Oil Bubble?
My friend Paul points to this report by Factset, titled: An oil bubble to rival the internet boom.
The difficulty with the bubble moniker is determining exactly how much of the price is being driven by purely speculative factors. With Crude, a variety of forces are driving prices: A combination of both fundamentals (increasing demand, constrained supply, pipeline problems), technicals (Trend, money flow, etc.), along with the geopolitics of two Middle East wars -- as well as some speculation.
Additionally, we have seen the general perception of commodities shift, where they are now seen as a more legitimate asset class for portfolio managers, along with Equities, Fixed Income, REITs, cash, etc. than it has been previously.
Even If I disagree with the bubble thesis, I love any report festooned with lovely charts, and this one is no different:
>
Source:
An oil bubble to rival the internet boom (PDF)
FactSet, 3 May 2008
http://www.factset.com/websitefiles/PDFs/outlook/english/03-05-2008english.pdf
Friday, May 09, 2008 | 10:51 AM | Permalink
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"...as well as some speculation."
Some speculation? Ya think?
Posted by: John Navin | May 9, 2008 11:13:52 AM
Oil Bubble?
I don't think so. The trouble is, everyone got too used to cheap oil in the late 90's and early 00's.
As I like to point out:
In 1964 (long before embargoes, oil shocks, and gas lines) gasoline was $0.30 per gallon; three dimes.
Today, the US national average price for a gallon of gas is $3.67.
Also today, the value of the silver in those three 1964 dimes is, coincidentally, $3.68 (this is after the March precious metals price corrections).
Energy, by historical standards, is not expensive; US dollars are cheap.
Posted by: Pool Shark | May 9, 2008 11:16:55 AM
I cannot see how speculation can last as long as it has in crude. If speculation is rampant, the good ol boys in the pits will hand the speculators their rear ends eventually. However, the oil bubble keeps going, which should tell us that fundamentals are the real story.
Posted by: larster | May 9, 2008 11:37:32 AM
Sadly, the only way I believe the "energy bubble" will pop is if the "population bubble" is popped. World population is the demand driver. Demand is real, especially ex-US.
The next US generation will suffer badly.
Posted by: Ed Miller | May 9, 2008 11:40:04 AM
Speculation and manipulation. Must read:
http://www.nakedcapitalism.com/2008/05/is-commodities-boom-driven-by.html
Posted by: Carmen | May 9, 2008 11:44:52 AM
The difference between Oil and Pets.com, is that oil is no service, it's a good that's being consumed at an ever-increasing rate.
Meanwhile, with Cantarell and the North Sea, for example, it's getting harder and harder to pump the stuff out.
If anything, we ought to be seeing higher oil prices.
Posted by: Greg | May 9, 2008 11:47:57 AM
Demand and "peak oil" are old stories, heard endlessly over the past 40 years. One of these decades they might even be true.
Posted by: rww | May 9, 2008 11:52:42 AM
I do think we're in an oil bubble. The real question is how high and for how long will it go. We could be getting close to the end. We could be years away. Does it double or triple from here? I have no idea. Usually bubble talk doesn't mark the end of a bubble. All bubbles are caused by overinvestment, thus when John Q. Public is raving about how well his investments in oil are doing, that's probably the top. Jmo, but I don't think we're there yet. Just as for houses, demand is a factor. A lot of supply is being created--just not enough to satisfy the demand. If the demand were to drop, we'd then see the price drop.
Posted by: Mista B | May 9, 2008 12:04:09 PM
Is it just me or does anyone want to see Dennis Neil off of TV. Every time he speaks, it gives me the feeling akin to fingers scraping a chalkboard. I can't believe that CNBC thinks he is good for their programming. Down with Dennis Neil!!!!
Posted by: Joshua | May 9, 2008 12:13:44 PM
I'd like to see the chart extend back further a few years. If I recall correctly, relative outperformance for IT stocks persisted for several years. If making a comparison, why wouldn't the same hold true for energy?
Posted by: Stock Market Beat | May 9, 2008 12:16:54 PM
Not to sound wishy-washy but it's quite possible both views are partially correct: We are heading into a period of rising commodity prices, a culminating long-wave of inflation, but there is also a lot of money looking for a new home (pardon me) and a mania, or bubble of you insist, has resulted w/ many commodities becoming rather seriously overbought.
Just wish I could have figured out a way to go long volatility on some of 'em.
Posted by: RW | May 9, 2008 12:22:20 PM
Additionally, we have seen the general perception of commodities shift, where they are now seen as a more legitimate asset class for portfolio managers
Asset class? Trading class perhaps. Trade it or consume it. There isn't really any middle ground. Oil is in a classic bubble. The only reason futures contracts are trading at $125+ is because people are buying futures at $125+. When the time comes for people to start paying $125 for oil they will use rather than trade there will be at some point a refusal and the whole speculative bubble will pop. Consumption demand data is slower than price signals, a classic bubble scenario. Some poor schmuck is gonna have a tanker off Galveston and the storage field is gonna say "No, not at that price. Sit out there at God knows how many hundred thousands per day or give me a better price to take it off your hands. There's another ship 10 hours behind you with a worse problem."
Posted by: Rob Dawg | May 9, 2008 12:25:02 PM
hmmmm let's see.. demand at a 5 year low according to the EIA...
and the best part of it is this little snip from it's website:
"OECD commercial inventories at the end of the first quarter stood at an estimated 2.54 billion barrels, 22 million barrels above the previous 5-year average level"
and then this:
"Based on projections of weak economic growth and record high crude oil and product prices, consumption is projected to decline by 190,000 bbl/d in 2008, a sharper drop than the 90,000 bbl/d decline projected in the previous Outlook. After accounting for projected increases in ethanol use, U.S. petroleum consumption is projected to fall by 330,000 bbl/d."
I'd say that speculation is the ONLY reason we are at this level. Remember they had that neat little electricity "shortage" in 2000-01...this is absolutely the same thing on a much larger scale...volume trading aimed at creating the perception of demand.
BR-
Call a spade a spade......you look at the data as well as I do....what does it say to you??? Not anything about rising consumption at all....the chindia thing is just another smokescreen.
Rob Dawg-
I'm sure the harbor master in Houston in already on the payroll....
Ciao
MS
Posted by: michael schumacher | May 9, 2008 12:46:25 PM
everything is a fricken bubble.
hey barry, i got your bubble right here...
http://www.youtube.com/watch?v=PaNYOeeNY7M&NR=1
Posted by: PhatMary | May 9, 2008 12:49:23 PM
The commitment of traders report doesn't show speculators as being heavily long oil.
Posted by: styron | May 9, 2008 12:50:54 PM
There are so many shorts in USO my borker won't let me short it(thank god!).
Posted by: Jodie | May 9, 2008 12:58:37 PM
jodie-
we are one flare away from staring at $200 oil.... (meaning that is all it would take to start another war-a flare from the "wrong" side).
Shorting oil at this point is suicide.
After we invade Iran and Syria (or have Israel do it for us) oil will become a possible candidate for shorting. But even then I would still be hesitant..only after January 20th, 2009 would it make "sense" however by that time...........
Ciao
MS
Posted by: michael schumacher | May 9, 2008 1:12:05 PM
Is there anyway to see the short interest for an ETF (USO or OIL)?
Posted by: Michael | May 9, 2008 1:13:46 PM
If you are going to compare 'bubbles', wouldn't you compare it to the 70s oil 'bubble'? Perhaps even the 70s gold bubble.
Posted by: Lord | May 9, 2008 1:33:07 PM
Pool Shark Said:
Oil Bubble?
I don't think so. The trouble is, everyone got too used to cheap oil in the late 90's and early 00's.
As I like to point out:
In 1964 (long before embargoes, oil shocks, and gas lines) gasoline was $0.30 per gallon; three dimes.
Today, the US national average price for a gallon of gas is $3.67.
Also today, the value of the silver in those three 1964 dimes is, coincidentally, $3.68 (this is after the March precious metals price corrections).
Energy, by historical standards, is not expensive; US dollars are cheap.
Hmmm.
While I don't know the average price of gas in 1964, California stated that in 1970, it was $.34 Nominal. (That's $1.34 in 2007 dollars). Gas is now 3X as expensive as it was in 1970, adjusted for inflation. The previous peak inflation adjusted price in 1981 per California was $1.43 (2.90 in 2007 dollars). We're now 30% above the previous peak during the great inflation of the 70's/early 80's.
Besides, that doesn't take into account that it only contributes to a minority of the cost of gasoline, as is evidenced by this current blow-off of oil prices and the price at the pump have not moved in lock-step. You can view the official gasoline and inflation adjusted stats here:
http://tinyurl.com/2kkur
In the prior 40 years, the cost of gasoline and silver has not correlated to your "silver dimes hypothesis", and I'd wager will not do so in the future.
Simply said, you can draw only one conclusions from this: prices go up over time. Sometimes faster than inflation, sometimes slower. Sorry, but that's a no brainer and doesn't require me to calculate the silver content of a dime and compare it to spot rates.
BTW, by your calculations (if correct), I should be able to buy gas in california for $3.32 today.
Chuck Ponzi
Posted by: Chuck Ponzi | May 9, 2008 1:33:15 PM
It's utterly amazing how so many people can confuse gouging with high prices due to scarcity of an item with inelastic demand.
When the dollar falls, oil rises and the dollar is blamed. When the dollar rises, oil still goes up and scarcity is blamed. If oil goes up 10% then another 10% in a few weeks and demand changes negligibly, scarcity is still blamed.
When refinery capacity is blamed as a bottleneck, then that should put an upper limit on the demand for oil since nothing beyond that point can be refined. Supply beyond refining capacity should mitigate prices for oil, but increase the prices of refined products if demand for refined products increases. Oil still goes up in price. Thus, refining capacity is more than adequate AND demand is exploding for refined products or the price of oil is in a feedback loop.
When oceans of money speculate in the oil markets without risking delivery of the physical commodity, efficient pricing is praised.
The simple fact is that a lot of people are getting rich on a pricing bubble - feedback loop and nobody wants to ask any questions. The fox is guarding the hen house and the watchdog is stupid and lazy. So are lot of the bystanders.
My God, what part of Stupid do so many of you live in? Why do so many placidly accept the gouger's explanation of 'High demand, scarce supply ... Sorry'. You are sheep and dumb as dirt.
Posted by: cinefoz | May 9, 2008 1:38:46 PM
CHART TRANSLATION:
In the year 2000 some oil men got into the White House. They stayed there for 8 years.
When the thief knows he's running out of time to steal, he takes bigger risks so he can "retire" after the really big haul. In the movies this is when they get caught and sent to prison. Oh but that reality was more like the movies.
Posted by: AGG | May 9, 2008 1:49:49 PM
In no way is this a valid comparison. On a value basis energy stocks remain cheap. BP at less than 10 P/E with a 4.25% dividend. XOM at 11 P/E. These valuations do not reflect the additional earning power of $125 oil and $4 gas.
During the internet bubble valuations relative to sales, earnings, and assets were ridiculous. That is certainly not the case with energy stocks today.
Posted by: BuffaloBob | May 9, 2008 1:54:48 PM
"In the year 2000 some oil men got into the White House."
Frankly that beats most of the explanations I've heard (but I confess I've heard some really wild ones and, of course, I could also be living on Stupid Street or something).
Posted by: RW | May 9, 2008 1:58:53 PM
>> Demand and "peak oil" are old stories, heard endlessly over the past 40 years. One of these decades they might even be true.
Yes, 40 years ago, various people predicted peak oil at different points in the future. But, c'mon, just because some of them picked wrong dates doesn't mean we should scoff at the whole concept. ;-)
That's like the climate-scoffers saying AGW can't be real because 40 years ago 1 or 2 scientists wondered aloud whether the earth was cooling.
So, have you read "Twilight in the Desert" yet? Please do.
Posted by: wunsacon | May 9, 2008 2:17:22 PM
