by Jerome a Paris
Tue Nov 6th, 2007 at 04:39:42 PM EST
Oil prices hit $97 earlier today, as bad news continue to sink in (floods in Mexico, a pipeline damaged in Yemen, tension in Pakistan, storms in the North Sea), and the markets are very obviously thinking about what happens next.
That graph represents the number of open positions betting that oil will be above $100 in December 2008 (in one year's time) - ie people paying today to have the right to purchase oil then at no more than $100 dollars.
Scramble to insure against more oil price rises
Energy consumers and speculators are scrambling to take out options contracts to insure themselves against oil prices rising above $100 a barrel - a further sign of growing expectations of a spike in the crude market.
Some have even taken out contracts to protect themselves against prices rising to $250 a barrel in the next two years. (...) The strong flows in call options - contracts that give the right to buy at a predetermined price and date - are boosting short-term oil prices as the banks that sell them have to hedge some of their positions by buying crude oil in the spot market.
The open interest in Nymex December 2010 call options at $100 a barrel rose on Monday to 24,903 contracts, double the level of the start of the year. (...) The open interest at the December 2007 call option at $100 a barrel is unusually high at 48,032 contracts. As banks cover their positions, that could push the spot price towards $100 a barrel.
This page by FreeCharts.com will give you an idea of the number of contracts being traded overall at various maturities (which include all 'plain vanilla' forward sales - the same at a future date at a price agreed today - and all sorts of other more sophisticated options). The symbolic $100 level is clearly in all traders' minds.
The "it's speculation" meme has been doing the rounds and is regularly repeated in the comments here.
Well, speculators, usually, only accelerate underlying trends: by betting that a given price will be reached in the near future, they effectively bring that price about faster. The important thing to note is that this pays off only if the underlying trend is correct: people are betting real money (even if not necessarily always their own...) on something happening, and that means these bets have to have some basis in reality. What people mean when they blame speculation is that they think that the markets are overshooting - i.e. in betting on higher prices, they keep on betting beyond what the "real" price should be, until others finally bet against them and bring the prices down to that underlying equilibrium level. Overshooting is a regular feature of markets, just as crowds movements take a life of their own (including occasionally all the way to stampedes), driven by fashion, herd behavior or fear of losing out on a 'certain' trend.
The Oil Debate
DAN YERGIN (chairman of Cambridge Energy Research Associates): [The price of oil] is decoupled from the fundamentals of supply and demand. What's driving the oil price now is the cauldron of geopolitics, momentum and financial markets, and tying it all together, fear, combined with a weakening dollar. So we could be one or two events away from $100 a barrel oil. So events could put it there. But if you look at it in terms of supply and demand, it's not as connected as it was in the past...I think the way it's going now, some other events, some more intensification--we're just six dollars away from $100, we can get there. But you know...economics work. And at some point, the price will respond to it, particularly when it's disconnected from fundamentals.
BOB HORMATS (Vice Chairman of Goldman Sachs International): I think [the price of oil] is out of line with the fundamentals, let me address that first. Oil is not just an economic commodity, it's a political commodity. And every time you get a lot of fear in a region that produces a lot of oil, even if it's not directly related to that oil supply, even if it's around that area, it does tend to push prices up.
Daniel Yergin is the man who predicted an unprecedented build up of oil supply back in 2005 (production is, right now, lower than it was then), $38 oil for November 2005 (it was above $60) and other assorted optimistic price forecasts, but hey, I've been accused of being a Cassandra for years, so I suppose I should give him the same courtesy and acknowledge that he may be right eventually...
The fact is - in today's religion, the market is always right and, today, the market is betting on oil going above $100 per barrel. Who am I to argue with our deities?
In more interesting news, here's an email sent out by MoveOn about Hillary Clinton's energy plan, which has been receiving a lot of praise here on dKos and elsewhere:
Yesterday in Iowa, Hillary Clinton announced her plan to confront our energy and climate crisis--and it's really good. Her plan, and her words announcing it, proves that Senator Clinton is taking this issue seriously:
"This is the biggest challenge we've faced in a generation--a challenge to our economy, our security, our health and our planet....I believe America is ready to take action, ready to break the bonds of the old energy economy and ready to prove that the climate crisis is also one of the greatest economic opportunities in the history of our country."
Over the past year, many of us have given Senator Clinton a lot of input on how her energy plan should look. MoveOn members have asked her to include fuel efficient cars, polluters-pay mechanisms, and to commit to dramatic reductions in greenhouse gases. Her plan includes all those things.
Industry will say this plan is too aggressive, so it's critical that Hillary Clinton knows that we have her back on this issue. Can you please take a minute and thank Senator Clinton for her bold and progressive energy plan?
This year we have been engaging with all of the presidential candidates--urging them to stake out progressive positions on key issues and supporting them when they do. Today, it is Hillary who deserves the praise and encouragement. Here are just some of the key points:
- A new cap-and-trade program that auctions 100 percent of credits;
- An increase in fuel efficiency standards to 55 miles per gallon by 2030, and $20 billion of "Green Vehicle Bonds" to help U.S. automakers retool their plants to meet the standards;
- The creation of a "National Energy Council" within the White House--the first Executive Branch to be dedicated to this issue;
- An aggressive comprehensive energy efficiency agenda to reduce electricity consumption 20 percent from projected levels by 2020;
- A $50 billion Strategic Energy Fund, paid for in part by oil companies, to fund investments in alternative energy;
Click here to see the entire plan:
Hillary's the last of the Democratic candidates to announce her energy plan. It's now clear that the Democrats are united in making the climate crisis a priority. All of them would lead our country in the right direction if elected.
Below are links to all of the Democratic candidates' positions on climate and energy:
Sen. Joe Biden: http://www.joebiden.com/issues/?id=0011
Sen. Hillary Clinton: http://hillaryclinton.com/issues/energy/
Sen. Chris Dodd: http://chrisdodd.com/issues/energy_independence
Sen. John Edwards: http://johnedwards.com/issues/energy/
Sen. Mike Gravel: http://www.gravel2008.us/issues.php
Rep. Dennis Kucinich: http://www.moveon.org/r?r=3139&id=&t=2
Sen. Barack Obama: http://www.barackobama.com/issues/energy/
Gov. Bill Richardson: http://www.richardsonforpresident.com/issues/energy
Earlier Countdown diaries:
Countdown to $100 oil (51) - we'll never see 100mbd
Countdown to $100 oil (50) - it's no longer 'oil', it's 'liquids'
Countdown to $100 oil (49) - peak oil and libertarians
Countdown to $100 oil (48) - 85, 86, 87, 88, ...
Countdown to $100 oil (47) - Malthus, Mein Kampf and ostriches
Countdown to $100 oil (46) - what's a dollar worth?
Countdown to $100 oil (45) - time to bet again (eurotrib)
Countdown to $100 oil (45) - time to bet again (DailyKos)
Countdown to $100 oil (44) - oil industry admits it cannot save us
Countdown to $100 oil (43) - IEA boss denies and confirms peak oil in same breath
Countdown to $100 oil (42) - IEA predicts shortages within 5 years
Countdown to $100 oil (41) - oil more expensive than it appears
Countdown to $100 oil (40) - Undulating plateau
Countdown to $100 oil (39) - BigOil running out of oil
Countdown to $100 oil (38) - Who gets Champagne edition
Countdown to $100 oil (37) - OPEC says peak oil (and $100 oil) is near
Countdown to $100 oil (36) - Free game! win champagne! no risk! (eurotrib)
Countdown to $100 oil (36) - Free game! win champagne! no risk! (DailyKos)
Countdown to $100 oil (35) - peak oil: the last skeptics capitulate (CERA)
Countdown to $100 oil (34) - Oil major CEO calls for demand reduction
Countdown to $100 oil (33) - Below zero
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline *
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)
* added to the series after the fact