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Deej (others are requested to chime in too),

Continuing our thread from MF GLobal board....

I understand the global demand for oil. I don't think you have to convince me on that. However there must be a rational price level for each demand level. I cannot give you the reference of where I read it but I read that during the last 12 months (or 6 months), the global demand of oil went up by 2.5%, the production went up by 2%. But the price went up by more than 100% ($60-$130). IF these figure are correct (even marginally), how do you justify the oil price rise based on demand?

My impression is that almost all of the recent price rise is a result of speculative futures trading. I don't think oil producers are making $130 per barrel. More likely they are near $50 per barrell.
As such, I feel this is a bubble that will collapse sometime. On top of this there are distinct moves afoot to limit speculative trading, reduction in air traffic, road traffic, boosting of porduction from existing oil field (OPEC is thinking of 10% boost) and oil production from shale (although environment unfriendly). Shale oil is already at $70 per barrell. It was uneconomical when oil was below 60. But now this is an economical prospect.

I got into oil in 2003. I think the run from this point onward is irrational. I have liquidated my positions in XLE, MDR, FRO and COP. I am still keeping all the TMF recommended oil related stocks from II, GG, SA and HG and some other natural gas stocks. VLO is the only refinery stock I have now. I have also liquidated my positions in steel. Shifting all the cash to financial sector and a few other speciality stocks like FCX and OMG (primarily for molybdenum (FCX) and other speciality chemicals and metal products (OMG)).

Some of my data and my understanding may be faulty. This board is a good place to set it right. I will appreciate your impressions about my thinking.


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Hi Anurag,

Thanks for initiating this discussion. On one of your points... we've been reading so much off late about how speculation in futures - commodities and oil, is driving prices up currently. How does that work? What is the link between futures and current pricing? Do you know or does any one else care to chime in?

I like this board as a place to discuss macroeconomic trends.

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Thanks for moving the oil discussion over here, Anurag. I personally wouldn't have sold MDR and COP. I own and plan on staying long them for a long time unless there is a significant change to where I see the price of oil heading. Oil doesn't have to be at nearly $140/barrel for these companies to be successful. They will still crush it with oil at $100, which I see as almost the new floor for the price, long-term.

Plus both companies are not just involved in oil. COP is the largest natural gas producer in North America and MDR works on nat gas projects. Furthermore, COP has refineries that would actually benefit if oil dropped. MDR is also involved in nuclear and energy, both of which I am bullish on. These are great, safer ways to play the oil boom because they are not going to get destroyed if the bottom falls out from under oil like some of the pure oil sands or shale plays would.

If you are really bearish on oil, you should consider increasing your positions in refiners. Companies, like Valero would benefit tremendously if the price of oil fell and the crack spread (the amount of money that they make by capitalizing on the spread between the price of oil and gasoline) rose.

I like your metals plays, but I'm personally staying far away from financials at this point. A lot of money will be made in that sector eventually and people who purchase the right companies now will probably do very well in the long run, but I have a feeling that we're not at the bottom of the problems in the financial sector yet by a long shot.

These things are all opinions of course. Time will tell what the right plays were, but it's interesting discussing it in the meantime :).

Long MDR & COP
No position in VLO
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Hey Vic. Great discussion. I was just writing about speculation in the oil market this morning. Here's the latest data from the very U.S. Commodities Futures Trading Commission that the geniuses on the Congressional pannel have referenced in their assertion that speculation is to blame for the high price of oil.

"The weekly CFTC data for the NYNEX shows spec funds are net long 12,712 contracts of crude oil. This amounts to less than 1% of the entire open interest in crude oil. In the aggregate, Spec. Funds are long 203,806 contracts vs. short 191,044 contracts for a net long of only 12,712 contracts.

I don't see how anyone can make the case that speculators are driving the price of crude higher when spec funds are net long less than 1 percent of the entire open interest. The CFTC report does not separate out Managed Funds and Index Funds for crude oil."

The government loves to blame the problems that their mismanagement has helped to create on mysterious speculators, but for the real cause of the problems they don't have to look any farther than the mirror.

But wait, I read that there is a bubble in the newspaper and my government told me that there is must be true right. Nope.

To me this bubble talk is absurd. Has oil gotten a little ahead of itself...probably. But the willingness to blame our problems on an evil cast of caracters and to assume that oil will just magically drop to say $70 per barrel if the government passes more laws is just contributing to the problem.

I am really curious to see how this whole story plays out over the rest of the year and 2009.

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Thanks for your comments. My questions eere slightly different though: how irrational is the current price of oil based on the current demand?

It is ok to invest in a variety of ways even after looking at identical data. Afterall that is why there is a market: diversity of opinions.

I have been studying MDR for the last 3 years. I sold MDR as I feel its valuation has risen high, relatively speaking, especially in response to the metioric rise of oil. I may get back into it if it back by more than 30% from my sell price. MDR is a volatile stock anyway. Maybe not. I feel SLB is a better alternative to MDR at this point. For nuclear energy play, I have my holdings in BHP for a while now. I sold COP as I prefer VLO over it for the same reason you mentioned. I am waiting for the oil to fall and refinery margins to improve. VLO will benefit the most.

In natural gas related stock, I already own decent sized positions in UNT, PDS, HAL and APC. UNT is starting to get expensive (P/E wise)

I am being cautious by monitoring the valuations of oil stocks closely. I don't want to keep any of them if their valuations (P/E and margins) get high on speculation alone. I managed to avoid the tech burst and the housing bubble burst this way. I missed the dizzying peaks but also the downfall.

I agree with your readings on financial world. I have charted my goal in achieving an average of the V or U curve of downturns. SO I am dollar averaging across a basket of firms recommended at TMF. I have reasonable faith that TMF selected firms (II, SA, GG and HG) have the highest potential relatively speaking in the troubled financial waters. Can't say where the bottom lies.

I metals I have long standing positions in SLT, MT (really small), AA (I don't know why I have it) and Tata Steel (Indian stock exchange) besides FCX and OMG. I will be keeping these positions.

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To me this bubble talk is absurd

...and the doubling of oil price in one year is not?

It is true that the demand is rising but to what extent?

Here is an oil consumption graph till 2005. I think it is easily extrapolated to get some estimates:
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Better quality data on oil consumption till 2005:

Less than 2% rise in global consumption per year.

Almost similar rise on global oil production as per the data:
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"I have also liquidated my positions in steel."

I think steel has a long way to go. One of the reasons I became interested in steel is that it is going to take a huge amount of steel to build the infrastructure necessary to bring the cost of energy down.

I am thinking of all the oil rigs, nuclear power plants, ships, bridges, buildings, electrical and cell towers.....all require steel. I was a bit late in seeing it but the steel play is also the China is one and the same.

I think I am starting to get a bit better in investing because I saw GSI immediately for the potential and I got a quick 46% gain which is hopefully just the beginning. I am hoping GSI drops back a bit so I can buy more.

I have done a lot....I mean a whole lot of research on the topic of energy. It is going to be quite difficult to work our way out of the box we find ourselves in.

People fail to understand that the easy oil has been found

I used to work in the Gulf of Mexico on oilfield supply boats in 1985 right before the price of oil had the bottom fall out and left Southern Louisiana and Texas looking like a Ghost town....I must know every rinky dink town in Southern Louisiana...Venice, Intracoastal City, Abbevile, Larose, Fourchon, Houma, Morgan City and how about the infamous speed trap Golden Meadows

Back in 1985 it was easy to drive the price of oil back down because we had over 20 years of easy oil left.....but our easy oil is gone.....probably to never return...Increasingly the extraction of oil and gas will cost more and more.

I really think everyone should really get a good look at what it takes to get a barrel of oil out of the ground...It is pretty intense and very dangerous...the technology is extreme and on the cutting edge.

Did I say dangerous??? I don't know about you but you have to pay up to get me to do that job. I am thinking seriously about working in the oil patch again and sorry you gas guzzlers you will have to pay up for me to put myself in this type of situation:

Here is a article that discusses a huge problem with the price of oil...the refining process:

The world's refining capacity will have to increase...especially Heavy Crude refining. What will all of that take??? Lots of steel....Also a few companies like CBI might benefit from increased building of refineries too.

I even heard that the Saudis, Indians and others want to build many huge refineries outside the USA since the USA wants to play NIMBY:

and how about South Korea?? Why is Buffett interested in S. Korea??...maybe because of reasons like this:

While there will be ups and downs, I agree with Jimmy Rogers who is probably the most knowledgeable investor worldwide that I am aware of....the commodity bull market is going to last awhile.....

Rob S
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Wow, this is a great conversation. Thanks for starting it anuragupta.

I guess that it depends upon what one's definition of a bubble is. For example, Barron's calls oil a bubble on the cover this week, but when one reads the actual article it states that oil may fall back to $100 and then eventually return to a gradual upward path. To me, staying in triple digits is not the popping of a bubble. The companies that I have invested in in this area would still do phenomenally well with $100 oil.

To me, while the charts look cool when they are superimposed on each other, the comparisons with the tech bubble and the NASDAQ that we have been seeing a lot lately are way off base. On one hand we were talking about companies that had absolutely no, or little earnings such as stupid sites like Dr. that were bid up to outrageous prices. Oil on the other hand we have a resource that there is a finite supply of that we use in every single aspect of our daily lives.

Not only do I believe that high oil and gas prices are here to stay, but I believe that the stocks of oil companies have a lot of catching up to do. Evidence that oil stocks will eventually rise is apparent in the following chart which compares the price of things like the S&P Global Energy ETF (IXC) to the three month moving average price of light, sweet crude oil.

The ETF's holdings, including large caps such as BP (BP), Chevron (CVX), ConocoPhillips (CPO), and Schlumberger (SLB), have some catching up to do if oil stays at its current level. The last time the IXC was this cheap relative to the price of oil was March 2003. Right after that the price of oil dropped by over 30% and the price of the fund actually still increased by 6%.

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I have no doubt that steel and oil have great demand which will only rise. But then again, their has to be a rationale in the rate of price rise and its comparison with rise in demand. I feel that prices have gone far ahead of themselves. I would hate to put a number here.

In oil, as my data says, the annual rise in demand is ~2%. The exising oil production is able to match it up fairly well even now. Their is a difference and that causes rise in oil price every year to keep the demand in check. That is why I find the price levels irrational. I could be wrong. Maybe this price level is neccessary to bring the demand down even more. There are fears that global production is peaking up and is set to fall. This has happened in the past as well. Nowadays ppl talk about no new oil fields but then their is a ramp up in alternate resources to especially shale oil and oil from sands. Technology is already ramping up. Arctic drilling and drilling in international waters will start happening at some point. There is enough capacity for the next decade. Those supply curves will keep shifting by few years every year. Environment will be effectively sacrificed. I cannot say when solar energy will become viable but their is great effort in this direction. I work in this area sometimes. It is amazing to see how companies across the globe are seriously putting an effort here. Ppl have talked about solar for almost half a century with nothing to show for it. The high prices of oil are clearly a boon for this industry. I have STP.

Bubbles like tech or housing took several years to form. Oil is not at the same level. It is in the begining stages if this rise continues.

There is siginificant economic slow down in India these days. Inflation has shot up from 3% to 12% in last 1 year. Some of my friends are working in the Cement industry and they tell me that a massive capacity build up is happening for the last 3 years. It the next 3 years to the capacity will reach to a point when the prices will drop, at least in the Indian market. Similarly for steel. China and India are both ramping up the capacity and technology. At some point, not far away, the supply and demand curves will cross over.

I am more interested these days in finding out speciality metal firms as they have a great potential ahead due to technological advance.
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Hi All,

I'd like to add the concept of "peak oil" to these very insightful posts. The oil industry has experienced some pretty good boom and bust cycles, but past busts have not included a declining capacity in world oil production. There seems to me to be strong evidence that we are at, or very near, peak oil production.

U.S. production actually peaked in 1970.

So I'd have to guess that oil prices will only trend higher from here. There will likely be minor and moderate pullbacks, but the only scenario for a collapse in oil price that I can envision also includes long soup lines. I'm optimistic that human innovation will rise to the challenge of meeting the world's future energy demands, but oil will necessarily become a smaller percentage of the puzzle.

I'm not ready to abandon my oil stocks (PDS, UNT) and will probably take a similar position in Bill's July recommendation (CEO) keeping energy as an equally weighted portion of my investments. It will take some time to ween ourselves off oil!

Disclosure: I'm a petroleum engineer and by no means an economist.

Pat in Colorado
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PDS and UNT are not oil stock. I am still keeping all my nat gas, deap see drilling and one refinery VLO. All TMF based recs are keeps unless their is a sell rec.

I agree that oil prices will be high and will go higher. The question is how high? Just because supply is tight and demand is high is any price justified? Oil falling back to $60 is not collapse. $60 is high too. In fact quite high. The price increment from $60 to $130 in < 1 year with 2.5% increase in demand and 2% increase in supply is hardly reasonable.
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Hi Anuraqupta,

You're correct in that PDS and UNT are not pure oil stocks. I should have labeled as "energy" stocks.

I think you're questioning the the current price point is certainly valid - it just seems crazy. I do note that DOE data on world oil production shows supply has not increased from 2005 levels. See data for 2006 and projection for 2007 in link.

An aside - the U.S. consistently purchases oil and places in the SPR (Strategic Petroleum Reserve). Who would have thought the federal government clever enough to be sitting on some 3 and 4-bagger investments over the past few years?

Another aside - a good price on Guinness is about $336 a barrel ($1/pint). For now, I go through more gasoline a week than Guinness, but that may change!

Pat in Colorado
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It seems different sites have slightly different data. Here is another data: 2000-2006 both production and consumption.

I note that during this period both the demand and consumption rose by ~10%. Gas prices at the pump doubled during this period.

I don't have data but my guess is that currently high guess prices are a combination of political factors, war in iraq, refinery outages and ageing and hedge funds. The demand from China and India is often blamed for the steep rise although they consume only a fraction of global oil are still way way down below the US consumption. It is hard to put a finger on the single largest contributor but my guess is hedge funds. Deej provided some data mentioning that ~1% trading is in oil futures. I don't understand that completely but I can certainly appreciate one thing: if a 0.8% mismatch increase in production and consumption can lead to doubling of the prices, 1% trading in futures can affect the price significantly. Again, I express complete ignorance at the details of the dynamics. I am looking only at the data envelopes.
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No one is really addressing the question in an earlier post about the relationship between oil futures and the current price of oil. I believe that speculation in the futures market is not a cause of the current price. I know this flies in the face of what you hear sometimes in the press. A recent article in The Economist had a great explanation:

“Stuck for answers, politicians have been looking for scapegoats. Top of the list are the speculators profiting from other people’s hardship. Some $260B is invested in commodity funds, 20 times the level of 2003. Surely all that hot money has supercharged the demand for oil? But that is plain wrong. Such speculators do not own real oil. Every barrel they buy in the futures market they sell back again before the contract ends. That may raise the price of “paper barrels”, but not of the black stuff that refiners turn into petrol. It is true that high futures prices could lead someone to hoard oil today in the hope of a higher price tomorrow. But inventories are not especially full just now and there are few signs of hoarding.” The Economist May 31st, 2008, p. 13.

I think the rising price of oil is fueling (no pun intended) the speculation, rather than the cause and effect going the other way.
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"This has happened in the past as well. Nowadays ppl talk about no new oil fields but then their is a ramp up in alternate resources to especially shale oil and oil from sands. Technology is already ramping up. Arctic drilling and drilling in international waters will start happening at some point. "

It took me awhile to find a article that made my eyes go wide open and finally understand. I can't find the article now but basically what was said is that many people failed to understand the difference in the different types of oils. There is a big difference in finding easy oil (i.e. oil that just bubbles up out of the ground that has low sulfur content and is super easy to refine) and high sulfur shale oil or oil from the Oil sands.

Take for example Oil Sands oil...the amount of energy that you must put back into the oil to extract it and worse refine it is HUGE!!! It was then I began to understand the problem big time...I forget the exact numbers but lets say for instance the amount of energy that you must put back into extracting and refining Oil Sands oil is like half the value of the oil that you actually extract from the Oil sands. Well that would mean you would need twice as much Oil Sands oil to replace the decline of the "easy oil" that simply bubbles out of the ground.

The same things apply to things like Artic oil and oil on the continental shelf. There are huge difficulties and expenses to drilling deep sea. I wish everyone could spend some time on a oil rig and see exactly what it takes to get that oil out of the ocean. It is a lot harder than simply collecting that easy oil that bubbles up out of the ground.

When they talk of oil fields declining and no new significant finds in the last 20 years....well they mean the easy oil. There is plenty of "hard" oil but that "hard" oil is not worth as much because you need more of it to get the same net energy as the "easy oil"

Oh, it is it starting to click now.....well there is more....When the Saudis talk about increasing oil production, they are talking about increasing the production of sour crude....the hard to refine stuff that you need special refineries for.

The USA has plenty enough refineries BUT the big problem is our refineries are set up to mostly refine sweet oil. The sour crude that the Saudis are offering is useless in the quantities offered to our refineries.

THAT IS WHY THERE IS A DISCOUNT ON THE SOUR CRUDE PRICE FROM THE SWEET OIL PRICE!!! The world has a shortage of refineries that can refine the SOUR CRUDE!!!

Hmmm....CBI makes refineries.....CBI is a BUY, BUY, BUY as Cramer would say (ummm Cramer actually hates CBI now but he will like it again when the world figures out the difference between Sweet and Sour Crude and the CBI price spikes).

It is not Peak oil but peak refining that is the problem:

"One of the issues facing the world is a lack of refinery capacity. Boone Pickens often says the world has a maximum refinery capacity of about 84mbpd. With the hurricane damage, I've delved a little more into this issue. A quick search on the net found a report by ICF Consulting.

ICF says the following in a report on refinery capacity issues:

(1) "over the next roughly 5-year period, that the ability to meet forecast demands for oil will be driven by refinery capacity issues, not crude availability"
(2) This refinery "capacity crunch will change the historical playing field for international crude and product supply and trade, and create strong and sustained margins for refiners, higher prices and potentially supply shortfalls for consumers"
(3) "ICF Consulting has examined recent global demand forecast date from the (IEA) from 2000 through 2020 and compared it to the current and estimated growth in refining capacity . . . The IEA estimates that the global oil demand in 2010 will be about 90 million barrels per day, an increase of nearly 8 million barrels per day over the 2004 number. This increase is about 30-40 world scale refineries, and the net impact on the marketplace, even if that much refinery capacity could be made operational by 2010, would simply be maintaining today's high margins and volatility . . . for the refining capacity to keep pace with this increase . . . it would need an additional 13.9 million barrels per day capacity to be built between now and 2010. This would be 50-70 refineries of world scale size."

****side note - keep in mind ICF just projected a need for an additional 13.9 mbpd in refinery capacity but as of 2005, only an additional 250K is in the pipeline for development****

"Since that publication, there have been some noteworthy announcements . . . however, even with these announcements, it is clear that the number of new refineries needed, or major expansions, is significant, and, more critically, these additions should right now, already be in the engineering phase to be operational by 2010 . . . the need for timely investment in capacity to sustain the demand outlook is compelling."

*** side note, so much for the optimistic CERA report of an oil glut by 2010, without addtional refinery capacity being added by 2010, any extra oil projected by Cera is of no use ****

"As capacity growth lags demand, small events can have a grossly magnified effect. This leads to increased upward pressure on prices, refining margins, and volatility"

****This was published before the Katrina and Rita Hurricanes. But the truth of this prediction that "small events have a grossly magnified effect" is evident from the U.S. refineries knocked off line, even temporarily.

"With IEA predicting another 17.6 million barrels per day demand by 2020, the refinery capacity need will grow even more"
****Whose budgeting for this?*****

"The magnitude of the need for additional capcity over the next 5 years is, however in stark contrast to the relatively few significant projects currently underway to expand global refining capacity. In cases where industry is evaluating or has announced capacity increases since the Oil and Gas Journal survey was released, the location of those projects are planned for China and the Middle East, and none are in the engineering stage"

***side note, so much for refinery capacity meeting the demand needs by 2010, maybe ole Boone Pickens is right***

"Moreover, the tighter product specifications in the United States versus the emerging Far East region will make it more cost effective for refiners with export capability in the Middle East, or even Europe, to manufacture and ship product to China or India. Where the product goes will depend on who is willing to ante-up and pay for the volume, and the ramnifications for both the 'winner' and the 'loser' in that battle are significant"

****note - this sounds like the beginning of a bad movie. In fact, it is the same thing Michael Klare has been saying concerning "resource wars." ***


Barring a radical and immediate innitiation of major refinery projects, there will be a competition for available supply as the decade draws to a close. The 'winning' bidders will pay a premium for products which could make today's prices look very reasonable; the 'losers' may be required to slow down economic growth. The overall effect of both may be that global economies will suffer until refinery capacity gets back in alignment with demand . . . The overall refining capacity crunch looks like it will be difficult to reverse given the long lead times necessary for construction . . . All these factors lead ICF Consulting to believe that the global oil product market will remain tight in the near future . . .it is more important than ever to look at the fundamentals and determine a long-term strategy to reduce or slow down the growth of petroleum demand, and to prepare for the future . . .

**note - how can any of us add to that last statement*** "

Oh eyes are starting to see now:

When it comes to gas prices it is not just crude oil production and the end demand that must be considered. The refining process and the different types of oil grades must be considered too.

There may be plenty of oil but if it is of the wrong type in the wrong place at the wrong times then huge price spikes can occur but this is quite complex so congress just simply blames it all on speculators....

Rob S
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I wish I could continue this discussion but I might not be able to access the internet for up to 10 days. It is indeed a interesting conversation. I'll talk to everyone again soon.....

Rob s
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Thanks for chiming in Rob!

I still don't think the correlation between the demand/supply and the current prices has been made successfully yet.

You are right about the grades of oil. the last time I looked there wer 200 grades of oil. Recently in India, Reliance industries is making a refinery for treating the world's heavies crude. India is self sufficient in refining. All the crude imported by India is sour crude. There is indeed a great deal of opportunity in improving refineries.

I do know that speculation plays a major role in oil prices. I have an example in a different area. This year the internation prices of wheat doubled and halved within the last 6 months directly coinciding with Indian governments declaration of importing a small quanity of wheat and then deciding against it a few months later. The quantum of wheat import with miniscules compared to the global availability of wheat and yet the impact on the prices was 2 fold.

It tell me one thing. My guess. Most of the supply in the international market is already taken so even a very small increment in need, of the order of 0.1%, is enough to spike the price. If what I say is true than even 1% futures trading has the potential to spike the prices in a big way. I can be wrong.

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Hi Starrob,

You make some good points and provide some interesting links - thanks for that. I do note that world oil production figures include unconventional petroleum production (shale oil, oil sands, etc.). These resources are vast and have and will certainly reduce the decline rate from peak oil, but as you allude - it is not the cheap, easy oil of the past. In addition to the cost, the rate of recovery will be much slower. It is just technically more difficult that punching a hole and turning a valve like in much of what's being produced now and in the past.

As for congress...


Pat in Colorado
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How much oil is really there? A nice article on this topic:

My takeaway:
1) Existing oil supply is meeting the demand at $60 per barrel.
2) Future oil supply is uncertain in the sense no one really know how much oil is really out there. Oil producing nation ensure that there is no excess supply under any circumstances.

My synthesis so far:
Even 0.5% mismatch between supply and demand, real or speculative, is enough to make the prices skyrocket due to sheer volume of oil trade. Speculation is most damaging as it bets on supply being unable to meet demand and to do away with speculation impact, legitimate oil demand must scale down which is almost impossible without a major economic slowdown in a system where oil is the engine of global economy and every ounce is well accounted for in the consumption side.
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Another interesting article from Charles Schwab:

It states 10 reasons why oil bubble will burst. I don't agree with each point though.

Congressional hearings on oil speculation.
Bernanke's comments on the dollar.
Airlines and autos getting crushed.
Nonstop media coverage of the "energy crisis."
Gasoline subsidies being lifted or limited in Asia and India.
U.S. Strategic Petroleum Reserve additions being halted.
Wall Street analysts' aggressive upside oil price targets.
Record decline in vehicle miles driven while SUV sales implode.
U.S. consumption of oil and oil products down nearly 4% in the first quarter.
Iranian [tankers] with 28 million barrels of oil sitting in the Persian Gulf betting on higher prices (and/or because of no buyers).
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I've found Charles Schwab's proprietary research to be pretty worthless. I wish that they would just cut their whole equity research department and use the money that they save to either reduce their commissions or buy better research from someone else.

No position in Schwab, but I've had an account with them for 12 years
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As I said before....there is plenty enough oil but there is not enough of the right oil in the right place at the right time.

The price of oil that gets quoted most often is light sweet crude. That type of oil is indeed running out. Most of the worlds major oil fields that contain that type of oil have been or are being depleted. That easy oil is gone and will over time will continue to go up. I am talking about the Brent oil and the WTI oil prices.

Most of the world's spare oil capacity is in unconvential oil which will be increasingly used as time goes on. Unconvential oil will not be cheap. Anyone that believes so has never been on a oil rig.

Let me say that I am not a expert on extracting oil from the ground but I at least have some basic knowledge. I know the difference between drill pipe and casing pipe. I know what liquid mud is and the reason it is used. I know what barite is. Many oil drilling companies used to buy things like Barite, liquid mud and cement from either Halliburton or Schlumberger. I first heard the name of Halliburton and Schlumberger in 1984 and knew what services they provided long before they became Mad Money investing themes. I have seen Rigs use the casing hammer before....Do people even know what the 20,000 pound hammer is used for on a oil rig??? I actually know what a blow out preventer looks like and what is does. I know the drilling process requires huge amounts of cement, water and Fuel oil. These are all items that we used to bring out to the rig on supply boats. I do know it takes a immense amount of time and energy to get the oil rig positioned exactly right with Anchor handling boats. Things are much more advanced these days than in 1984 as the boats in use today all use dynamic positioning and may have several stern thrusters in addition to the bow thruster. The whole deep sea oil drilling thing is a very expensive thing to do.

I also know that drilling for and/or refining sour crude can be a extremely dangerous thing because sour crude contains a lot of Hydrogen Sulfide gas. I remember that many oil rigs that drilled in the Gulf of Mexico off the coast of Misissippi used to have hydrogen sulfide detectors hooked up to a huge blaring alarm. We were always warned on the boat that if we ever heard the alarm to get into our SCBA's (breathing apparatus). For those interested google Hydrogen Sulfide gas to see what it is and what happens if you breathe it.

Sorry you gas guzzlers, if you want someone like me to go find your crude oil for you by spending weeks and/or months away from home and potentially exposing myself to Hydrogen Sulfide gas then you will have to pay up....or find alternative energy sources for if you don't pay...we ain't drilling is what the oil companies say!!!

Yes, there is indeed speculation in all markets but it works both ways. For very long periods of time oil the price of oil was speculated to be below what it cost to produce it from offshore oil rigs. When oil dropped to something like $14 a barrel in 1985, it caused me to lose my job in the oil patch because the drilling activity came to a halt in the Gulf of Mexico.

Over 20 years ago, the oil companies of the world could turn to easy oil and simply stop investing in new oil production from harder to extract sources such as offshore drilling while the price of oil was low.

Today the situation is different. There is not much spare capacity of easy oil to take care of the worldwide growth in oil consumption. There has been under-investment in oil infrastructure....both refineries and rigs. Right now, the world is only in middle stages of making the investment in energy infrastructure.

Will the price of oil stabilize and come down??? Why sure it will. Various advancements in drilling techniques, new refineries, advancements in different alternative fuels and technologies will all work to bring the price of oil down over time or at the very least slow the rate of price apprecation.

However, Most people that think the price of oil is too high think that this will happen overnight. The engineering for many various solutions could take anywhere from 5 to 20 years. So, I would not speculate that the price of oil is going to drop anywhere near $60 per barrel any time soon.

Most people when they try to say that the price of oil should be at a certain price use very simple assumptions while the oil market is extremely complex.

The oil market is very different from the copper market which is different from the corn market which is different from the steel market which is different from the wheat market and even has different fundementals than the natural gas market or the coal market. Different commodity markets operate on different fundementals and respond differently to different influences and should not be compared.

Oil fundementals include the different various oil grades, refinery costs, storage logistics, logistics capacity, specifications that different countries require by law for various refined products, seasonal variation in different gasoline blends, crack spreads, supply disruptions of particular grades of oil, shipping costs, availibility of ships, costs of various additives, pollution standards of various countries and numerous other factors that effect both the price of crude oil and the refined product.

Everyone speculates on the price of oil and the speculative price of $140 is just as likely to be too high as the speculative price of $60 to be far too low. I believe everyone that speculates on the price of oil is missing important parts of the equation. It is what makes the price very volatile as new information comes in every day.

To me, what people call "speculation" on the high side is really a fear premium. Fear that there will not be enough oil available to meet various needs.

In my opinion, from what I know of the oil industry (which is only very small) it is indeed a valid fear. Various parts of the oil industry are not getting the types of oil that they want at the right price points and times. There are severe mismatches.....dislocations that will not be solved easily.

When it comes to the energy industry, I tend to rely on what Boone Pickens and Jimmy Rogers say because those two have been more accurate on those markets than just about anyone else. There is a reason why people listen to Boone Pickens when he talks about me on that one. People listen to Boone Pickens on the energy market like a lot of investors listen to Warren Buffett on how to invest in stocks. I use Boone Pickens as a general guide as to what is a good idea, even though he is not always right just as Warren Buffett is not always right..

Currently Boone is investing in Wind Mills which he believes should take over most of the power production in the USA and natural gas which he believes should be used for transportation. I am not sure how feasible these ideas are but the USA reliance on oil must go down.

India (Mostly Reliance Industries) started off building a few Sour Crude refineries in a partnership with Chevron more than a few years ago. They did so namely to take advantage of the huge profits that were being made in refining sour crude and shipping the refined product to the USA.

I think the grand plan for the Indian oil refineries was to ship refined oil to the USA to take advantage of the inability of the USA to invest further in building new refineries to keep up with demand. I think companies like Reliance saw the huge profits being generated by companies like Valero.

The next part of the plan assumed that demand for refined products would drop off in the USA and that India would then simply switch to using the refined products to take care of the demand in the huge Indian market.

Reliance could make huge profits off such a plan....or it might not work out as planned. Just as my investment in CBI might not work out according to plan. I actually read the risks to investing in CBI and I think there was something in there about if the price of oil remained too high it could limit investment into things like oil refineries. Say what???

You see...Oil refineries are a huge capital investment and most of the time they do not make much money for the refiners because of slim margins. If Oil companies and others that would like to invest in this area begin to believe that high oil prices will drop demand to such a level that a investment in a oil refinery would not be profitable then additional refineries will not get built and companies like CBI will not do as well in the refinery building business.

How about catch 22...It is the reluctance to invest in new oil refineries because of the big risk of losing money that keeps the rate of demand ahead of the rate of refining capacity which keeps prices high..hmmm..more complicated than I thought.

As for Reliance, I have read various theories that have said that Peak oil for Light Sweet Crude is already here and that peak oil for Heavy Sour Crude could be as little as ten years away. If such a theory is correct then if Reliance or any other company builds out too many Crude refineries that can crack heavy crude then they may end up losing money in the long term.

I don't know if I explained this all very well because this is just my simplistic view of a very complex problem in which even the experts argue over various theories about things like Peak Oil. All I do know is that the pricing of oil is extremely complex and does not lend itself to very simplistic formulas to determine a price. That is why I am leery of predictions that say the price should definetely be a certain price.

Some people believe the price of today is a bubble but I say the price of oil today could just as easily be considered under-valued as it can be considered over-valued. The price could easily rise to $200 a barrel before the "bubble" pops and the price drops to let's say maybe $90 a barrel before going back to $150. The price might not ever see $60 a barrel again. That scenario is just as likely as any. So what is the real price of oil? Is it what some formula says it is or is it what the market place is pricing it at?? I will let you decide....

Now, Jimmy Rogers believes the bull market in commodities will be here for at least the next few years. Can the price of oil correct and go down to $100??? Yes....but barring a massive implosion of economies around the world I don't believe the demand will drop off enough to stop the general rise higher. We may be in for a very painful period of stagflation that will correct the various supply and demand imbalances. That stagflation just might implode a economy or two or more....We shall see.

As for alternatives to oil....Even if for instance, they proved that Fusion energy is viable overnight...enough alternative energy projects to drastically lessen demand will probably not be here for another five years at least. It takes a minimum of that long to get things off the engineering stage and in to actual production.....things like Nuclear power plants, huge solar panels out in the desert, new refineries or what some believe is the perpetual motion machine of Fusion power :)

.....these things are not erected overnight in places like the USA or Western Europe.

India and China may be able to erect certain things at a much faster pace but probably not fast enough to solve the world's energy needs...

Rob S
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A very nice writeup. I concur with all your points

Your writeup and my linksleads me to conclude the following:

1) No one can put a finger on what the price of oil should be or would be in the short/long terms.

2) Probably no one knows how much oil there really is or how much supply in the future can be generated.

2) High price of oil is a double edged sword. It brings opportunities via development of oil infrastructure while at the same time it creates the catch 22 situation where oil infrastructure may not get the investment it needs just because the current price it too high. Sharp rise in oil prices have the potential to derail the global economy, reduce the demand a little, drive out the speculators, at least temporarily and put a question mark on the extent of oil infrastructure needed. Had the oil price rise been gradual. 10-20% per year, this catch-22 would not have been created. It is primarily the sudden rise that has created a lot of uncertainty.

As an investor, for me, I think the prudent actions would be to keep investing in those companies that have reasonable current valuations and not simply based on a dramatically high projected growth. One can take advantage of oil price rise by also investing in alterantive energy stocks and agricultural commodities. Investing in oil related companies is not the only way to take advantage of commodity price rises.

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