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Oil Prices will reach $300

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PostPosted: Fri Jul 21, 2006 5:54 am    Post subject: Oil Prices will reach $300 Reply with quote

Future will prove that I am correct.


Oil that glisters
Jul 20th 2006
From The Economist print edition

How high can they go? Speculators love commodities right now. But what do the fundamentals say?

WHEN commodity prices slipped from their giddy highs in May, many observers hailed the beginning of an inevitable correction after four years of rapid ascent. But the markets, it turns out, were simply pausing for breath. On July 14th the price of a barrel of West Texas Intermediate oil reached a new record in nominal terms of $78.40, although it has since fallen a little. Nickel followed, topping $26,000 a tonne for the first time. Even some agricultural commodities are starting to get caught up in the boom. Rapeseed oil, for example, is fetching unprecedented sums. The price of food crops has risen by 40% since the beginning of 2002, although that increase is dwarfed by huge run-ups in the prices of oil and metals, as the left-hand chart, below, shows.

Some analysts believe that investors have inflated a speculative bubble in commodities. Hedge funds' investments in energy markets rose from $3 billion in 2000 to about $90 billion last year, according to the International Energy Agency, a think-tank. Trading of commodities at exchanges doubled between 2001 and 2005, according to International Financial Services London, an industry group. Over-the-counter trade has risen faster still.

Other pundits think piling into commodities is justified, because the world has embarked on a “super-cycle”, in which commodity prices rise far higher and for much longer than is normal in a business blighted by frequent busts. The boom is certainly exceptionally long and lucrative. A recent report by Société Générale, a French bank, analysed five others since 1975. They lasted 28 months, on average, during which prices rose 35%. The present run, by contrast, has lasted 56 months, during which prices have doubled.

The super-cyclists put all this down to a simple mismatch between supply and demand. During the 1980s and 1990s, when commodity prices were low, mining and oil firms invested too little in new mines and wells, leaving them with little or no spare capacity. Although they are now rushing to increase their output, it takes years to find and develop new seams and fields. In fact, it takes longer now than it used to, because environmental regulations have become more onerous and activists more obstreperous around the world. With everyone trying to dig and drill at the same time, costs are rising and shortages of such things as huge tyres for mining trucks are hampering progress.

Meanwhile, on the demand side, the world as a whole, and China in particular, has been growing much faster than expected and consuming lots of raw materials as it does so. In the past 15 years China's imports of commodities have risen more than tenfold (see right-hand chart, above). One recent forecast, by Deutsche Bank, says that they will continue to grow by more than 10% a year for the next decade. At any rate, China's economy shows little sign of slowing. GDP grew at an annual rate of 11% in the first half of the year, according to official figures published on July 18th—the fastest pace in over a decade. This combination of feeble production and feverish consumption, the argument runs, means that demand for commodities will outpace supply for years to come.

But it is hard to apply this logic to all commodities. The supply of agricultural ones, for example, increases much more readily when prices rise, because farmers can plant more of them. Take maize (corn, to Americans) which is used both to make ethanol and to feed livestock. China's exports of maize are shrinking, as its herds multiply to cater to its citizens' growing appetite for meat. At the same time, the high price of oil is fuelling demand for ethanol, which is used as both a substitute for and an additive to petrol. Ethanol is expected to consume about a fifth of America's maize harvest next year. Both trends have helped to propel the crop's price to dizzy heights, with the prices of other commodities from which fuel can be made, such as sugar and rapeseed oil. But not for long: American and Chinese farmers are already planting more maize.

Gold is another exception. It is dearer than it has been for decades, yet jewellers and industrialists would need years to use up all the world's stocks. Gold is valued not for its scarcity, but as a hedge against inflation. Its price has duly risen, as worries about inflation have grown (thanks partly to the expense of oil) and central banks have raised interest rates. Higher interest rates, however, should eventually slow global growth, and so crimp demand for other commodities. The prices of gold and more mundane metals may therefore start to move in opposite directions.

Not even oil, the archetypal industrial commodity, quite conforms to the super-cycle theory. Granted, consumption continues to rise, especially in China, where imports have grown by about 10% so far this year. Furthermore, the industry can muster only about 1.5m barrels a day of spare pumping capacity—a tiny fraction of the 84m-odd barrels the world consumes daily. That makes the price sensitive even to relatively minor interruptions in supply. Iran, which exports 3.4m barrels a day, has threatened to use oil as a weapon in its disputes with America and the European Union. So oil traders twitch every time the two sides exchange barbs.

Nonetheless, during the past year spare capacity has actually increased marginally, as have stocks. This cushion should expand further over the next couple of years, as production starts from oilfields now being developed. Meanwhile, there are signs that demand, although not falling, is growing more slowly in the face of high prices. Supply and demand will certainly remain finely balanced for several more years, but the outlook is improving for consumers—even if this is not yet detectable in the price of oil.

It is hard, concedes Frédéric Lasserre, the author of Société Générale's report, to translate nebulous fears about future supply into prices. In the long run, the price of any given commodity should revert to the cost of producing an incremental unit of supply. By that measure, Mr Lasserre calculates, oil is overvalued by 50%, and zinc and copper by almost 40%. In the short term, the level of stocks plays an important part. But again, relative to the historical relationship between stocks and prices, Mr Lasserre reckons copper is 148% too dear; zinc, 122%; nickel, 70%; and oil, 49%.

Other analysts see parallels with the dotcom bubble of the late 1990s. After all, plenty of people are opining that “things are different this time”. Pension funds and individual investors are keen to get in on the action. CalPERS, America's biggest pension fund, is due to decide soon whether to put money into commodities. If such a conservative operator is eyeing commodities, cynics say, then a correction must be close at hand.
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PostPosted: Mon Jul 31, 2006 5:09 am    Post subject: Reply with quote

Also, from David Fuller

The brief of highly important, detailed and provocative Hansard transcript, produced by the Commonweath of Australia is as follows:

Senator MILNE-Recently we had the head of BP in Australia talking about their statistical review. They take at face value the claims, particularly of Middle Eastern countries, about the extent of their reserves. We are aware that a few years ago these countries readjusted their reserves, yet there were no new discoveries that would have justified that. This is a really critical question to ask because it goes to the heart of the argument. Could you give us your frank appraisal of the Saudi reserves, in particular, and the Middle Eastern reserves, generally, and the extent to which they have been inflated for political and economic purposes et cetera and do not reflect what is actually there?

Dr Samsam Bakhtiari-Most reviews of the reserves of the major Middle Eastern countries today, especially the BP Statistical Review of World Energy, mention reserves amounting to between 600 billion to 700 billion barrels. These are official reserve figures-in other words, the countries involved say that they have so much oil reserves available. The Oil and Gas Journal and BP take these reserves at face value. As you mentioned, in the 1980s these reserves were revised upwards. For example, in 1988 Saudi Arabia, which had reserves of 160 billion barrels, suddenly took these up to 260 billion barrels. Since 1989, it has kept this number of 260 billion barrels; there has been no change to it up to this day. So, for 17 years, it as if they have not produced anything.

In Dr Campbell's opinion-and it is also my personal opinion-the reserves of the Middle East are roughly one half of what is officially said and presented. In other words, there should only be between 300 billion and 350 billion barrels of oil. This is the best figure I have come up with. I and Dr Campbell, as a rule of thumb, divide the official reserves by two to get a number that we believe is the actual amount of the reserves in these countries. Does that answer your question?

Senator MILNE-It certainly does. Can you go on to tell us what your view is of the US Geological Survey and its accuracy in terms of the reserves?

Dr Samsam Bakhtiari-Every institution gives its own numbers, and we can only compare theirs to ours. You can see that the reserves given by the USGS, which is an endowment for the world of over 3,200 million reserves, is much, much higher than the numbers we are using, of only 1,900 million. Of course, we cannot accept such reserves as realistic, as we cannot accept the projections of certain institutions like the International Energy Agency in Paris, which predicts that the world will be consuming 118 million barrels per day in the year 2030 as realistic, because I cannot see how the world can get over 81 or, say, 82 per day right now, let alone in the future. I believe we are in decline. So you have an enormous discrepancy between what these institutions publish and what we believe in, whether it is in reserves or whether it is in production of crude oil per day.

Senator MILNE-Given what you have said about the fact that the Middle Eastern reserves are probably half of what they say they are, and given what you have just said about the US survey, how are we going to tell? Given that the Saudis and the other Middle Eastern countries keep on saying that their reserves are the same-and they have been saying they are the same for all these years whilst production has kept on going-how are we going to know? What indications are there going to be so that we can revise the estimates to be more accurate? If they are half of what they say they are, then the shock in the share markets et cetera everywhere around the world will be huge. You mentioned before that they may not be able to manipulate it forever because of the horizontal wells and the step change that will occur. Is that the main indication-when one of the wells goes kaput? Or what will happen, in your view?

My view - I urge all subscribers to read this transcript - one of the most important that I have seen. Peak (conventional) oil is neither a new story nor is it generally accepted. Therefore we need to hear what Samsam Bakhtiari says, in what I believe are very convincing arguments on a range of topics - from how important oil fields have been damaged by production methods, to the question of reserves, the costs and production complexities of non conventional oil, and the prospects for alternative fuels.

Most people, other than oil producers, would welcome lower energy prices on a permanent basis, and with less reliance on fossil fuels. And we already know how to live and operate in a world of comparatively inexpensive energy. But what if energy prices range higher, indefinitely, as rising demand outstrips supply?

It would change everything.

And how can we tell who is right - those who say that energy prices are heading much higher, permanently, or Lord Browne of BP and various institutes and analysts or economists who forecast a return to $40 a barrel for oil?

More easily than you would imagine, you may be surprised to hear.

I maintain that oil is at the centre of a key Fullermoney investment theme since 2003 - Supply Inelasticity Meets Rising Demand. And cruelly for the unprepared, the supply of oil that can be produced at an acceptable price, financially and environmentally, is not being replaced at the rate it is being consumed. Furthermore, demand is rising as previously moribund economies embrace capitalism, globalisation and technology, and develop very rapidly.

And the deceptively simple means of telling whether Lord Browne or Samsam Bakhtiari is right about the long-term outlook for oil prices?

The answer will be in the price charts - our most useful analytical tools - and I'm not talking about the art and often controversial process of interpretation.

If Lord Browne is even remotely right in saying that oil prices are heading back to $40, they will fall within a year or two and perhaps sooner, to approximately $50 and either stay there or move even lower.

Conversely, if those of us who say that oil prices are in a secular bull market, let alone a commodity supercycle are right, then oil will not only stay above $50 but range higher - eventually moving much higher.

If Lord Browne and others forecasting $40 a barrel are right, I'll be surprised, lose some money on my energy investments, but be relieved overall. The world will be safer as a consequence of stable energy prices and we would all know how to invest in a familiar environment.

But if Samsam Bakhtiari is right and I believe he is, short of a pandemic or ecological disaster of biblical proportions, then the world will be more dangerous as countries compete for scarce energy. It would also be a more inflationary and stagflationary world as governments printed more money to pay for oil and other industrial resources.
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PostPosted: Thu Sep 07, 2006 6:21 pm    Post subject: Reply with quote

Cruel will fall back to mid 40 range per barrel.

Reason: there are no real supply shortage other than hedge funds hype it up fear of unstable mid-east and China/India overheated economy.

It will happen before 1st quarter of 2007 if not happen before X'mas 2006.
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PostPosted: Thu Sep 07, 2006 9:31 pm    Post subject: Reply with quote

I certainly wish oil prices fall back to mid 40's, but how would you explain the demand from China and that the countries that Chinese leaders visit are mostly oil rich countries?

What do you think about the supply? Could you provide us with some insights?
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PostPosted: Sat Sep 09, 2006 1:02 am    Post subject: Reply with quote

Question received:

"I have a question about oil & gas. Although I can believe that the standard commodity story (rising demand meets inelastic supply) applies here as much as in the case of the base metals, the fact is that stocks in the US of crude, gasoline and natural gas are at historically high levels at the moment. I'd appreciate your comments as to how this fits in with the bigger picture?"

Fuller's comment -

Given highly liquid trading conditions, which we have for the commodities mentioned in your question, the price charts during a long-term bull market will include plenty of countertrend reactions. Inevitably, most of these will be of short-term duration - certainly noticeable if you are monitoring the action on a daily or weekly basis but largely disappearing on a monthly chart. There will also be some larger medium-term corrections and trading ranges within the primary trend. These will usually last for several months but occasionally persist for two or even three years. And because people trade these instruments, often on a leveraged basis, prices will be considerably more volatile than changes in the long-term supply and demand picture for the physical commodities.

Governments will not leave everything to the markets, not least because of the political in addition to economic implications of shortage. Clearly, a major effort has been made in the US to lower the risk of energy shortages. There has also been some luck in the form of a mild winter and absence of hurricanes in the Gulf of Mexico to date. Consequently the charts are reflecting increased supply and a small drop in demand.

Over the longer-term, I believe that global demand for energy in its various forms will continue to rise on an annual basis, even during the next recession, whenever that occurs. Global consumption of crude oil has been rising for years, including during the recession of 2001-2002, and many developing economies are much larger today. It has yet to be proven that the production of oil and other forms of energy, including renewables, can be increased at a faster rate than the growth of demand, or will be allowed to due to environmental considerations.
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PostPosted: Tue Oct 03, 2006 6:02 pm    Post subject: Reply with quote

As of October 03, 2006, according to experts in the field, the supply and demand would result in the oil prices at around $45/barrel. The current inflated prices are mainly caused by speculators in the futures market.
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