Oil Slick
I don’t seem to be getting through to anybody regarding this huge oil bubble, yet nobody can give me a good fundamental reason why crude is still $50+ bbl. The peak oil crowd, including T. Boone Pickens is still firmly convinced that supply production is peaking while cold hard facts show otherwise. This ridiculous peak oil theory is nothing but a hype machine. Also, just because oil prices have declined 30% from their high doesn’t mean they can’t fall much further. Remember technology in 2001 and 2002? Sure, this oil bubble is not as big as that tech bubble, but it’s still very big. Let me show you.
In December of 2004 the total value of OTC Commodity Derivatives held by U.S. and foreign banks was $1.02 trillion. In June 2006, the value had swelled by nearly 6x to $5.85 trillion. Assuming half of this is for oil (reasonable assumption), at $60 bbl, that represents ~48 billion barrels of crude which is ~1.5 years of what the world physically consumes. Let that sink in for minute – 48 BILLION barrels of crude have been purchased in the futures market! I think a liquidation event is necessary, especially now that it’s clear, at least to me, that supply is growing faster than demand.
In December of 2004 the total value of OTC Commodity Derivatives held by U.S. and foreign banks was $1.02 trillion. In June 2006, the value had swelled by nearly 6x to $5.85 trillion. Assuming half of this is for oil (reasonable assumption), at $60 bbl, that represents ~48 billion barrels of crude which is ~1.5 years of what the world physically consumes. Let that sink in for minute – 48 BILLION barrels of crude have been purchased in the futures market! I think a liquidation event is necessary, especially now that it’s clear, at least to me, that supply is growing faster than demand.
posted by Never-Limp at 7:15 AM
4 Comments:
Regarding Peak Oil... do you believe that Hubbert's theory is bunk in general, or do you believe that it might be valid, and it's just that we're nowhere near the peak?
Nowhere near the peak.
Non-crude inventory numbers came out showing greater build-up than expected. So far, your contrarian call on energy has been a great one.
What would have to happen for you to call a bottom? I know you've expressed your feeling that we're nowhere near one, but what type of data would you need to see before you went from bearish to neutral or bullish?
First of all, the normal inverse relationship between oil storage levels and crude prices needs to be restored. The relationship has become positively correlated over the past 2 years, which only happened once before in the 1978-1980 bubble. In basic terms, the oil price/oil storage relationship shifted from an "inventory-based" model to a "fear-based" model, reflecting the over-riding fears about OPEC spare capacity, peak oil and various geopolitical issues. Once oil becomes undervalued based on the traditional inventory model, I’ll likely become bullish. Prices would still need to fall a lot for that to happen.
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