bloomberg - 20 dollar oil this year

[muldoon]

interesting article.

it fits with a deflationary spiral, the complete cliff dive of demand.   it fits with a 200billion dollar a week treasury schedule as the money has to come from somewhere, it fits with increased demand for us dollars as debt servicing continues to absorb all available funds, it drives a huge coffin nail into anything green.  it puts a "special" hurting on russia and venuezla.   

Personally - 20 is a stretch, but I can see 30-40 barrel again given current conditions.  by current conditions I mean consumer led depression looming.  -- for historical perspective, oil touched 16 dollars a barrel in 1999. 

http://www.bloomberg.com/apps/news?pid=20601072&sid=auTu3RI8WC1A

July 16 (Bloomberg) -- Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger.

A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.

"The economic situation is not getting better," Verleger, 64, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a telephone interview yesterday. "Global refinery runs are going to be much lower in the fall. If the recession continues and it's a warm winter, it's going to be devastating."

Crude oil last traded at $20 a barrel in February 2002. Futures were at $61.18 today in New York, having recovered 89 percent from a four-year low reached last December. The Organization of Petroleum Exporting Countries is implementing record supply cuts announced last year in response to plunging consumption.

"OPEC don't realize the magnitude of the cuts they need to make," which would total about a further 2 million barrels a day, Verleger added. "Storage is going to become tight. It's not clear if there's going to be enough storage available."

China, Inflation

Oil will average $63.91 in the fourth quarter, according to the median of analyst forecasts compiled by Bloomberg. Crude for December delivery traded at $65.61 today in New York. Prices have rebounded on expectations of a demand recovery, led by China and other developing economies, and concern expansionary monetary policy would stoke inflation and weaken the dollar.

At the other end of the spectrum from Verleger, Goldman Sachs Group Inc. predicted in a report yesterday oil will rally to $85 a barrel by the end of the year, and recommended that clients buy futures contracts for delivery in December 2011.

"China is in a real desperate situation," said Verleger, who publishes the Petroleum Economics Monthly. "We're in a situation where U.S. consumers aren't consuming and Chinese manufacturers get hurt. Economists are looking for growth in all the wrong places."

Forward contracts for oil have been higher than prices for immediate delivery this year, a situation known as contango, creating incentives to buy crude now and store it. That may end as growing stockpiles make storage more expensive.

"Prices would be much lower today, but for the very large incentive to build inventories," Verleger said. "You need forward buyers, which we had when people were fearing inflation, but as concerns turn toward deflation" that will no longer be the case.

[harry51]

Very interesting.............

[waggin]

Most investors, both individuals and funds, seem to be betting on higher oil prices and higher commodity prices in general right now.  Look at the stock price increases recently in oil explorers, oil service companies, precious metals & mining stocks.  Part of that is the fear of dollar devaluation.  Things got a bit peaky a little while back, then we had a correction.  I expected that one.  Now we're back up without any real fundamental reason other than fear, and I think, protection going forward for an expected declining dollar.  However, this is a hard one to call.  I absolutely believe in commodities for the long-term, but short-term, I'm not sure what to expect right now.  When enough people expect something and take steps based on their expectations, it moves the market, regardless of the underlying fundamentals.  Case in point:  All the "green shoots" hoopla.  Um, what has actually improved.  By every measure, economic activity is declining.  Ah, but it's declining at a slower rate.  This is what's being touted as a turnaround.  Yippee!  We can all go back to spending & borrowing like there's no tomorrow!

Another noteworthy item:  The dollar fell (and stayed) below 78 on the USD index today, what some considered a long-term resistance level.  Some authors attribute this to investors pulling out of the "safe haven" dollar and investing in commodities and other currencies.  I'd be willing to bet (and bet my own money!) some of the big boys like GS & JPM are borrowing dollars on the cheap & investing in higher yielding currencies.  Of course, we're not privy to that information though.  People used to do that with the Japanese yen, but now they're doing it with the US dollar.  When your currency is being used to fund carry trades, it's not exactly a sign of confidence in it holding its value going forward. 

By the time "Government" Sachs is talking about a recommendation, it's too late.  They're the worst pump & dump advice out there.  I'd follow their advice to buy oil futures for a certain date on the same day I make an investment based on Jim Cramer's recommendations.  If oil drops into the $30's (which I do not expect), and I have some spare cash, I'm a buyer.  My gut feel is we'll get another correction, but I'm not sure if I  would be comfortable trying to time it or estimate its depth on the way down.

[ScottA]

Oil is used a throttle on the economy. In other words the price is fixed by people well above our pay grade. Does anyone still belive the sky high prices we saw last summer where a coincidence? They where slamming on the brakes hard to bring about the crash we saw in the fall. Once the train wreck was complete they eased up again. Anyone who tries to invest in it is gambling. No other way to describe it. Personaly I'd say as long as the economy is lousy the price of oil will remain more or less stable or fall. It all depends on where we are being driven.  

[John Raabe]

What a fun ride! 

Thanks for the interesting read...

[peternap]

I make an investment based on Jim Cramer's recommendations.

[muldoon]

Good points waggin, while I do see where you are coming from, I disagree in the final conclusion you drew.  More than likely, we both have some right and some wrong, but I dont mind talking the points through to see if we cannot get some clarity. 

Most investors, both individuals and funds, seem to be betting on higher oil prices and higher commodity prices in general right now.  Look at the stock price increases recently in oil explorers, oil service companies, precious metals & mining stocks.  Part of that is the fear of dollar devaluation.  Things got a bit peaky a little while back, then we had a correction.  I expected that one.  Now we're back up without any real fundamental reason other than fear, and I think, protection going forward for an expected declining dollar. 

Yes, it seems many are betting that commodity prices will rise; however that belief has no fundamental or technical merit to warrant it.  All of it is fear of dollar devaluation / and or fear of inflation - both of which describe the same thing. 

However, this is a hard one to call.  I absolutely believe in commodities for the long-term, but short-term, I'm not sure what to expect right now.  When enough people expect something and take steps based on their expectations, it moves the market, regardless of the underlying fundamentals.  Case in point:  All the "green shoots" hoopla.  Um, what has actually improved.  By every measure, economic activity is declining.  Ah, but it's declining at a slower rate.  This is what's being touted as a turnaround.  Yippee!  We can all go back to spending & borrowing like there's no tomorrow!

The recent runup is not exactly without explanation.  The runs from June and July have not been organic, they have been on very low volume and a high percentage directly from just a few large primary dealer brokers.  The high frequency automated trading platforms from goldman sachs have been in the news for weeks.  And news out the last week has centered on nasdaq printing orders to select few prior to execution - in order to compete with DirectEdge exchange (which is owned by goldman).  Consider this, some select few get to see the market orders before they go through.  There are no retail investors anymore.  What you see is manipulation. 

A note about this type of manipulation - it never works. 
In 2003, British Petroleum cornered the propane market by buying the front month supply from the market and then escalated prices to try to force more money.  Aside from being caught by the SEC and getting tarred and feathered and paying huge fines and such - the strategy itself did not work.  They actually lost money on the strategy, and heres why.  As you go into the situation where you are the market, you become the only buyer at the escalted prices.  Manipulating prices higher means nothing if you have no one to sell to at the inflated price.  Eventually, money (just like water) will seek its way back to level and price determination ina market will be established. 

Goldman et all can run this market as far as they wish, and in the end all it will accomplish is their computers selling to their computers.  It is funded by the treasury and federal reserve via their various lending programs.  Which again is the same sham. 

Last week saw a bid to cover under 2 on the 5 year, this means there were not enough bidders to take the auction and the primary dealers were forced to buy up the rest.  By artificially keeping the yield low (quantitive easing) they are only ensuring that the market does not participate.  They may end up owning the entire treasury market and succeed in keeping yields low - however in doing so they lose all buyers.  There is no free lunch. 

Another noteworthy item:  The dollar fell (and stayed) below 78 on the USD index today, what some considered a long-term resistance level.  Some authors attribute this to investors pulling out of the "safe haven" dollar and investing in commodities and other currencies.  I'd be willing to bet (and bet my own money!) some of the big boys like GS & JPM are borrowing dollars on the cheap & investing in higher yielding currencies.  Of course, we're not privy to that information though.  People used to do that with the Japanese yen, but now they're doing it with the US dollar.  When your currency is being used to fund carry trades, it's not exactly a sign of confidence in it holding its value going forward.

Yes, it does look this way.  In fact Art Cashin wrote today in his letter:

"There is speculation among brokers that a "dollar carry trade" may be evolving. For
decades, arbitrageurs would borrow money in Tokyo at zero percent and short the
yen. They would then take the "free money" and buy commodities, crude, high
yielding bonds and even stocks. With U.S. rates held at zero for months, traders
wonder if an American version of the "carry trade" is beginning to evolve.
Whatever the source, there is no denying the influence of dollar movements across
asset classes. It is clearest against oil and commodities but quite evident versus stocks. "


I agree with what he is saying, and with what you are saying as well.  However, Japan has been doing this for nearly two decades.  Where is their inflation?  By your reasoning - it should be rampant.  Here is the facts as I see it.  Alot of "monetary theory" focuses far too much on monetary base, and not enough on credit contraction/expansion.  If a country - say Japan or the US - lowers rates below other parts of the world and creates the arbitrage opportunity - the net affect may indeed be a reduced currency value.  However that does not necessarily indicate inflation will take hold as the primary fundamental driver for our economies is credit.  Credit and debt are the same thing, for me to borrow at almost zero, it also means I cannot make loans less than that (and turn a profit at least).  If money is offered at zero, no one BUT the central bank will loan money.  This in turn causes credit to contract massively.  As credit contracts and no one is seeding the real economy craters.  Savings increase, purchases are put off, new jobs are not created, etc.  Without velocity of money (consumer spending!) there can be no inflation.   

When I say inflation/deflation - I am not necessarily talking about prices, especially food prices as in the coming 12-24 months as I expect them to fluctuate wildly for different reasons. 

By the time "Government" Sachs is talking about a recommendation, it's too late.  They're the worst pump & dump advice out there.  I'd follow their advice to buy oil futures for a certain date on the same day I make an investment based on Jim Cramer's recommendations.  If oil drops into the $30's (which I do not expect), and I have some spare cash, I'm a buyer.  My gut feel is we'll get another correction, but I'm not sure if I  would be comfortable trying to time it or estimate its depth on the way down.

Agree never to follow GS or Cramer.   I try to do my own research and thinking. 

As another example of this, consider the above, when US carry trade is being published in the UBS Wealth Management Research newsletter - its about played out as well.

[Pox Eclipse]

Oil is used a throttle on the economy. In other words the price is fixed by people well above our pay grade. Does anyone still belive the sky high prices we saw last summer where a coincidence? They where slamming on the brakes hard to bring about the crash we saw in the fall. Once the train wreck was complete they eased up again. Anyone who tries to invest in it is gambling. No other way to describe it. Personaly I'd say as long as the economy is lousy the price of oil will remain more or less stable or fall. It all depends on where we are being driven.  

It never fails to amuse me to learn that the same government that is so incompetent, it couldn't possibly run a national health insurance program, is also an evil genius that can manipulate the international oil market to bring down the world economy.

[ScottA]

Who said it was the government?

[Pox Eclipse]

Who said it was the government?

Then who was it?  The Trilateral Commission?  The Illuminatti? The Jonas Brothers?

[peternap]

Who said it was the government?

Then who was it?  The Trilateral Commission?  The Illuminatti? The Jonas Brothers?

It was the Duke Brothers!

[Windpower]

Again

read "Confessions of an Economic Hit man" if you want to know how the 'system' operates

[ScottA]

Exactly, it was the Duke boys and Uncle Jessie! 

[Pox Eclipse]

Exactly, it was the Duke boys and Uncle Jessie!  

I was thinking of Randolph and Mortimer, myself!

[rwanders]

   -----back though the looking glass and down the conspiracy rabbit hole again.

[MountainDon]

  -----back though the looking glass and down the conspiracy rabbit hole again.

[glenn kangiser]

Life must be very dull for those who don't believe in conspiracies.

[rwanders]

   Fortunately, we have the conspiracy theorists to keep us amused watching them build their mental  Rube Goldberg devices.

[glenn kangiser]

That is why we are so advanced.... Just can't slow those wheels down.

[waggin]

Who said it was the government?

Then who was it?  The Trilateral Commission?  The Illuminatti? The Jonas Brothers?

Don't be silly; the Jonas brothers have nothing to do with manipulation of markets.  However, from a supply & demand perspective, the sheer volume of cosmetics and hair care products used by them and other boy bands would be a factor in overall demand for oil.

[ScottA]

I don't need a conspiricy theory to explain the obvious.

The markets are obviously manipulated.
911 was obviously an inside job.
America is obviously a Facist controlled country.

Anyone who has ever bothered to read a little history can see it even without the need for a grand theory to explain it.

[Sassy]

Tell it like it is, Scott! 

[glenn kangiser]

I agree, Scott.  

I knew we did 9/11 as soon as my sister told me about it on the phone before I had seen the scripted news lies by the talking heads..  

I'm a pilot and most pilots who have worked with ATC (IFR-Commercial) know that with the safeguards that were already in place pre-9/11, it could not happen without being assisted  by insiders.

The military industrial complex Eisenhower warned about is firmly in place.

[rwanders]

I heard from my sister's neighbor's third cousin, twice removed that the whole conspiracy was masterminded by Homer Scraggs, the Grand Potentate of the Peoria, Illinois Masonic Lodge but, all intelligent and informed persons know it was really controlled by Adolf Hitler from his secret lair in the basement of the Sistine Chapel where is has been hidden by the Knights of Columbus ever since he was flown out of Berlin by Amela Erhart who had been captured by the Japanese and traded to the Nazis for their secret plans to rule the world by flooding the market with cheap automobiles from Toyota. Only the assassination of FDR by agents of the Trilateral Commission in league with the International Bank Conspiracy led by the Rothschilds delayed their diabolical plot. They struck again on 9/11 when their agent, cleverly disguised as the 104th floor janitor at the WTC, successfully smuggled in 10,000 cherry bombs, blowing up the building while Steven Spielberg, a secret agent of the Elders of Zion, bamboozled the world by projecting a special effects film of planes striking the towers and taking control of all cable and network cameras. No thinking person could ever doubt this!   

[Whitlock]

That's funny rwanders

What happened to the 20 dollar oil

The only problem I have with the 911 theory is why use four planes?
If it was a conspiricy wouldn't one be enough to get the aginda though?