Still going up, as I’m sure you’re aware…

BTW, Pch, I see oil prices are back up at $134/bbl. As for your concerns about volatility, sometimes that’s just how the free markets work: chaotic and unpredictable, but efficient over the long run.

How’s this: between 3 months and 5 years from now.
Sounds like Rick Wagoner talking about GM’s infamous turn-around strategy…

No. I’m not a prophet. How’s this: between 3 months and 5 years from now.

Are you going to put a timeframe on your “I fully expect crude oil will trade below $80 a barrel in the not too distant future” prediction?

If you say, for example, “I meant within 12 months,” then we can look back in twelve months, and determine whether this prediction was right or wrong.

I’ve said all along that random walk theory tells us that short-term price movements are not meaningful of long-term trends.

Still, you missed the point. The price of oil just moved $4 (the direction doesn’t matter) based upon what was really nothing. This sort of thing has become just another routine day in the oil market. That casualness of this event signifies a substantial amount of volatility exists in the market.

That kind of volatility makes no sense, given that oil demand growth is below average. Under normal circumstances, a moribund business or commodity gets no such strong reaction. Yet these days, oil rockets around in price for no good reason.

It just dropped $4 for no good reason. The day before that, it went up a couple of bucks, for no good reason. The fundamentals today are really no different than they were on Monday or Tuesday.

Not long ago, these would have been dramatic price changes. Now, they’ve become routine. When the absurd becomes normal, that’s a classic sign of a bubble.

Volatility and bubbles go hand and hand. Volatility suggests that supply and demand are not determining prices. That’s particularly true when demand growth is below normal.

The number of contracts is up by 25% since Jan 2007. Not enough to cause a doubling of price.

This is false, and I’m frankly discouraged that you keep saying this when I’ve provided a convenient chart that makes it obvious that this is not true.

Here’s the reality:

-Up until late 2004, open positions tended to range in the 500,000 – 1 million range.

-By the end of 2005, that figure was about 1.5 million

-By the end of 2006, that had soared to the low 2 million range

-By year end 2007, it had 3 million positions.

To put it another way, the marginal increase in the number of positions during one single year — 2007 — was equal to the maximum size of the entire market up until 2004. That is a massive shift in capital, not a minor non-event to be brushed off or overlooked.

In any case, that figure isn’t 25% by any stretch of the imagination. In comparison to 2005, when this party began, it is triple its previous size.

Essentially, we took the market size peak of 1995-2004, and added two more markets right along side the original. Imagine tripling the population of a city in just three years’ time, and this is the level of drama and hysteria that we are talking about.

And as is generally the case with everything else, there is a time lag between the initial ramp up of buyers and the price increasing. Demand precedes pricing changes. The price increases of 2007 were built upon the swelling of investors pouring capital into it during 2005 and 2006.

Demand rates are falling…
Can you read? Boy, you sure don’t let the facts get into the way of your story. For the umpteenth time: US demand is beginning to fall. World demand, based on the latest information, is still trending up.

If you have more recent facts, I’d be glad to learn otherwise. But your (endlessly repeated) opinion doesn’t cut it.

A year ago, oil was about $50-60. The price has doubled since then, yet the fundamentals are essentially the same as a year ago. The only substantial thing that changed during that time frame is not supply or demand, but the number of open positions in the market.
Again, here are the facts, as listed above:
1. The number of contracts is up by 25% since Jan 2007. Not enough to cause a doubling of price.
2. Supply is flat.
3. Demand is up.
4. This, in spite of prices doubling.

So put it all together, and you have: So far prices have had no apparent effect on either supply or demand. The logical conclusion: Even higher prices are needed to reign demand in, and to attract more supply. This is what the speculators are betting on. Perfectly rational, when you think about it.

You seem to think that because there is no shortage at the bargain price of $130/bbl (ignoring daily fluctuation), the market should be in equilibrium at $80/bbl. How does that work? Why stop at $80/bbl? How about $60? Or $40? $20! No! $10? $5! Yeah, afterall the Saudi’s can pump it for that. Darn it. Why do they need any profit?

Add sentiment and timing into the mix, and things get fuzzy. A year ago the market was perhaps way behind schedule. At $130/bbl, we may be a bit ahead of schedule. These things happen. That’s why prices change over time.

You’re behind the times. Oil fell below $130, by more than four bucks today.

Which illustrates the absurdity of the situation. The fundamentals today are pretty much the same as they were yesterday, as they were a week ago, as they were a month ago, and for that matter, as they were a year ago. Yet an uneventful report from the EIA can trigger a $4+ price movement, an amount that would have been next to unthinkable before a few years ago.

Those spikes and declines are not based upon fundamentals, but upon overeager traders trying to get into and out of positions at the right time. That’s what George Soros seeing, as am I.

Growth is growth.

Not at all true. Rapid growth can create disruptions because it can’t be absorbed efficiently enough by the market over the medium term. Slow growth can be anticipated and managed accordingly, while stocks can be built to offset interim shortages.

We heard that the price of housing would never fall, because they don’t build more land. As it turns out, it is true that they can’t build more, so they got half of it right, but that doesn’t mean that demand can’t topple, anyway.

Between the traders betting on uncertainty and OPEC trying their best to manage supplies to maintain prices, we have temporary upward pressures in the market. S**t happens.

But demand always ends up determining the final outcome, for ultimately, there is no market without demand. Demand rates are falling, and the OPEC cartel will break, just as it did before back during the last sky-is-falling doomsday period.

A year ago, oil was about $50-60. The price has doubled since then, yet the fundamentals are essentially the same as a year ago. The only substantial thing that changed during that time frame is not supply or demand, but the number of open positions in the market.

George Soros understands what that means, because he has built his fortune on taking open positions and betting on what his fellow speculators are thinking.

If you can’t understand that the demand for investments can change the price of the stuff that is being invested in, then you simply won’t comprehend this concept. It happened with the internet companies (new paradigms were supposed to keep those sky high), real estate (no new land, of course) and now, oil.

It’s all the oil hype of the seventies, but without any of the actual shortages that we had at the time. At least the earlier panic was somewhat justified. What our excuse is going to be in retrospect, I have no idea.

Here’s what the market is saying: Oil is available for purchase at the grand bargain price of $130/bbl.

You might link to some blog that claims otherwise (I’ll stick with Soros, thanks), but when oil is demanded by a purchaser, there is a supplier ready to provide it.
Blogger? Who needs a stinking blogger, when the facts are right there in black and white in the liberal media WSJ? Or are you saying Soros in infallible?

So demand is being met. You claim a supply “restriction” that doesn’t exist.
And now for the facts, courtesey of the WSJ: Among the world’s biggest oil exporters, only Russia put more crude in the market last year compared with 2006; all the rest, from Saudi Arabia to Venezuela, produced less oil and used more at home. In many cases, the lower production and higher consumption go hand-in-hand.

Or, how about this: Saudi Arabia is the poster child. Production fell by about 400,000 barrels a day from 2006 to 2007. Domestic demand rose almost 200,000 barrels. Exports were indeed down almost exactly 600,000 barrels.

Demand growth during 2007 was 2/3rd’s of the average, a figure not to get excited about.
Growth is growth. Increased demand means upward pressure on prices, even if the increase is small.

So, we still have: [Supply leveling off, or decreasing] + [Demand increasing, even if slowly] = [Prices increasing, as expected]. Elementary, my dear Watson.

No magic required!

And regarding speculation, MSNBC reports: After Thursday’s inventory report, prices initially strengthened, then fell. The ambivalent reaction partly reflects a deeper battle between investors who believe prices have risen far beyond levels that can be justified by underlying supply and demand fundamentals and those who believe speculative money will continue flowing into oil futures, sending prices higher regardless of the market’s fundamentals.

“This was the first time we’ve had a bearish reaction,” to news that in the past would surely have driven prices higher, Cordier said.

Who knows? We may know soon how much of this run-up was speculator driven. They may even do us all a favor, and start driving the price down. I’d be surprised to see prices drop by as much as $30. Stay tuned.

The market says who. Oil is available for purchase. You might link to some blog that claims otherwise (I’ll stick with Soros, thanks), but when oil is demanded by a purchaser, there is a supplier ready to provide it.

So demand is being met. You claim a supply “restriction” that doesn’t exist.

The oil system is essentially similar to a just in time production system. Most of it stays in the ground until not long before it’s needed. Producers don’t pump out years of supply ahead of time, because the earth serves as a gigantic underground storage tank that allows the oil to stay right where it is until the market is ready to absorb it.

If there was an oil shortage, you would know it, and not because some blogger claims that there is. It would become obvious because there would real-world limits and restrictions on buying it.

Demand growth during 2007 was 2/3rd’s of the average, a figure not to get excited about. With an economic downturn underway which may be labeled as a recession soon enough, demand growth should slow further still, not just in the US but internationally, just as it has been.

Your math “correction” is wrong, and fallacious attempts to explain why oil is the magic commodity that can’t possibly flounder don’t aid understanding. To agree with you would require believing in a supply “restriction” that does not exist. As oil demand growth slows down even more than it has been since 2005, this will become more obvious until hedge funds are left holding this bag, just as they were left clutching that bag of mortgages that also wasn’t supposed to deflate. (They don’t build more land, you know, so it can’t possibly happen…)

Your argument is effectively, There can’t be a bubble, because the free market creates equilibrium prices by default.
Tell you what, let me tell you what my point is, effectively or otherwise. You tell me what your point is.

Bottom line: as shown by the graphs I linked to, its supply and demand. Not that markets are always in equilibrium. These prices may well cause long term demand destruction. Whether that means lower prices will depend on how much supply these prices can bring to market. So far it’s not looking good. We’ll get back to that.

Just as we saw with real estate, and prior to that with internet stocks.
There are some key differences between speculation with real estate and speculation with oil futures. Let’s review:
- Real estate: There is no physical difference between a speculator and someone buying a house to live in. The speculator can hold onto the house for decades, if the market stays strong that long. In fact, a rising market would encourage the speculator to increase his portfolio. The only thing that limits how much a given speculator can buy, is his access to credit. Given the creative financing (call it aggressive or risky if you must), the speculators kept buying and the bubble kept inflating.
- Oil futures: The oil future trader obviously cannot hold onto his contract for a long period of time. To get more speculator demand, you need more speculators or more money flowing from the same speculators. As you have shown, over the last few years the number of contacts has increased. This is confirmed by some of the numbers that William reported. Obviously this has had some effect on oil prices. However, the severity of this effect is related to the rate at which new contracts are issued, i.e. the amount of fresh money entering the market. In other words, the upward pressure goes away when there is no more fresh money flowing into oil futures. Your own figures would suggest the number of contracts, while still growing, isn’t growing at a high enough rate (~25% since Jan 2007) to cause significant upward pressure.

Free markets don’t change basic math: Ample supply + relatively low demand usually equals moderate prices. Prices today are anything but moderate.
Talk about fuzzy math. Ample supply? Says who? Remember: Just because you don’t see gas lines does not mean ample supply. Refer to the graph again. Supply has stayed flat for three years, while demand has grown.

And it appears to be getting worse: Fresh data from the U.S. Department of Energy show the amount of petroleum products shipped by the world’s top oil exporters fell 2.5% last year, despite a 57% increase in prices, a trend that appears to be holding true this year as well.

Relatively low demand? On what planet? Remember, the US is not a planet (yet). Check the graph. Read up on what is happening in the rest of the world: Soaring oil prices have not slowed China’s consumption of oil as statistics show that China’s apparent consumption of crude oil and refined oil products both hit record highs in the first quarter of the year.

According to statistics released Tuesday by the China Petroleum and Chemical Industry Association (CPCIA), China’s apparent consumption of oil products composed of gasoline, diesel and kerosene rose by 16.5 percent year on year to 52.73 million tonnes in the first three months, and crude oil, rose by eight percent to 91.8 million tonnes.

So let’s correct your statement, based on the facts: “Free markets don’t change basic math: Ample Restricted supply + relatively low growing demand usually equals moderate increasing prices. Prices today are anything but moderate increasing, proving the oil market is acting like a free market.”

Well said! ;-)

Here’s another guy who apparently doesn’t get it: George Soros. His recent comment on the subject: “The price has this parabolic shape which is characteristic of bubbles.”

My point is that this is exactly how the free market operates.

And that’s not a very good point. Because while the free market of commodity users has been growing at a below-average rate for the last two years, in comparison to the last 25 years’ worth of demand growth, the interest of investors trying to profit from it has tripled over the last three years.

You don’t realize it, but you’re contradicting yourself. Your argument is effectively, There can’t be a bubble, because the free market creates equilibrium prices by default. Except you’ve already admitted that a bubble did burst in the real estate sector, which proves the point exactly that prices are not always near equilibrium.

Free markets don’t prevent bubbles. On the contrary, active speculative markets encourage bubbles when speculation soars above a normal level.

There are two forms of demand: demands from end users of the product, and demands from traders. The product is ultimately the same, but those who want to consume the product view it very differently than those who consume investments in the product.

Usually, the traders are a small enough group that they don’t influence the price, there usually aren’t enough of them to make a difference. But at times like these, when their number of positions has tripled compared to normal and when they keep trying to day-trade their way to success, they do become important factors in determining the final cost, but only temporarily. Just as we saw with real estate, and prior to that with internet stocks.

The speculative interest in oil is based more upon the ongoing Iraq war and the uncertainty it brings than demand for oil itself, which is growing at 2/3rd’s of its normal pace. If you look at US stocks, you can see that those levels are in line with the norm, so there is no shortage. There’s no need to panic about supply when demand has been tapering off since 2006, when oil was half this price.

Free markets don’t change basic math: Ample supply + relatively low demand usually equals moderate prices. Prices today are anything but moderate.

As George Soros notes, steep short-term price increases indicate a bubble. Short-term trends that move sharply in one direction are not sustainable over the long run, because prices don’t normally behave like that when demand is normal or below normal.

Which brings up the matter of timing: right now, with oil trading at ~$130/bbl US demand is taking a dive. World demand: who knows? Based on the fact that prices are subsidized in many markets, I wouldn’t be holding my breath. At some point though, even world demand has to face up to reality. Just how much can any government spend on these subsidies?

I don’t consider it likely, but it is certainly possible that $130/bbl will hurt demand enough so that prices start going in the opposite direction. But as you point out with the example of the housing bubble, it is almost impossible to predict when this will happen.

Now, you’re arguing that supplies are in balance (which is odd, since that’s what I’ve been doing throughout this discussion.)
Forgive me, but you still don’t get it. You seem to think that since there are no shortages (as happened in the 70s), oil prices should be lot lower ($80/bbl?). Now if only we could rid ourselves of those pesky speculators.

My point is that this is exactly how the free market operates. According to the market, we need $130/bbl (and $4/gal) to prevent those shortages you (and author William) are looking for. Suppliers and consumers agree about this, even though one group is obviously much happier about this than the other. If you’re not happy with $4/gal, don’t buy. Easier said than done, I know, but that’s the free market for you.

Again, timing comes into this. $4/gal may hurt like hell, but you might not have any short term options to relieve the pain. If prices stay at these levels, or even increase further, you’d start to make long term adjustments: you may move to reduce driving, buy a move fuel efficient car, etc. to reduce you consumption. Hence it may take a while for us to see the full effect of these prices.

Not sure how that’s possible, as I have actually posted that on other threads of this website. I’m making no secret of my position on this topic. At this point, I’d prefer that you just search for it yourself, given your obvious charms.

If you want to promote your position, you have the burden of proof.

I have done that in abundance, as you will note in the links and data that I have referenced above.

You, on the other hand, have provided nothing but shrill rejoinders. Other than being fond of science as you define it, I’m curious to know what issues you have with the information that I’ve provided thus far. So far, you seem to find it objectionable, but you’ve kept it a secret as to why you might.

I’m sure enough other people have now seen that you are either unwilling or unable to answer the straightforward question how much of the current price of oil is attributable to the bubble?

If you want to promote your position, you have the burden of proof.

Pardon me for pointing out that such a statement (a) is nebulous, (b) fails to address my question requesting whatever data, if any, that you may have used to formulate your position, whatever that position may be, and (c) need not be accompanied by your clear penchant for evasive condescension.

I can sense that you want to manage and moderate this thread, but that is not your prerogative. If you want to have a conversation, that’s fine, but I am not going to ask “How high?” when you rudely demand that I jump.

My position is “science is good.” Science doesn’t try to “take sides”; it evaluates evidence.

I’d really like some falsifiable hypotheses that we can use to test your theory; for example, “if oil is still over $100 a barrel twelve months from now, there wasn’t a bubble.” You can choose another test if you wish.

I’d also really like to know how much each marginal unit of investment increases the marginal price of oil.

There are those and the other questions I’ve asked that have all been ignored, so I’ve just tried to settle on one, that I ask for the fourth time here: how much of the current price of oil is attributable to the bubble?

If insulting me first makes answering that question easier, that’s okay. I’ll take one for the team. Just have the decency to answer the question after doing that.

I’ll throw out some numeric ranges (I actually have done this on other discussion threads on this website, so I’m not adverse to doing so), but I’m curious to know what data you have to defend your position, and for that matter, whether you have a position aside from being a contrarian.

I’ve gone to great lengths to detail why I see a bubble. You can disagree with it, but clearly I didn’t pull that supposition out of thin air, nor is it based upon a conspiracy theory.

What you base your antipathy on, I don’t know. So a bit of transparency on your part might be nice.

The big problem I have with peak oil was the non-falsifiability of it; every month that peak oil didn’t happen, they got more convinced that it was going to happen. That’s pretty much what I’m seeing here; every month that the oil bubble doesn’t pop, some folks become more convinced that there’s a bubble.

That’s why I’m trying to get you to say something that’s testable. For example, how much of the current price of oil is attributable to the bubble?

How much of the current price of oil is attributable to the bubble?

Er, I’d whip suggest that you break out your mirror out before you start pointing fingers.

You’ve begun contradicting yourself. Now, you’re arguing that supplies are in balance (which is odd, since that’s what I’ve been doing throughout this discussion.) Yet despite supplies being in balance, and demand slowing down, you see a rational demand-based reason for prices to increase about 2.5 times and demand for oil contracts to increase by 3 times.

I’m curious — have you ever before spotted a speculative bubble before the fact, or have you always steadfastly believed that markets never get overheated? I get the feeling that had we been talking about mortgages two years ago that your points would be identical, i.e. that the capital markets are always rational. Until, of course, they aren’t.

At some point these sky high prices would lead to increased supply (apparently not yet) and lower demand (slowly starting to happen). Eventually, this would lead to lower prices. Apparently, we are not there, yet.

To get rationing, you need a dimwit politician (such as Richard Nixon) to try to put a cap on prices. Will that happen again? Quite possible, given the supply of dimwits in Washington DC. Let’s hope the demand for dimwits stay low, although that can’t be guaranteed.

Demand growth for oil during 2006 and 2007 combined was just 2/3rd’s of what it was during 2004 alone, the year that triggered this surge of investing.
You have to remember that 2004 brought an unexpected spike, which pretty much caught the market with its pants down. Some claim the 2004 spike was related to demand for electric power in China, which the grid could not satisfy, and was ultimately satisfied by diesel-burning generators.

Also of interest: a claim that ANWR oil would reduce the oil price by… wait for it, $0.75/bbl. Whoopee!

Wrong time period. As I noted above (and check the graphs in the linked PDF file), the surge in speculative activity began around 2005.

During 2004, oil demand increased 3.4%, as part of a global economic boom, while oil prices fluctuated between $30-40, as it had the year prior, but double what it had been around 9/11.

Combine this with the quagmire in Iraq creating uneasiness about conditions in the Middle East and the weak dollar, and speculators got excited around 2005. They dived into the market — by the end of 2006, they were so numerous that they served to increase the number of futures contracts by 2.5 times, an unprecedented level well above anything seen in the prior decade.

At this point, the prices of contracts are feeding the market. Futures traders betting against each other are doing more to pricing than actual demand, which is slowing. Demand growth for oil during 2006 and 2007 combined was just 2/3rd’s of what it was during 2004 alone, the year that triggered this surge of investing. The rush to oil has been on the investment side, not in the consumption side. (And no, there are no genuine supply shortages, otherwise we’d have rationing.)

All of this points to a bubble. There are signs that the futures market may be weakening. The number of open positions is starting to decline, and recessionary news won’t help.

What could pop the bubble would be an immediate cessation of the war, as that has stimulated a lot of the betting, as has the weakening dollar that is also the byproduct of the war. What would make it hiss is the economic decline, which appears to be taking hold throughout the west and is sure to impact China’s exports and domestic GDP growth.

Prices will probably surge before they fall, but a decline is probably coming. If a Democrat wins in November, that should push it over (all bets are off if McCain wins), but recession news alone might just be enough.