to the increasing role that financial investors are playing in the oil futures market. The investigation was led by the subcommittee's chairman, Rep. Bart Stupak, and senior Democrat, Rep. John Dingell, both of Michigan. In the coming weeks, Congress is expected to consider legislation to set strict limits -- or in some cases, an outright ban -- on trading in energy futures in some markets.
Bush administration officials, Wall Street banks and federal regulators have taken the position that speculation has played a minimal role in the recent surge in oil prices. But a diverse chorus of institutions and politicians is taking a different view, including the International Monetary Fund, the Saudi Arabian government, some big oil companies and both major presidential candidates.
The main targets of critics of speculative oil trading are pension funds and investment banks that never take physical custody of oil, but instead invest in oil futures contracts as a way to hedge against inflation and diversify their portfolios. In recent weeks, the federal agency charged with regulating commodity trades -- the Commodity Futures Trading Commission -- has begun to gather more data on unregulated trading of oil. Last week, it announced it would require the London-based ICE Futures Europe exchange to adopt limits used in the U.S. for trading positions in the West Texas Intermediate crude-oil contract......
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June 25 (Bloomberg) -- Crude oil fell more than $2 a barrel after record fuel prices cut consumption, causing U.S. inventories to rise for the first time in six weeks.
Stockpiles gained 803,000 barrels to 301.8 million last week, the Energy Department said. A 1.1 million-barrel drop was forecast by analysts in a Bloomberg News survey. Fuel demand averaged 20.2 million barrels a day in the past four weeks, down 2.3 percent from a year earlier, the report showed.....
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Oil down more than 40 bucks from its peak, gold below 900 an ounce, soy and corn way down and the dollar is at 7 month highs vs. yen.
Can you say bursting bubble? Looks like I was right. Too bad I'm not a commodity trader.
Thanks for the update Matthew. I think these are all separate markets that only seem to be moving together.
I believe I agreed that some part of oil prices were probably bubblishish, but you also need to look at the significant decline in demand. US demand is like 25% of global demand, and US consumption is down I think about 4% year over year. A 1% decline in a commodity where demand always goes up 2% a year is pretty significant.
I don't really know much about soy/corn. I can only hope the drop is also related to dropping fuel prices though. A) cheaper to grow/ship corn.
Regarding gold, I think that's more a market to measure total fear. People buy gold when worried about total economic collapse, so people are less worried about that than they were in Feb when BSC was shutting their doors. That seems reasonable. If something real scary and unexpected comes out again gold should go back up.
Oil, right now, is at about $118. It peaked at a closing price of $147 on July 11th. While I don't disagree that the commodity bubble seems to have popped, I think your numbers may not be entirely accurate. Maybe next week you'll be right.
Personally, I think it will only continue to come down as the world-wide economy slows, and everyone realizes that there aren't enough non-poor people in China to buy all the crap they're making.
The dollar. But isn't that the deflation theory? The dollar will rebound when everyone is aware that decoupling is a myth and the rest of the world is as bad off if not worse than us? Seems to be playing out that way.
Burst Bubble: Energy or Speculator?
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by Doug Noland - portfolio manager and financial markets strategist at David Tice & Associates, has eighteen years short-side investment experience as a trader, analyst and portfolio manager.
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.....Here's how I see it. Many are rejoicing the bursting of the energy/commodities Bubble. Rapidly declining oil and resource prices are now expected to alleviate inflationary pressures, while bolstering household purchasing power. There'll be no pressure on the Fed to raise rates, while their global central bank compatriots can soon begin cutting. The consensus view is that this is bullish for the U.S. economy and stock market and, if nothing else, market action did take attention away from troubling financial and economic news.
.
I am not one to easily dismiss notions of bursting Bubbles, and perhaps there is something to the energy bust thesis. I'm just skeptical of the idea that a slumping global economy is behind recent stunning price declines. Examining the global market backdrop, I sense different dynamics at play – important dynamics. And I tend to believe rapidly retreating commodities markets should be viewed in the context of a Bursting Leveraged Speculating Community Bubble.....
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So there you have it. Commodity markets are being manipulated by LEVERAGED SPECULATORS !
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No, wait a minute. Commodity prices are increasing because of REDUCED SUPPLY !
Oil Rises $2.99 on Bigger-Than-Expected Gasoline Supply Decline
Aug. 13 (Bloomberg) -- Crude oil futures rose more than $2 a barrel after a U.S. Energy Department report showed a bigger- than-forecast decline in inventories of gasoline as refiners shut units and imports fell...
Gasoline supplies dropped 6.39 million barrels to 202.8 million barrels last week, the biggest decline since October 2002 when Hurricane Lili and Tropical Storm Isidore disrupted output along the Gulf of Mexico. Stockpiles were forecast to decrease 2.15 million barrels, according to a Bloomberg News survey.
``Refiners are cutting runs and imports plunged because demand is so weak,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``Refiners weren't making money so it made sense to shut units.'' ....
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No, that's not right. Increased commodity prices are due to INCREASED DEMAND !
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Nickel, Wheat Lead Biggest CRB Commodity Index Gain Since June
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Aug. 13 (Bloomberg) -- Surging prices for nickel, wheat, corn and crude oil sent the Reuters/Jefferies CRB Index of 19 commodities rebounding to its biggest one-day gain since June.
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The CRB index rose 9.16, or 2.4 percent, to 393.16 in New York, after dropping yesterday to a four-month low. The UBS- Bloomberg Constant Maturity Commodity Index rose 2.9 percent, the most since June 6.
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Buyers returned to futures markets today on speculation that slumping raw-materials prices, which sent copper, oil and corn into bear markets, were overdone, given demand from China and other emerging economies. Chinese consumption will rebound starting next quarter, analysts at Goldman Sachs JBWere Pty and Citigroup Inc. said this week......
.....``We believe that the key structural themes behind the commodities and resources boom of the past five years are very much intact,'' Goldman's Malcolm Southwood in Melbourne said yesterday in a note.
.
``Across the commodities sphere the fundamentals are still very supportive,'' Abah Ofon, a commodities analyst with Standard Chartered Plc in Dubai, said today in a Bloomberg Television interview. ``We're still seeing increasing demand in some of the major consumers.'' ....
Peak oil doesn't claim that oil prices will only go higher.
Peak oil claims that there will be an ultimate limit to supply in terms of total aggregate pumping capacity. If the prices goes high enough to reduce demand, or alternative energy/conservation reduces demand, then prices may fall even as oil is peaking.
Even if we hit $60/bbl oil that doesn't invalidate peak oil unless it happens on the back of something like 85-90 Mbd of supply.
Do you believe we have reached peak or or not?
I'll go on record for this. Keep in mind, I'm not Lamont and I'm not an expert. Here's a few qualifiers to start with. There are many kinds of hydrocarbons and it's possible that we could use others after peak oil is reached to still increase gasoline supplies (coal->gas for example). Also, there are several grades of oil, and light crude (the most useful kind) will (or has) peak(ed) first.
So, I think the world is pretty much at the peak. Several of the largest oil wells are now in decline, and several major producers are at or very near peak oil today. Here's a handy list (I know it's wikipedia but it's easy to read at least). You'll notice that some major producers like USA, Venezuela, Russia, Australia, and Norway have hit peaks. Also notice that it's possible (like with Russia) to peak and then later come back to an extent as political or technical changes make higher production possible. Also note that Saudi Arabia and Kuwait are predicted to peak in the next 5 years.
Anyways, I think sometime between 2007 and 2012 will like turn out to be the peak for global production.
I think we've either hit peak oil or we're within a few Mbd of it. I mentioned 85-90 Mbd as a threshold that I doubt we'll see exceeded (85Mbd is a pretty reasonable peak, we might hit 86 or 87 Mbd, but I seriously doubt we'll see capacity exceeding 90Mbd). Agreed that 2007-2012 is probably the peak.
And we aren't likely to hit "peak hydrocarbon" anytime soon because of coal where there is still a lot more coal in the ground than has been already mined. Coal gasification is highly carbon-emissions-intensive, however, and carbon sequestration of coal gasification is unlikely to be competetive -- nuclear is probably a more scalable than CCS coal gasification. Coal gasification without CCS would take us to 2000 ppm of CO2. That would be catastrophic to the climate.
Prepare for deflation America! OPEC was actually talking about CUTTING production this week!
Regarding oil prices, if I remember correctly it was only about 18 months ago that most experts thought it would take a war with Iran to push prices above $100. It seems to me that celebration over "low" oil prices is premature.
We can hope that declining oil usage is due to improved conservation (people driving fewer miles), but I suspect it's due to a nearly global recession in the pipes. </sigh>
Saudi Arabia is pumping in excess of their OPEC specified capacity. They will likely cut back to that capacity, which will take about 1 million bbl/day off the market.
In my marginally educated opinion, what we're seeing is trimming of the speculative fat and the impact of recession. The oil producing nations will begin trimming back production if prices go significantly below $80/bbl, or even $100/bbl (depends on the country). The Saudis have implied they'd like a floor price below $100/bbl, but have never really said what they'd like it at. Remember, OPEC tried to keep prices at or around $20/bbl through most of the 90s.
I think OPEC will begin to push the issue and keep a floor in the $60-80 range.
It just seems that every year, the peak oil theorists argue that the new oil highs are due to a new paradigm in the oil market. While I don't fully discount the peak oil theory, I believe that it is premature and that the world markets are currently well supplied with oil.
BTW, oil is hovering at a huge resistance point at 100/barrel. If we plunge below 100, ROOK OUT BEROW!
I'm a firm believer of peak oil in its properly stated form - that being that eventually oil will be too difficult and too costly to extract to justify its use as it is today. The nimrods in the MSM continue to paint it as "running out of oil" which won't happen anytime soon (and probably not in the time frame of Humanity). The peak oil theory is still valid on the supply side - all new supplies have a low EROEI and the oil producers of the world can not quickly increase supply as they once could.
You (Matthew) hit the nail on the head with respect to the demand side. It, like housing, stocks, and gold, is bubble driven. But the bubble showed the chinks in the armor. China and India will still continue to increase global demand, albeit at a slower pace, and the US demand will begin creeping up after the benefits of moving to higher MPG vehicles are realized over the next year or two.
OPEC doesn't seem ready to cut back production yet. We will break the $100 barrier and I think OPEC will balk at that and begin trimming production. What remains to be seen is if the members abide by the lower numbers or continue pumping while trying to line their coffers.
An $80 floor value should hold gas prices around $3-3.25/gallon and jet fuel around $2.50. I don't think either number is low enough to get people to resume their guzzling ways.
Our very own Maria Cantwell is mentioned.......
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Lawmakers Seek to Curb Speculators
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Three members of Congress, armed with a new report that they say proves that excessive oil speculation is distorting consumer energy prices, are renewing their efforts to exclude many institutional investors from the nation's commodity markets.
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The report was released Wednesday by Senators Byron L. Dorgan, Democrat of North Dakota, and Maria Cantwell, Democrat of Washington, and Representative Bart Stupak, Democrat of Michigan.....
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That didn't take long.
Trading around $98 now.
HELLO DEFLATION!
Personally, I wouldn't call oil dropping back to a more demand-based price "deflation" at this point.
Deflation = a reduction in the general level of prices sustained over several months, usually accompanied by declining employment and output.
Perhaps one sign of it coming, but if lower oil prices work to spur more economic activity I think there is an argument it could also work against it. Our economic engine runs as much on energy as it does on anything else, and when the price of that drops it may make up a bit for disappearing credit.
Oil prices dropped precipitously off a short term peak in the early 80's to no ill effects.
So, have you guys heard any suggestions that all economists believe deflation is bad? One of the most vibrant growth industries in the last 20 years has been personal electronics, which is also the domain feature the most reliable deflation over time (if measuring performance per $).
I think deflation in assets/durable goods is generally a bad thing. People will postpone purchases because they believe prices will be lower in the future. And if factories choose to slow down because they believe components will be cheaper - I think you get where I am going. When this mindset gets well established it is hard to turn it around.
But oil and other commodity prices are by their nature volatile - and the run up in prices was pretty brief - so I don't think it changed the fundamental underlying behavior. It's a 3 sigma event, but not a 6 sigma event.
Failing electronics prices are to a greater extent deflationary, but it is offset by rapidly improving capabilities, which makes older units functionally obsolete because they won't run new software that is geared towards more recently built machines. Eventually you do run into the same situation that you do with gasoline, where you just have to buy a new one.
When capital equipment prices start to fall, that's when the economy goes into a severe downturn. Manufacturers lay off workers because customers can't make a profit if their competitors waited a little longer and got a better price on the same equipment. The falling demand then leads to lower prices and thus feeds on itself.
Looking at charts of prices for all the items mentioned, it almost looks as if they have been jumping off a cliff in the last month.
Prices for finished goods always take longer to decline than the underlying materials. For example, it now costs more to build a house than to buy an existing one. This works on the way up to. It took quite some time before consumers saw the price increases in milk, wheat, and other items show up on the store shelves, even though the underlying goods had been getting more expensive for quite a while.
Eventually we will start to see the price of capital goods fall, now that the underlying materials are getting cheaper (even the energy the plants use is getting cheaper now). Further, the higher unemployment rates will lead to downward wage pressure which will further reduce the costs of manufacturing. We are already seeing how construction contractors are unilaterally making 20% or 30% reductions in the rates they pay to tradesmen in markets like California and Florida.
We are entering a deflationary depression and can expect to see ALL prices continue to decline in the next couple years.
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