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Countdown to $100 oil (48) - 85, 86, 87, 88, ...

by Jerome a Paris Tue Oct 16th, 2007 at 07:16:30 AM EST

Oil prices are breaking records so often these days that news papers have to rewrite their stories twice a day to keep up, right now. The NYMEX prices broke through the $85 level yesterday, closed above $86, move above $87 this morning and are now hovering, as I write, just below $88...


Oil surges near $88 a barrel

Oil prices rose to fresh records on Tuesday, with US crude surging near $88 a barrel, and pushing gold to a new 28-year high as investors feared a spike in inflation.

The threat of a Turkish military operation against Kurdish militia in northern Iraq contributed to the oil price increase, but traders said the main factor of the rally was low US inventories, strong demand and a timid production increase from the Organisation of Petroleum Exporting Countries.

The short term variations of the price are to a certain extent random - they are spur-of-the-moment reactions to news on various fronts, as suggested above - OPEP declarations, inventory numbers, geopolitical events - while the mood on the currency markets as well as reallocation of funds throughout financial markets can also play a role. But what is more striking to me right now is the following combination:

  • regularly increasing oil prices have still not had any visible impact on worldwide growth numbers;
  • all players have brutally changed their expectations of future prices, and brought them to levels close to current prices.
    I discussed this in an earlier Countdown diary, but recent news have confirmed this, with French oil giant Total now increasing its internal hurdle rate to $60/bl (i.e. it will invest in projects that require oil to be higher than $60/bl on the long term to be profitable - see slie 15 of this (big pdf) corporate presentation), and others increasing their medium term price assumptions.

What these two tidbits suggest is that oil is still cheap. Its price is driven by strong demand growth and not, as in previous oil shocks, by (artificial) supply shocks, and the continued, regular, increase suggests that investments in places like China are still worthwhile even with higher oil - and other commodity - prices.

As these investments drive up demand, prices will have to go high enough to dissuade them, unless supply can keep up, which seems improbable right now, as this chart shows: production has been flat for almost 3 years now, as per official statistics.

In fact, I personally think that the oil price increases have actually allowed the financial asset bubble to survive another year, by providing yet another source of easy financing: revenues from oil exports have extracted more money from households around the world; in the West, as that spending is basically compulsory, it has to a large extent been financed by increasing debt levels; meanwhile, those huge inflows could not be all spent in the oil producing countries, and had to be recycled in the financial markets - mostly in the form of investments in US Treasuries, thus keeping long term interest rates low and making the debt financing easier for their customers. Of course, by financing their customers on easy terms, the oil producers have worsened the already massive global financial imbalances - and have acquired funds large enough to make them players in our markets - buying, via their Sovereign Wealth Funds, companies and assets and not just State debt. Right now, we're selling jewellery to pay for our fix.

But the price is still not high enough to make us stop. It seems that until we actually have to sell the house, we won't even slow down our craving for the black stuff. And $100 still won't be enough.

Earlier Countdown diaries:
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

Display:
http://www.dailykos.com/story/2007/10/15/183453/29
Thanks for your support!

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Oct 16th, 2007 at 07:45:33 AM EST
Euro slips against US Dollar

The euro dipped to 1.4183 dollars, from 1.4205 in New York late on Monday, but was not too far off the record high 1.4283 dollars set on October 1.

Elsewhere Tuesday, the dollar fell to 117.02 yen, from 117.35 late Monday.

On the London Bullion Market, gold jumped to 767.09 dollars per ounce -- which was last seen in January 1980 -- as the precious metal was boosted by the flagging US dollar.

I just don't see this as an oil price rise, so much as a dollar fall.

And I don't see an end to it, either. I reckon we'll be at $100 oil or actually, 0.01 bbl Dollars, before the year is out.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Oct 16th, 2007 at 08:10:08 AM EST
We recently calculated that since oil was at $50/bl prices in europe have risen by 30%, whilst in the US they've risen by over 50%.

So it's not quite proportionate.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Tue Oct 16th, 2007 at 08:19:43 AM EST
[ Parent ]
No, oil rose faster than the dollar fell. IIRC one third of the rise is due to dollar depreciation.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Oct 16th, 2007 at 08:23:38 AM EST
[ Parent ]
Maybe so.

But I don't think oil demand destruction outside the US will kick in at current (adjusted for $ exchange rate) prices and in any event not unless and until the US hits a recession/depression, which is only a metter of time.

Moreover, that was then and this is now: we are seeing dollar lows against virtually everything

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Oct 16th, 2007 at 08:32:57 AM EST
[ Parent ]
is actually happening in Europe - very marginally, to be sure, but it is happening. Overall oil consumption has been stagnant or declining in the big European economies over the last several years.

Oil consumption also stagnated in the US last year. The problem is that stagnation in the West is not enough at a time of brutal growth in the places we now know about (China, India, etc...) and even more in the places nobody thinks of - the oil producers: Saudi Arabia, Iran and Russia (and Canada, too) are in the top 6 of the biggest consumption increases over the last several years. And they won't slow down - their economies are booming and gasoline is usually heavily subsidized (i.e. sold closer to production cost than to market prices).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Oct 16th, 2007 at 08:39:30 AM EST
[ Parent ]
I confirm that for example German oil consumption definitely went down.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Oct 16th, 2007 at 09:07:36 AM EST
[ Parent ]
... impact ... that the increase in the price of crude oil is much lower in Euros than in dollars ... roughly 3/5's as much ...

... but I wonder whether there is a second dimension. In countries where petrol taxes are by unit rather than by value, where passing on a given percentage increase in crude oil prices results in a lower percentage impact on petrol prices per litre. I don't know whether any major Eurozone countries have any substantial portion of their petrol taxes per unit rather than by value, but if they do, that would be an added dimension.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Oct 16th, 2007 at 06:26:37 PM EST
[ Parent ]
Given that one form of demand destruction in the US would have to be cosumer driving habits, it's not surprising that rising oil prices have not caused much of a reduction.  Given the layout and strucutre of the places where most Americans live, urban, suburban, and rurual, it's nearly impossible for most of them to cut back on driving beyond a certain point.

Unless the further-flung suburbs and exurbs are more or less depopulated, we`re just not going to see behavior start to change much.  The US is really locked into a driving intensive lifestyle, and even with the political will and economic ability to change this, it would take several years for the infrastructure to be appropriately re-built.

Commercial trucking, on the other hand, may concievably be a sector where demand destruction may happen, as there are alternatives to long-distance trucking.  The American rail network may need some serious investments to pick up the slack, but it would be a lot easier than rebuilding every American town and city.

by Zwackus on Tue Oct 16th, 2007 at 09:09:33 PM EST
[ Parent ]
there such a metric to analyse movements from the burbs to cities? Housing prices only go so far. Are depopulated houses traceable?

In other words, how can one see that suburb people are migrating, that cities are compacting and that far-out suburbs are depopulating? Because as long as public transport infrastructure is not in place in the USE, this seems to me the most realistic event going to happen soon.

by Nomad on Wed Oct 17th, 2007 at 07:10:57 AM EST
[ Parent ]
I suppose that an informal way of looking into this issue would be to compare vacancy percentages over time in obvious exurbs, for example, Palmdale/Lancaster in Southern California, and compare them to similar figures in better populated/more established urban areas.

However, I know of no real statistics or figures for properly measuring this.

The fact that the housing bust has hit at more or less the same time as this dramatic rise in the price of oil also makes it harder to look at this properly.  The market has been cooling off since 2004, even if it's taken until this year for the whole system to start collapsing.  One of the major effects of the whole thing has been rising available stocks of new housing, and most of that new housing is located rather far from urban centers.

How much has the rising cost of commutes figured into the decline in sales, and how much of it has been caused by the various other factors behind the financial collapse?  Hard to say.

by Zwackus on Wed Oct 17th, 2007 at 11:07:53 PM EST
[ Parent ]
from two years ago (so oil prices have almsot doubled since that):



In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Oct 16th, 2007 at 11:07:45 AM EST
[ Parent ]
The saudis have invested heavily in the US, but, like the Chinese, are now seeing those assets diminish as the dollar falls. I've seen reports of them attempting to repatriate their money or convert into another currency (euros?).

If that is the  case, are we likely to see a malign feedback develop that will suck the US economy down a hole ? Surely there must come a point, as oil continues to rise, that the US domestic consumption pattern ceases to be affordable ?

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Tue Oct 16th, 2007 at 08:17:52 AM EST
Oil prices are breaking records so often these days that news papers have to rewrite their stories twice a day to keep up,

how many times did you have to rewrite this article?

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Tue Oct 16th, 2007 at 08:56:48 AM EST
But I had started with the FT article headlines "Oil prices above $87" and then saw on their front page that it had becme "oil price nearing $88", while articles in the morning papers still had the close at $876 from yesterday, or even a "above $85 for the first time" title... So that whole series of headlines gave me my intro...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Oct 16th, 2007 at 09:31:38 AM EST
[ Parent ]
$876? That would mean demand destruction...

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Oct 16th, 2007 at 09:53:10 AM EST
[ Parent ]
That's the price when you factor in hidden strategic costs.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Tue Oct 16th, 2007 at 10:23:11 AM EST
[ Parent ]
I've been wondering something. Of all my oil investments PetroChina has been the greatest. Friday it was up 54 % from when I bought it. The other integrateds we're up on average 9 % during the same time. Part of this difference is due to the new big find at Bohai Bay, but anyway.

Yesterday the stock surged further, up 73 % from when I bought it, and today it hit 89 %. All the while, Warren Buffet has been paring down his investment in PetroChina, missing this latest surge.

So, what's going on here? The Chinese stock bubble tainting PetroChina? Or what?

I was planning not to muck around with my oil stocks, just buy and hold, but if Warren "our investment horizon is forever" Buffet is selling, one really starts wondering...

Anyone got any idea what's going on here?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Oct 16th, 2007 at 09:39:49 AM EST
I don't know exactly, but I have been told that there are bubble effects in the Chinese stock market due to recent changes in domestic investment rules.
by Metatone (metatone [a|t] gmail (dot) com) on Tue Oct 16th, 2007 at 10:17:24 AM EST
[ Parent ]
Hmmm..

Well, no one ever went broke taking a profit.

Me, I'd buy Statoil/Hydro.

(a) it's oversold, due to all the corporate shit recently (entire board gone);

(b) the Norwegian economy isn't dependent on producing consumer goods for a US market that is shortly going to look pretty sick;

(c) the Norwegian currency is massively oil & gas backed;

(d) their finances are ludicrously conservatively managed.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Oct 16th, 2007 at 11:36:34 AM EST
[ Parent ]
But most of their activity is in the North sea, and I guess is suffering swift declines. Furthermore, the new horizons in the Barents should mainly be gas, not oil. And gas in Europe? There is a lot of gas in Russia.  Supply shouldn't be a huge problem, if the Russians invest. But if they don't, sure, as gas is declining in the North sea too.

On the other hand, in the US, new gas equals LNG. That means problems and makes gas a good investment in the US. My play there is Exelon, the biggest private nuclear utility in the world at about 20 000 MW.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Oct 17th, 2007 at 04:00:33 AM EST
[ Parent ]
My take is that the big oil companies had better get used to a new business model as service providers because "ownership" of oil is increasing staying or being reclaimed by sovereign states.

Classic case is the Shtokman field, where although Statoil ostensibly lost out to Total, I think that their hard won technology and experience in inhospitable places is going to be their major winning card in years to come, backed by a Norwegian tradition of actually investing in engineers and engineering excellence.

That being so, Statoil's return on the capital they actually commit (Intellectual Capital, if you will)will wipe the floor with that of their competition.

So Statoil is IMHO structurally a buy:

(a) for the gas in the short and medium term;

(b) for its IP, if you see the future - as I do - as a disintermediated future.

As far as I know Petrochina is all about ownership and exploitation  - they are the ones who will be paying the Statoils to do what they cannot. ie it's another gambling chip, IMHO, in a casino market with a pretty rigged wheel.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 17th, 2007 at 08:32:39 AM EST
[ Parent ]
You come to ET for information about the devil?  Choose your own idol.  They are all false, Buffhead included.

Our knowledge has surpassed our wisdom. -Charu Saxena.
by metavision on Tue Oct 16th, 2007 at 03:45:49 PM EST
[ Parent ]
Hehehe.

I think Warren It's class warfare, my class is winning, but they shouldn't be Buffet is more candid than most.

And remember, I am a supporter of the ownership society. A fair and equitable capitalism with free movement of capital where the means of production are controlled by the people, a secure and generous welfare state, and taxes as high as needed to pay for it, but not a promille higher.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Oct 17th, 2007 at 03:54:28 AM EST
[ Parent ]
OK, I've found some info now, at the Wall Street Journal site. It's from October 15.

BEIJING -- PetroChina Co. said it has completed all procedures for its Shanghai initial public offering and will likely list in November.

Its Hong Kong shares jumped 13% yesterday as news of increased oil production and hopes of major oil-deposit discoveries spurred optimism about its performance in the fourth quarter.

PetroChina President Jiang Jiemin, speaking at a Communist Party Congress panel discussion, said PetroChina's mainland share listing was "only a matter of timing."

PetroChina is the largest listed Chinese oil company by output.

Its shares rose to 18.78 Hong Kong dollars ($2.42) in Hong Kong, boosted by rising oil prices, the imminent A-share offering and faster-than-expected output growth. A shares are yuan-denominated shares of Chinese companies listed on mainland exchanges and restricted to approved foreign investors. H shares are Hong Kong listed and issued by companies registered and based in China. The company has American depositary receipts listed in New York.

H shares reached an intraday high of HK$18.94, giving PetroChina a market value of around US$430 billion, outranking General Electric Co. as the world's second most highly valued listed company, behind Exxon Mobil Corp.

PetroChina's share price has risen despite investor Warren Buffett having scaled back the stake he holds through Berkshire Hathaway Inc.

Mr. Jiang attributed the run-up in PetroChina's shares to the company's growth and the strength of oil prices, which have generally traded above US$80 a barrel since Sept. 12. Oil prices climbed yesterday, with crude rising $2.44 to $86.13 a barrel on the New York Mercantile Exchange.

A person familiar with the situation said PetroChina will start the road show for its offering on Oct. 22. Late last month, China's securities regulator approved the sale of as many as four billion A shares, or 2.18% of the company's enlarged share capital.

The company hasn't said how much it plans to raise from the IPO, but it has said it plans to spend about 37.77 billion yuan ($5.03 billion) on five projects, including crude-oil output at its Daqing and Changqing fields.

The company's third-quarter oil and gas output rose 5.6% from a year earlier, bringing PetroChina toward its full-year target of 5.3% growth.


So, it comes down to mainland listing, IPO and new oil finds, hopes of even more oil finds and growing rate of extraction.

The last thing is really quite extraordinary for a company of this size. As Jerome has written about earlier, the big oil companies have all been struggling with falling extraction even in this age of high oil prices.

The P/E for the integrateds are about 10, 12-13 for Exxon and 20 for PetroChina. Maybe the hopes for growing extraction make these levels reasonable.

By the way, funny that PetroChina is now the second most valuable publicly listed company in the world. A sign of the times.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Oct 17th, 2007 at 09:11:18 AM EST
[ Parent ]
Now PetroChina up 112 %. This is insane.

I bought it at $125 this spring.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Oct 17th, 2007 at 12:30:11 PM EST
[ Parent ]


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