Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

Countdown to €100 Oil: €70 Oil

by DoDo Thu Mar 20th, 2008 at 10:04:24 AM EST

Time for an update to Oil prices in Euros from last October. The accompanying text was edited for a less European audience for an upcoming re-post at The Oil Drum. Update [2008-3-19 15:46:31 by DoDo]: Now with another week of data, more consequent colours and added logarithmic graphs.

In the past half-year, we often saw simultaneous crude oil and Euro/dollar rallies. The question emerges, how would oil prices look in Euros?

(Click to enlarge)

Below the fold, I'll explain what data is displayed on the diagram, and show a few more diagrams.

Promoted by Migeru

The Euro itself as basis for a historical trend is not that straightforward. Over the past three decades, the Euro (EUR, €) has been (and is) "under construction".

The Euro is presently the official currency of 15 of the currently 27 member states of the European Union (as well as four embedded micro-states, from Andorra to the Vatican), controlled by the monetary policy of the European Central Bank (ECB). But it became physical currency only in 2002, then in 12 of the then 15 EU member states, and started existence as accounting money of only 11 member states in 1999.

For the time before 1999, the Euro has to be pegged to some predecessor. There are two possibilities.

One is to use a virtual unit calculated from then extant national currencies. Preceding the Euro was a long convergence of European monetary policies and exchange rates, part of which was indeed the definition of such virtual monetary units. The last of these was the European Currency Unit (ECU). The Euro was set to equal the ECU at its launch. Thus the virtual Euro-ECU peg is simply 1:1.

The second possibility is to stick with the strongest of the preceding national currencies: the West German Mark (DEM). This makes sense because the ECB largely continues the monetary policy of the [West] German Bundesbank, thus in some practical respects, the Euro is more DEM 2.0 than ECU 2.0. In 1999-2001, the German Mark only served as paper money for the Euro, at a fixed exchange rate. Using this, the pre-1999 virtual Euro-German Mark peg can be set at 1.95583:1.

The actual data I used:

With the above, the long-term exchange rate history:

As oil price in dollars, the currently preferred reference values are that of front-month futures. However, NYMEX's WTI futures started only in 1983, IPE's Brent futures even only in 1988. For a benchmark extending back to the two Energy Crises, we need spot prices. Fortunately, today spot prices follow front-month futures rather closely, thus the distinction is of little importance.

The datasets I found & used:

Daily vs. monthly data: another incompatibility over time. Only exchange rates will give an indication of daily volatility. However, one can hardly tell how prices would have been if market response had been as fast as today: maybe spikes would have been even higher, but maybe not, because of faster declines after spikes.

Now here is the finished graph again. One can observe the First and Second Energy Crisis, the seventies fall of the dollar, the 1985 dollar high and oil low, the Iraqi invasion of Kuweit energy mini-crisis, the early nineties ECU and DEM highs, and the Bush II Era.

How would oil prices look if corrected for inflation? That depends on the deflator used. The German Mark-pegged prices above give an opportunity for another crude comparison. The price indexes used:

On the resulting diagram, I call attention to the curves of the Second Energy Crisis:

In the next diagram, let's zoom in on the Euro era (e.g. 1999-present). This period includes the Euro weakness bottoming out in 2001 and the rally since. For this, I also included daily Brent spot prices from the EIA, which is more relevant for European consumption. Price development in Euros is more moderate (we passed the August 2006 highs only with the October rally), but the trend is the same.

To have a better picture of relative changes, it is better to have prices on a logarithmic scale. I re-did all three three graphs above:

One a final diagram, let's compare the recent percent change of daily closing spot prices and that of the Euro/dollar exchange rate (using the end of last year as 100%) over the last six months. It seems apart from the very peaks, the fall of the dollar doesn't determine the oil price rise.

For more graphs of oil prices from 2006, in a greater variety of world currencies, check this Oil Drum story.

Next: shall I switch to civilised units entirely, and calculate oil in Euros per litre?...

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Mar 12th, 2008 at 02:33:52 PM EST
The (metric) tonne rather than liters or m3 would be the right unit. Volumes vary with temperature, etc. The tonne is also the actual unit of trade for a lot of other commodities.

Plus a tonne of oil is easier to relate to conventional TOE and TPE units.

by Francois in Paris on Wed Mar 12th, 2008 at 03:20:25 PM EST
[ Parent ]
However, a litre is easier to relate to everyday purchase units.

Crude price is still below 0.45 €/l.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Wed Mar 12th, 2008 at 03:43:47 PM EST
[ Parent ]
All the more reasons not to use the liter.

Everybody knows that much of gas price is taxes - a good thing - but it's one of those things much better left a bit in the abstract, to keep people ranting in general - they always do anyway - but not in particulars and specifics.

If you price crude in euros per liter, people would actually realize how much of the retail price is taxes. And then, they would start to have ideas...

The gov should never lie but a little bit of obscurity here and there can be good, pragmatic policy :)

by Francois in Paris on Wed Mar 12th, 2008 at 04:48:33 PM EST
[ Parent ]
Thankyou for a post with graphs and data I could understand.

Crude price is still below 0.45 €/l.

Coca Cola is 0.97 €/l.

Member of the Anti-Fabulousness League since 1987.

by Ephemera on Wed Mar 12th, 2008 at 04:54:07 PM EST
[ Parent ]
How much is mineral water in your neck of the woods?

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Mar 12th, 2008 at 05:09:48 PM EST
[ Parent ]
Evian, which I presume is available EU-wide, is currently  at 42 €/l.

So it's about the same as oil.

(BTW These prices are all taken from the Asda website, which is a fairly cheap grocer, and based on buying a 2l bottle.)

Member of the Anti-Fabulousness League since 1987.

by Ephemera on Wed Mar 12th, 2008 at 05:17:52 PM EST
[ Parent ]
(Gosh, that's 42 cents!)

Member of the Anti-Fabulousness League since 1987.
by Ephemera on Wed Mar 12th, 2008 at 05:19:11 PM EST
[ Parent ]

13 cents for the local stuff (based on 1.5 liter bottle). The better known brands are of course a lot more.
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Mar 12th, 2008 at 05:21:13 PM EST
[ Parent ]
Somewhere in Italy? Funny, that's cheaper than here, for the cheapest sort, prices averaged end of last year 45 Ft, that is c. 17 Euro-cents.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Mar 12th, 2008 at 05:28:19 PM EST
[ Parent ]
Yes, in the north of Italy. 1.5 litre bottles of Pejo (you've probably never heard of it, as they don't waste much on advertising) costs 20 cents in my local supermarket.

Italians seem to mostly drink the local water, making it a little less bad for the environment than shipping it all over the world (there are still the plastic bottles, of course). There are exceptions. I once got Pejo at a restaurant in Cattolica at full restaurant prices. They probably figured out that they could get a bigger markup with hardly any of their customers noticing. Since then, I always get suspicious when I see non-local, non-San Pellegrino, water at a restaurant.

by gk (gk (gk quattro due due sette @gmail.com)) on Thu Mar 13th, 2008 at 01:52:11 AM EST
[ Parent ]
...which my above graphs don't reflect:

  • Euro/dollar: 1.5571
  • WTI crude futures: intraday peak $110.20, settled at $109.92. (With nearby in time Euro peak c. €70.7, no record)
  • Brent futures: $106.41 and $106.27.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Mar 12th, 2008 at 04:40:30 PM EST
[ Parent ]
to redo the graphs using a log scale for prices?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Mar 13th, 2008 at 04:14:11 AM EST
It wasn't easy do do passable graphs with the software at hand, but I made these:

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Sun Mar 16th, 2008 at 11:43:28 AM EST
[ Parent ]
diary!  If we have a serious recession, the air could come out of oil to the tune of 25% pretty fast.  

There is a lot of fast money chasing yield/short term profits right now.  My money market deposits have crashed from the 5% to the low 3% in just a few months.  It's very tempting to buy something, but what?  Real Estate? Nope, still puking.  Stocks?  Tried that, burnt fingers.  Many are chasing commods.  No way with my own money -- ever.

Great charts.  Esp. the inflation corrected one.  Really puts this rally into perspective though I really, really doubt we get a puke out like 81-86 again.  80% fall -- that was an ugly time in the oil biz.

by HiD on Thu Mar 13th, 2008 at 05:42:27 AM EST
I really, really don't want to hurt analysts, but...

Bloomberg.com: Energy

This is the 10th straight week that analysts have forecast a decline in prices. They were correct in two of the eight weeks through March 7. The oil survey has correctly predicted the direction of prices 51 percent of the time since its introduction in April 2004.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Mar 14th, 2008 at 06:24:47 AM EST
[ Parent ]
I hear you.  This is not really a market.  OPEC really is an effective cartel now that only Saudi matters a tinker's damn.
by HiD on Wed Mar 26th, 2008 at 07:35:45 AM EST
[ Parent ]
Incidentally, I have a question to you as a professional trader.

In what way do you think crude prices would have been different in 1980, had there been a futures market?

My hunch is that with the much faster market response to news, there would have been panic peaks followed by declines, while on the spot market back then, 'panic peaks' were conserved for weeks to months, and thus just added up. In other words, maybe prices wouldn't even have climed as high as they did on the spot market back then.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Fri Mar 14th, 2008 at 06:29:41 AM EST
[ Parent ]
bit before my time, but IIRC WTI made its appearance about 1982 and has always been pretty volatile.

My gut says the volatility occurred in 1980.  It just took place in the cash market out of sight of the average consumer and the media.  

Perhaps it was less then just because the 7 sisters had a much bigger piece of the pie and the producing nations were still under their thumbs.

by HiD on Wed Mar 26th, 2008 at 07:17:34 AM EST
[ Parent ]
Great posting.

To summarize, I get the following average rate of increases in prices for crude oil, using your inflation adjusted graphs and the classic rate equation:

  A/A0 = Exp[rt]   r = Ln[A/A0]/t

For the Euro, the price appears to rise from E12 to E70/bbl. This gives an annual inflation adjusted oil price increase rate of 19.6%/yr over this 9 year period.

For the US dollar, the price appears to rise from $15/bbl to $105/bbl, which gives a rate of 21.6%/yr.

But of course, there is no such thing as Peak Oil, but I'm sure that the Easter Bunny is alive and well. Or for you chemically inclined, the Ether Bunny. Next to Mole Day (Oct 23), Ether is a Chemical holiday, but not a holiday from chemicals...


by nb41 on Thu Mar 20th, 2008 at 11:46:04 AM EST
This is like a review...

Good reviews are the centerpices of good references.

This diary is a reference.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Mar 20th, 2008 at 05:40:11 PM EST
Fortunately, today spot prices follow front-month futures rather closely

Maybe I'm crazy, or hopelessly naive, but I always thought it was front-month futures which were converging on the current spot price, because futures contracts, by their nature, must ultimately settle at just that price.

I'm not claiming spot traders entirely ignore the futures market, but surely here you have the cart wagging the horse. Or putting the tail before the dog. Whatever.

In equities, the two-way interaction between futures and "spot prices" (ie., actual stock trades) is more complex -- or should I say, more unknowable. In that realm, psychology is everything.

But when dealing with commodities, especially with oil, there is (surely!) a robust connection between the real world situation and the spot price... n'est-ce pas?

by Ralph on Thu Mar 20th, 2008 at 10:48:00 PM EST
I'm not claiming spot traders entirely ignore the futures market, but surely here you have the cart wagging the horse.

But from the little I know, that's exactly how it works: futures markets are supposed to be 'transparent' and in best knowledge of the entire market situation, thus the front-month futures price is supposed to reflect the 'real' price; while the spot market is supposed to be more secretive, but often using futures prices as benchmark.

I hope HiD turns up to give the insider view.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Fri Mar 21st, 2008 at 05:40:50 AM EST
[ Parent ]
Ummm...well, HiD will give you the trader's perspective.

Part of my job til late 1996 as Director of Compliance & Market Supervision at the IPE (now ICEFutures) was to deal with the games that went on in relation to IPE's Gas Oil (Heating Oil/Diesel hybrid spec) contract.

This was deliverable in "ARA" (Amsterdam, Rotterdam and Antwerp) area in 100 tonne contract "lots", but typically into barges (there were other delivery mechanisms) that were 1000, 2000 and even 3000 tonners.

On the day of contract expiry (two business days before the 14th of the contract month) the "Exchange Delivery Settlement Price" was set at 12 noon, and when the big players had large outstanding positions it was Europe's largest game of "chicken" and God help any other participants caught in the cross fire during the last morning of trading and right up to the wire.

That was only the start of the guerilla warfare that then went on as the Buyer nominated barges to collect the oil from the ARA installations, and typically took it up the Rhine for delivery to "end users".

It was a "second half of the month" delivery, so buyers would try and pick up the oil as early as possible or as late as possible in the second half, depending on where the physical "barge market" price (1,000 tonne contracts) was.

Only real professionals ever made or took delivery. Dealing with the trading games - and the resulting disciplinary cases and arbitrations -  was for me one of the most interesting parts of the job, and gave me quite a body of experience.

But I digress: Nostalgia isn't what it used to be!

Point is that the purpose of futures markets is NOT delivery, but risk transfer, and 95 to 99% of IPE Gas Oil traded was simply "closed  out" and never went to delivery.

Yes, there IS convergence, after a fashion, on the day of expiry, but even here you must understand that the IPE spec was itself a hybrid, being essentially too good for heating oil, and needing blending to use as diesel.

The trading here - and one firm in Monaco were masters at "in tank" blending to precise specification - was basically to take advantage of "quality giveaway" eg from cargoes of crudely refined gasoil from origins like Ventspils in Latvia.

As for the ICEFutures Brent contract, that is not deliverable at all (being cash settled, like the FTSE) against an Index of "Forward" Brent (now BFO - Brent Forties and Osebjerg) Crude contract transactions.

The Brent forward "15 Day" contract - originally introduced by Shell, but which became a market standard - has always been subject to expert manipulation, and particularly "squeezes" when traders would buy up the available forward cargoes of crude and attempt to make profits from those who had sold cargoes forward "short" as a "hedge", but had not actually bought any from someone who actually owned the stuff.

While manipulation of IPE's cash-settled futures contract did not directly affect the physical/forward market, all sorts of games went on.

These typically involved esoteric "OTC" contracts aimed at hedging the "basis risk" between the futures contract expiry and the actual physical or "spot" delivery some time later in the("Dated Brent") market which actually does form the benchmark price against which 65% of world crude oil is priced.

In fact I got into hot water for alleging (and I had chapter and verse) that the big Investment Banks in particular were routinely manipulating the (then) IPE Brent daily settlement price in view of the profits they could make from sophisticated "swap" contracts priced against these prices at the end of each trading day.

Also they were routinely "date raping" investment funds associated with them - and in all likelihood

Date Rape

still do.

It was all quietly buried (in best British tradition, since I could not be seen to be right) and so was I, as  a treacherous, "bitter and twisted" (five years after I left the IPE!)"whistle blower".

However, the truth of it - and that article is a good example, is now coming out, but it's all a bit late for me. Lost income, marriage, home, the lot. But I think I'm a better person for it.

Not just a Diary there, there's a Book.

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

by ChrisCook (cojockathotmaildotcom) on Sat Mar 22nd, 2008 at 12:45:41 PM EST
[ Parent ]
Very interesting, but you didn't really answer the question. Is real-world oil (mainly) priced on fundamentals, or is there really a (substantial) influence on pricing played by speculation in the futures market?

From your answer-essay, I would still have to guess that oil is, at the day or week of reckoning, priced by demand. Short of actual large-scale hoarding (longer than, say, 30 days -- which to me sounds implausible), I can't see how speculators could cause oil to change hands at a price very far from the one dictated by the laws of supply and demand.

by Ralph on Mon Mar 31st, 2008 at 04:37:24 PM EST
[ Parent ]
What is true is that the difference between the futures for a given expiration date and the spot price decreases as the expiration date approaches. The same thing is true of the price of bonds: as their maturity approaches the price approaches the principal or face value.

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — Franηois in Paris
by Carrie (migeru at eurotrib dot com) on Tue Mar 25th, 2008 at 05:34:29 PM EST
[ Parent ]

Go to: [ European Tribune Homepage : Top of page : Top of comments ]