Crude Oil at 5 years low — Sentiment and News Flow Extremely Negative

Crude Oil has been dropping like a rock over the past few weeks, which leads the total decline of CL1 (the front trading WTI contract) to more than 45% since it was trading at above $100 dollars at its peak in June to $58 today.

This is a historical decline. Not the biggest drop in history (that was in 2009) but still a historical one.

USO — the largest oil tracking ETF — is now trading well under $22 (currently trading at $21.87, while typing this post), making a historical low, below the 2009 crash level when WTI bottomed and bounced off at about $32 (The reason is the roll cost of commodities contracts, and show that buy and hold in futures contract is very inefficient).

Everybody bets on oil dropping, the newsfeed is only negative, and even at one of my clients, a tech shop, the PA knows that it will drop until at least $50 until mid Jan.

Quote from Bloomberg:

“I can see no news that would give any reason to buy oil at the moment,” Christopher Bellew, senior broker at Jefferies International Ltd. in London, said by e-mail.

Another quote from another Bloomberg report:

“It’s a new era,” said Carl Larry, a former trader who is now a Houston-based director of oil and natural gas at Frost & Sullivan 

[...]

Known for his conviction that oil prices will rise in the long term and that U.S. shale drilling is overhyped, Hall — [pej: aka Oil Trading ‘God’] — still sees reasons for an oil rally -- eventually. First he sees crude prices falling further to as low as $50 a barrel before recovering in the first half of next year, according to his Dec. 1 letter to investors.

Based on this, I have decided to bet against the crowd, and opened an initial position in USO @21.90

Portfolio Update and Mean Markets

Yesterday I woke up in the middle of the night (Singapore time, 1 AM) and realized the massive correction in commodities. I bought oil at $78.20 and gold at $1556 on my iPhone and set up stops before falling asleep immediately...

The rest is tragic: I woke up, my stops had been hit overnight, and markets were now surging massively... And I had left a LOT of $$$ on the table... Gold and WTI are up in the 3-5%...

I wanted to share this frustrating experience with my readers for:

1. transparency reasons: you either show your trades or not
2. share my disappointment: you cannot always win, even if you see things right. markets are mean and tricky!

Oil Recap — Oil Heads for Longest Run of Weekly Losses in More Than 13 Years — Venezuela Overtakes Saudis for Largest Oil Reserves — Why Oil Is Probably Finding a Short Term Bottom Here

Oil peaked at $147 in 2008 and then again in the $110 range in 2011 and 2012. Peak Oil theorists and hyper-inflationists do not understand why the price has fallen so low, in the low $80s... Moreover, Peak-Oil or not, it seems like supply is actually increasing for the time being, and not being constrained by the so called peak-oil theory. The US are almost at the point of drowning under their oil inventories. Last argument: oil demand is not as inelastic as the bulls pretend. Demand actually declines with price increases, and also in economic downturns. Finally, it's interesting to note that according to BP, known reserves have increased in 2012 compared to 2010, while all the producers have been pumping like there is no tomorrow.

So, first, I do not believe that oil has been driven by anything but speculation in the past 5 years. Peak oil or not, the current price reflects not the usage demand by end consumers, but demand by speculators. Yes, speculators do affect prices, as they are part of the demand and supply side in the futures markets.

Second, the massive flow of negative news after a long decline and very negative sentiment is leading me to believe that oil is scratching bottom and is ready for a temporary bounce, before resuming the downtrend of the Greater Depression.

There's a massive flow of extremely bearish news about oil these days. See for yourself, in the past 3 days, on Bloomberg:

• Oil Falls in New York as IEA Says Global Supplies Have Improved
• Oil Drops Before OPEC Meeting, U.S. Crude Stockpile Data
• Oil Drops a Fourth Day on Naimi Comments, Iran Exemptions
• OPEC Set to Break 10-Year Habit of Supply Cuts During Routs
• Venezuela Overtakes Saudis for Largest Oil Reserves
• Venezuela’s Chavez Plans to Double Oil-Output Capacity by 2019
• Oil Heads for Longest Run of Weekly Losses in More Than 13 Years

Below are quotes from the respective articles (in the order above):

(Bloomberg) June 13, 2012 — Crude oil declined in New York as the International Energy Agency said global markets are better supplied than earlier this year and U.S. retail sales dropped. 

Futures slid as much as 1.2 percent. The Paris-based IEA said in a monthly report today that global supplies increased by 200,000 barrels to 91.1 million barrels a day in May. U.S. crude inventories, which rose to the highest since 1990 at the end of May, may drop this week, according to a Bloomberg News survey before a government report. [...] 

“There’s still an overhang in crude inventories in the U.S. and stocks have built globally in the first half of the year,” Gareth Lewis-Davies, an analyst at BNP Paribas SA in London, said by phone.  [...] 

The IEA said the oil market is better supplied amid concern that slowing economic growth will curb crude demand. The agency cut its forecast for 2012 crude consumption to 89.9 million barrels a day, down by 100,000 barrels from May and reflects an increase of 820,000 barrels from last year. 

The Organization of Petroleum Exporting Countries, which meets tomorrow in Vienna, cut production last month, ending seven months of increases, as Saudi Arabia and Iraq lowered supplies, the IEA said. [...]

Abdalla El-Badri, OPEC’s secretary-general, said today in Vienna that “there is some oversupply in the market” for oil. 

Saudi Arabia, Kuwait, Qatar and the United Arab Emirates would like to raise the output ceiling by 500,000 barrels a day, an OPEC delegate said yesterday, declining to be identified because member countries are still in talks. Iran, facing a European Union embargo on its oil exports from July 1, and Venezuela have been joined by Iraq and Angola in warning that supplies are excessive. 

OPEC will keep the production ceiling at 30 million barrels a day, according to all 20 traders and analysts surveyed by Bloomberg News last week. 

Retail sales in the U.S. fell as slower employment and subdued wage gains damped demand. The 0.2 percent decrease followed a similar decline in April that was previously reported as a gain, Commerce Department figures showed today in Washington. Sales excluding automobiles slumped by the most in two years. 

[...] The South American country’s deposits were at 296.5 billion barrels at the end of last year, surpassing Saudi Arabia’s 265.4 billion barrels, BP said today in its annual Statistical Review of World Energy. The 2010 estimate for Venezuela was revised to the same amount, up from 211.2 billion in the previous report. 

Global reserves advanced to 1.65 trillion barrels at the end of last year, a 1.9% percent increase from a revised 1.62 trillion in 2010, BP said.


(Bloomberg) June 13, 2012 — Oil fluctuated in New York amid speculation the Organization of Petroleum Exporting Countries will keep output quotas unchanged even after a slide in prices. 

[...] “OPEC’s output is a very significant feature of the oil market and has the potential to make quite significant changes to supply and impact prices,” said Ric Spooner, a chief market analyst at CMC Markets in Sydney. “The consensus view is that at current prices it’s not too likely that we’ll get any public announcement on production-quota cuts.”
[...] 

“Demand has been incredibly weak,” said Dominic Schnider, the global head of commodity research at UBS AG’s wealth- management unit in Singapore. Boosting supply “will really be the wrong signal.” 

Oil in New York fell after a bearish “death cross” formed on the daily technical chart, according to data compiled by Bloomberg. The 50-day moving average, at $96 a barrel today, dropped below the 200-day mean at $96.41 for the first time since December. Investors typically sell contracts when the moving average for a shorter period falls below a longer one.
[...]


(Bloomberg) June 13, 2012 — Oil traded near an eight-month low after Saudi Arabia’s oil minister said OPEC may need a higher output limit and the U.S. issued more exemptions from sanctions on buying Iran’s crude, cutting the risk of supply disruption. 

Futures slid as much as 2 percent after the Organization of Petroleum Exporting Countries said the market is “amply supplied.” The U.S. added six countries and Taiwan to its list of exemptions, saying they “significantly reduced” their purchases of Iranian crude. U.S. gasoline stockpiles probably climbed to a five-week high, a Bloomberg News survey showed.

“The comments from yesterday are surprising and suggest Saudi Arabia isn’t willing to reduce production,” Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt, said by phone. “Without a production cut, there will be considerable oversupply in the market in the second half, which will put further pressure on prices.”
[...]
Persian Gulf Arab members of OPEC want to raise the group’s output limit by 500,000 barrels a day, a person familiar with the situation said today.
[...] The U.S. added India, Malaysia, South Korea, South Africa, Sri Lanka, Turkey and Taiwan to the list of exemptions from sanctions, Secretary of State Hillary Clinton said yesterday in an e-mailed statement. Clinton announced in March that Japan and 10 European Union nations had qualified for an exemption for a renewable period of 180 days. 

India and South Korea were the third- and fourth-largest buyers of Iran’s crude in the first half of last year, according to the U.S. Department of Energy. China, the Persian Gulf nation’s biggest customer, wasn’t exempted from the sanctions, which are targeted at curbing Iran’s nuclear program. 

Countries have until June 28 to demonstrate they have “significantly reduced” purchases from the Islamic Republic, OPEC’s second-biggest producer, or their banks that settle the oil trades may be cut off from the U.S. financial system. [...]

(Bloomberg) June 13, 2012 — For the first time in a decade, OPEC will maintain oil-output quotas while prices plunge as Europe’s debt crisis and China’s slowing growth curb fuel demand. 

[...] Crude has fallen 22 percent in London since March 13 on mounting concern that Europe’s debt crisis will derail global growth and curb demand for energy. Saudi Arabia, the biggest OPEC member, is pumping the most in 33 years to bring prices below $100, a target set by its Oil Minister Ali al-Naimi. The group exceeded its official output level by 6 percent in April, according to the International Energy Agency. 

“They’re not going to want to rock the boat,” said Mike Wittner, head of oil research for the Americas at Societe Generale SA in New York. “This is a very fragile time for the global economy so I don’t think they’re going to take any action. There’s no way that OPEC is going to announce any cut or even say that very strongly.”

This is one of silliest comment I've ever heard. Not surprising that it's coming from a banking analyst... Does Mike Wittner really believe that OPEC cares at all of the global economy? They care about themselves only. And if the producers are pumping, including the Saudis, is because they need the cash. Why do they need the cash? To keep their people out of the streets and avoid protests by giving away subsidies and cash handouts. That's it!

[...] “It is very clear that there are tremendous surplus quantities that led to this severe decline in the prices,” Iraqi Oil Minister Abdul Kareem al-Luaibi said today in Vienna. “This would not serve anyone.”
[...]

(Bloomberg) June 13, 2012 — Venezuela now holds the largest proven oil reserves in the world, overtaking Saudi Arabia, according to BP Plc. 

The South American country’s deposits were at 296.5 billion barrels at the end of last year, surpassing Saudi Arabia’s 265.4 billion barrels, BP said today in its annual Statistical Review of World Energy. The 2010 estimate for Venezuela was revised to the same amount, up from 211.2 billion in the previous report. 

Global reserves advanced to 1.65 trillion barrels at the end of last year, a 1.9 percent increase from a revised 1.62 trillion in 2010, BP said. North Sea Brent crude, a benchmark for more than half of the world’s oil, averaged $107.38 a barrel in 2011, according to data compiled by Bloomberg. 

[...] BP said the estimates in today’s report are a combination of official sources, OPEC data and other third-party estimates. Deposits include gas condensates and natural-gas liquids, as well as crude.

(Bloomberg) June 13, 2012 — Venezuelan President Hugo Chavez will more than double the country’s oil-production capacity to 6 million barrels a day by 2019 if re-elected on Oct. 7, according to a government plan released today on his website. 

Chavez wants to increase domestic refining capacity to 1.8 million barrels a day from 1.3 million barrels a day in 2013, according to the plan. No details on funding were given in the plan, which stated that the nation would “intensify efforts to obtain the financing needed.”  [...]

(Bloomberg) June 10, 2012 — Oil fell a second day in New York, heading for the longest run of weekly losses in more than 13 years, on speculation the economies of the U.S. and China, the world’s biggest crude consumers, will slow and curb fuel demand. [...] 

Late Portfolio Update: Stopped out on WTI on Friday

Last Monday, WTI reached 86.50 in early trading in Asia before collapsing down to 81.00 at the close of the futures trading day.

My position got stopped out in the neighborhood of 84.50...
I remain long EUR.USD, Silver and Gold.

Portfolio Update: Long Again

I've reopened my long EUR.USD, silver, gold positions during the US trading day on Friday, and also went long the WTI. Stops are once again in place, however, I'm still hoping not to be kicked out of my positions by crazy intraday volatility...

Gold in 2011 is what Oil was in 2008

It's not 2008 — NO — It's 2011-Oh-Eight. I borrowed this from M3 Financial Sense, which post I couldn't agree more with. Here's a quote:

However, the trades in equities are not the monsters of the era, those are the currency and debt trades and the commodity shorts. EURO, Dollar, Pound, Silver, Oil, Gold, Palladium, the softs and hards...it does not matter they are all destined for a major collapse. However, I expect this panic in the equity markets to trigger further distortions in these markets. Targets remain as I have said a few weeks back: EURO - 1.47 to 1.49 and Dollar Index - 71 to 69. The action, will not be orderly...and Eric Sprott, among many others, will be broke when the ashes are revealed.

Well, indeed, in my opinion, we are facing the perfect set up for a massive crash, and which asset is bubbling at the moment, and making all the headlines, making new all time highs everyday like oil did back in 2008 while the markets were imploding? It's gold.

So I believe gold is the last bastion of greed and speculation, like oil was, except that you cannot find any bear on gold, not even deflationist like Mish can think of gold going lower.

I think gold either has peaked, or will peak just shy of $2,000, the way oil peaked at $147 just shy of $150.

Now, the main issue is that IV is very very high, so shorting gold with put options is very expensive. I am now waiting for a nice set up to short it out-right buy going short GLD shares.

Market Sentiment: Gold 5000, S&P 2100, Silver 150 are still with us

Here's S&P 2100:

June 14 (Bloomberg) -- Birinyi Associates Inc.’s Jeffrey Yale Rubin said the firm is bullish on equities this year, while Dean Curnutt of Macro Risk Advisors says the performance of stocks depends on the actions by the Federal Reserve.

“For the remainder of the year, we’re positive,” Rubin said today at a panel discussion on equities at the Bloomberg Money Managers conference in Boston. For the Standard & Poor’s 500 Index, “we have a target of 2,100 but that’s not this year, that’s not next year. When we look at stock markets that go on for a long period of time, that start off quickly -- 1974, 1982, 2009 -- those markets are not ones that end quickly. If you also look at those markets during this period, phase two of the market, it runs into difficulty.”

Here's Gold $5,000:

(Standard Chartered via ZeroHedge) We are bullish on gold.
[...]
We believe that these factors – limited gold production, buying by central banks and increasing demand from India and China – can potentially drive the gold price to US$5,000/oz, as highlighted in our commodity team’s earlier report, Gold – Super-cycle to extend above US$2,100/oz (17 April 2011).

And if you are looking for crazy lunatics, conspiracy theories about silver, and forecasts like silver $300, it's always good to turn to KingWorldNews.com here over the past few weeks, the following market experts (?!) avec forecast a floor of $150 for silver, and no top on sight, but basically, they believe in a Gold/Silver ratio of 10 and an ounce of Gold at somewhere between $6,000 and $30,000:

• John Embry (Sprott bias)
• Steve Leeb (Yes, the infamous of Peter Schiff vs Steve Leeb)
• Rob McEwen (Gold Producer bias)

And many more. Steve Leeb has now even published a book were he forecasts shortages of Copper and Iron Ore... 

I need to find oil $1,000 but nobody has the guts to put a price target, because obviously, with the cumulative effect of Peak Oil and Bernanke, oil will go far far beyond $1,000.

Questions That Contrarians Should Be Asking Themselves

Here a few points that strike me to the point of being losing sometimes my sleep on them:

• That we are not running out of oil? That Peak Oil will take the price of oil to unbelievable levels? Do you know anyone who thinks oil will be a poor investment?
• Do you know anyone who thinks that Silver and Gold can decline meaningfully and stay there? Even after what happened to silver in May?
• Do you know anyone who believes that the US Dollar can have a meaningful rebound?
• That the Australian dollar and the Euro can collapse?

If you do, please email me the reports :-) 

If you don't, you know what side of the bet you should take.

Silver crashes 30% in 4 trading days — the USD rebounds finally?

It looks like we might have the start of the end of the silver bubble, about the same proportions as the oil bubble of 2008.

The US dollar might have finally spread its wings, and decided to take off against the Euro, which is really in bubble territory.

Oil is also down 10% in just 4 trading days as well. If everything goes according to the plan, we are nowhere near the end of the correction.

In the meantime, equity markets are correcting softly, and nobody is paying attention to the crashes happening in the commodities markets. The decline has been happening slowly, which is great for bears because it doesn't affect the sentiment of the speculators, who remain over-bullish. The VIX is barely at 17, confirming the option market doesn't believe in a meaningful correction.

Short Term Fundamentals of Oil Are Very Bearish as Cushing Inventory Reach Their Max Capacity

While most market participants are being ultra-bullish on price of oil, I remain a sceptic over the next few months for the following reasons:

• Price forecasts are now aiming for the moon, with targets easily reaching $200 or $300
• The CoT report from the CFTC shows that speculation has run so wild that it exceed everything we experienced in the past few years, speculators are even more bullish now than when oil had reached $147. See the nice chart here.
• Inventory of oil have been steadily increasing over the past few months in the US. This means that demand is weaker than supply.
• There are serious issues in the middle east, but production hasn't really been impacted yet.

As you can see, both the sentiment and the fundamental are already very bearish for oil. Well on top of that, Dian over at EconMatters has published a great post showing that there will very soon be no more storage available at Cushing. And he forecasts that WTI will trade at $90 within a month. Here a few quotes from this great post:

The latest inventory report came out on Wednesday, March 30 from the U.S. EIA showing Cushing stocks at a record 41.9 million barrels. The news is only going to get worse for WTI longs, as the next couple of weeks will bring the total storage at Cushing close to the max capacity of 44 million barrels due to the fact that more traders took delivery on WTI (West Texas Intermediate) on the last CL rollover.

There is a three week span after the expiration where actual physical delivery takes place, so expect the next two EIA reports to test whatever remaining spare capacity exists at Cushing. In other words, it doesn't really matter what is occurring in the MENA (Middle East and North Africa), since over the next month at the next rollover, traders will have to sell any long positions because they cannot take delivery even if they want to.

Furthermore, because of the events transpiring in the MENA over the last couple of months, traders who normally don't take delivery have taken delivery over the last two rollovers, due to ‘what if” scenarios where Saudi Arabia became a legitimate concern, and oil spiked to $130 a barrel. The fallout from this is that traders and investors who normally take delivery will not be able to during this next rollover, as there will literally be no more storage at Cushing.

This is very bearish for WTI prices over the next month, as now you are going to have an entirely new segment of sellers come rollover time. As such, expect the U.S. WTI prices to overshoot to the $90 a barrel range
[...]
The consumer and the US economy needs lower prices to grow at a significantly higher rate in order to make a dent in an overall saturated oil market. The longer prices stay artificially high, and not reflect true demand in the market, given the current oversupply situation, the correction, when it does occur, will be even sharper (For example the 2008 Oil collapse).
[...]

Crude Oil Update

Contrary to what many believe, speculators can drive prices in the commodities (and more generally futures markets). This is exactly what is happening with oil, which is experiencing the biggest speculative boom since the COT report from the CTFC has begun.

ZeroHedge has published a nice chart showing the price of oil and the number of speculative positions on the WTI futures contract:

As you can see on the above chart, the number of long speculative positions has doubled in the past several months alone and yet, the price of oil has merely jumped 15-20%.

This also confirms that there's no production or delivery concerns, and that oil producers are selling their production against these long speculative positions, which will have to either roll over from contract to contract, or be closed by selling them.

Carl Futia, who I do not often agree with, has published a nice post about oil making the cover of the Economist (which is one the of best contrarian indicators you can find!) and other magazines and newspapers. He concludes that the next big swing in crude oil prices will be downward. I couldn't agree more with this forecast.

Oil Top at Hand

An oil top might be very much at hand (or actually given that oil dropped from $103 to $98 while writing this post, oil might actually have already topped out).

I have covered this extensively since early Feb, and for that matter, here's the past few relevant posts.

• 2011-02-23 Oil May Surge to $220 (really ?)
• 2011-02-14 $150? Oil Prices Could Go Up "Very, Very Fast" Says Stephen Leeb
• 2011-02-13 Oil Price Forecasts: Talks of a $300 Baril Emerge
• 2011-02-09 Oil Speculation Reaches All Time Highs As Gasoline Supply Rises to 18-Year High
• 2011-02-08 Oil speculation far exceeds the levels reached in 2008

Since my last post, a couple of interesting posts have been published by fellow bloggers.

Yesterday on Carl Futia's Art of Contrarian Trading:

[...] this morning the New York Times headline concerned the oil market [...]

The headline itself is emotionally very restrained. However, I do think that the two year rally from the December 2008 low at $35 has built up a substantial bullish investment crowd in the oil market. People keep telling me that oil can only go up from here because of inflation, and improving world economy, etc.
[...]
Once the psychological $100 barrier is breached I think sellers will come out in droves. Within a couple of years crude oil should be selling below $50.

Today on Babak's Trader's Narrative:

Analysts are tripping over themselves to reset their price targets higher: $150, $200, do I hear $300?

I know that there is rampant fear out there right now and the grisly images are difficult to ignore. Yet, we must remember that the market’s job is to provide the maximum pain for the maximum amount of participants. That is to say, it is never as easy as one imagines: trouble in Middle East, ipso facto, buy oil.

My contention is that we are much closer to a top here than a buy opportunity.

Babak's has some nice charts showing how the rally has been overextended in oil.

[Update] I just ran into this amazing advert offering you a 200:1 leverage to speculate on oil...

Full disclosure: I've opened a small put options position on oil today. Fingers crossed, and Caveat Emptor

Oil May Surge to $220 (really ?)

After oil $150 and oil $300, here's another forecast, somewhere in between: oil $220:

Feb. 23 (Bloomberg) -- Oil prices may surge to $220 a barrel if political unrest in North Africa halts exports from Libya and Algeria, Nomura Holdings Inc. said.

Crude futures rose to almost $100 in New York today, the highest in more than two years, as violence in Libya threatened to disrupt exports from Africa’s third-biggest supplier. Libyan leader Muammar Qaddafi vowed yesterday to fight a growing rebellion until his “last drop of blood.” Protests in Algeria led to the ending of a 19-year state of emergency.

“If Libya and Algeria were to halt oil production together, prices could peak above $220 a barrel and OPEC spare capacity will be reduced to 2.1 million barrels a day, similar to levels seen during the Gulf war and when prices hit $147 in 2008,” the Tokyo-based bank said in a note today.
[...]
“The closest comparison is the 1990-1991 Gulf War,” during which OPEC’s spare capacity dropped to 1.8 million barrels a day and prices surged 130 percent in seven months, Nomura analysts led by Michael Lo in Hong Kong said.

Nomura said the $220 prediction may be an underestimate, as speculative investors trading crude oil who were not active in the early 1990s may amplify the price.

A surge to $220 would trigger demand destruction and a correction lower, according to Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania.

It is true that if production is disrupted, then supply and demand law should make the price go up. That said, there are several things to consider:

1. Demand is not as inelastic as they seem to think. If price goes to $220, people will stop driving, airlines will not fill in their planes and will ground some flights, ships will halt, and so forth.
2. There are massive long speculative positions on oil, and guess what? They will have to unwind at some points, and this will create a big air pocket that will cool down prices
3. Geithner says Bernanke will save the day: “The economy is in a much stronger position to handle” rising oil prices, Geithner said today during a Bloomberg Breakfast in Washington. “Central banks have a lot of experience in managing these thing

Finally, as I stated before:
Irrelevant of these points, and even more importantly, these kinds of crazy forecasts happen only in periods of extreme and irrational exuberance. It is fair to assume that two years ago, when oil dropped to $30 a baril, the supply and known reserves were about the same as today and that the fundamentals over a period of 10 years didn't change so much during these past two years to justify a price move from $30 to $300. So my opinion is that Dow 36,000 and Oil $300 and Gold $5,000 forecasts are generally made close to long standing market tops than floors. I'm thinking that oil will trade at $20 before it trades $300.

Of course, I could be wrong, but I'm very much anticipating the CFTC report this week, to find out what is happening on the speculative oil positions. This should shed some light on what is driving the market here.

$150? Oil Prices Could Go Up "Very, Very Fast" Says Stephen Leeb

Following up on the post I wrote yesterday titled Oil Price Forecasts: Talks of a $300 Baril Emerge, TechTicker has interviewed Steven Leeb, very well known for his inaccurate forecasts and his complete lack of understanding of the economy stated on TechTicker that:

If this or any scenario rattles the markets and drives up demand, prices could spike as high as $150, warns Leeb. "You're going to see oil prices go up very, very fast; much faster than people think," he says. That would likely "lead to a real terrible decline in the market and real hardship in the economy." Since the 1970s, every time oil prices rose 80-100% in one year, it's resulted in market or economic calamity, Leeb notes.

Stephen Leeb is chairman of the Leeb Group and author of The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel. I think you've read everything you needed to know.

I stated yesterday that "these kinds of crazy forecasts happen only in periods of extreme and irrational exuberance. It is fair to assume that two years ago, when oil dropped to $30 a baril, the supply and known reserves were about the same as today and that the fundamentals over a period of 10 years didn't change so much during these past two years to justify a price move from $30 to $300. So my opinion is that Dow 36,000 and Oil $300 and Gold $5,000 forecasts are generally made close to long standing market tops than floors. I'm thinking that oil will trade at $20 before it trades $300." Well, guess what? The same applies to $150 and also $200.

Oil Price Forecasts: Talks of a $300 Baril Emerge

Babak over at Trader's Narrative flags this Barron's report titled $300 Oil by 2020. It requires a subscription that I do not have, but here's an excerpt:

Charles T. Maxwell, an analyst who's been toiling in the energy business since 1957, all but shrugged off the toppling of the dictator. He's sticking with a bold prediction: Prices will climb to $300 a barrel in 2020, or about $225 in today's dollars. The world simply won't have enough oil to meet demand, he says.

Not only Charles T Maxwell missed what the readers of this blog now: the fundamentals of oil are in a sorry state (at least on the short to medium term, I can't forecast long term), but he seems to be assuming a fair amount of monetary inflation (2-3% per year until 2020) in the face of Japanese style deflation.

Irrelevant of these points, and even more importantly, these kinds of crazy forecasts happen only in periods of extreme and irrational exuberance. It is fair to assume that two years ago, when oil dropped to $30 a baril, the supply and known reserves were about the same as today and that the fundamentals over a period of 10 years didn't change so much during these past two years to justify a price move from $30 to $300. So my opinion is that Dow 36,000 and Oil $300 and Gold $5,000 forecasts are generally made close to long standing market tops than floors. I'm thinking that oil will trade at $20 before it trades $300.

Oil Speculation Reaches All Time Highs As Gasoline Supply Rises to 18-Year High

This is an update to the previous post Oil speculation far exceeds the levels reached in 2008. Yesterday, we said that the most important thing to remember is that You can speculate all you want, but at some point the fundamentals have to line up with the speculation. It looks like fundamentals are far worse that what I first believed, as gasoline supplies are reaching an 18 year high.:

Feb. 8 (Bloomberg) -- U.S. gasoline stockpiles probably climbed last week to the highest level in almost 18 years as demand from motorists declined, a Bloomberg News survey showed.

Supplies of the motor fuel increased 2.6 million barrels, or 1.1 percent, in the seven days ended Feb. 4 from 236.2 million a week earlier, according to the median of 16 analyst estimates before an Energy Department report tomorrow. The projected advance would leave inventories at the highest level since Feb. 26, 1993. All of the respondents forecast a gain.

Gasoline stockpiles have climbed in 10 of the past 11 weekly reports from the department as refinery output outpaced demand. The crack spread, or profit for processing three barrels of oil into two of gasoline and one of heating oil, rose to a 43-month high. Consumption fell to an 11-month low.

“Weak demand fundamentals and rising output have increased gasoline stocks,” said Stephen Schork, president of Schork Group Inc., a consulting company in Villanova, Pennsylvania. “The crack margin makes it attractive for refiners to produce fuel. There seems to be a disconnect between the crack and the demand numbers.”

Crude oil stockpiles climbed 2 million barrels, or 0.6 percent, from 343.2 million the previous week, the survey showed. It would be the fourth straight weekly advance. Fifteen analysts gave crude forecasts and all projected an increase.

Gasoline for March delivery rose 4.37 cents, or 1.8 percent, to settle at $2.4942 a gallon on the New York Mercantile Exchange. Crude declined 54 cents, or 0.6 percent, to $86.94 a barrel.

The crack spread surged 12 percent to $21.209 a barrel at 3:47 p.m. today based on New York futures prices, the highest level since July 11, 2007.

“The crack spread is high despite astonishingly high inventories,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “Prices are seemingly bulletproof because of the flow of cash into the energy market. This has changed the way the crack works, removing that discipline from the market.”

Hedge funds and other large speculators increased net-long positions, or wagers on rising crude-oil prices, by 17 percent in the seven days ended Feb. 1, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report on Feb. 4. It was the largest gain since the week ended Dec. 7. Bullish or net-long bets on gasoline prices rose 5.8 percent to 65,331 futures and options combined, the data showed.

Regular gasoline at the pump, averaged nationwide, declined 0.5 cent to $3.117 a gallon yesterday, the AAA said on its website. Prices reached $3.124 on Feb. 3, the highest level since Oct. 14, 2008.

“Given where prices are, we may go into the summer with weak demand and extremely high gasoline inventories,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester Massachusetts. “Instead of a pre-summer run-up in prices we could see them weaken significantly.”

Pump prices have climbed in the first two quarters during five of the past six years, according to AAA data.

Gasoline consumption fell 1 percent to 8.55 million barrels a day in the week ended Jan. 28, the lowest amount since the week ended Feb. 12, 2010, department figures show.

Imports of the motor fuel surged 82 percent to 1.17 million barrels a day in the same period, the highest level since August, according to the department. It was the biggest one-week increase since September 2006.

Refineries probably operated at 84.7 percent of capacity, down 0.15 percentage point from the week before, according to the Bloomberg survey. Refiners bolstered operating rates 3.3 percent in the week ended Jan. 28, the biggest one-week gain since Dec. 3.

“Both the supply and demand side are pointing to higher gasoline stocks,” said Jason Schenker, president of Prestige Economics, an energy advisory firm in Austin, Texas. “We’re expecting a very big build because of the big increase in refinery utilization, and demand was weak because the winter weather kept people off the roads.”

A winter storm moved across the U.S. from the Midwest to Maine last week, grounding thousands of flights. Chicago had its third-largest snowfall on record as gusts of 70 miles per hour (113 kilometers per hour) off Lake Michigan closed Lake Shore Drive and stranded hundreds of cars and buses.

Supplies of distillate fuel, a category that includes heating oil and diesel, probably slipped 1 million barrels, or 0.6 percent, from 164.1 million, the inventory survey showed. Twelve of the analysts anticipated a decline, two projected an increase and two said there was no change.

Oil speculation far exceeds the levels reached in 2008

Below is an interesting chart published by Tiho over at TheShortSideOfLong blog. This chart shows on the right axis the number of long contracts in oil (speculative positions as reported to the CFTC). As you can see, the number of long contracts far exceeds any historical precedents, including the period were oil was trading at above $100 and reached $147. Interestingly, during that time, speculators were closing their positions, and we still ended up with a massive 70% crash. Given what we see here, a $20 baril or even lower seems more than achievable.

Here's a Bloomberg report relating the oil bullish speculations due to the events in Egypt. If you had to remember only one sentence, it would be:  You can speculate all you want, but at some point the fundamentals have to line up with the speculation.

Feb. 7 (Bloomberg) -- Hedge funds raised bullish bets on oil by the most in eight weeks on concern that political unrest in Egypt will spread and disrupt supplies from oil-producing countries in the Middle East.

The funds and other large speculators increased net-long positions, or wagers on rising prices, by 17 percent in the seven days ended Feb. 1, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. It was the largest gain since the week ended Dec. 7.
[...]
Concern of disruptions to the Suez Canal sent North Sea Brent crude to $103.37 Feb. 3, the highest intraday level since Sept. 26, 2008. Brent for March settlement fell $1.93, or 1.9 percent, to $99.83 on the London-based ICE Futures Europe exchange on Feb. 4

About 2.5 percent of global oil output moves through Egypt via the Suez Canal and the Suez-Mediterranean Pipeline, according to Goldman Sachs Group Inc. The waterway was open and operating normally on Feb. 4, Ahmed El Manakhly, head of traffic for the Suez Canal Authority, said by phone.

Oil may drop unless transport through the canal is disrupted, said Hamza Khan, an analyst with the Schork Group Inc., a consulting company in Villanova, Pennsylvania.

“We’re not seeing a decline in traffic,” Khan said. “You can speculate all you want, but at some point the fundamentals have to line up with the speculation.”

Persian Gulf shares gained yesterday, sending Dubai’s index to a week high, as Egypt’s government met with opposition leaders to quell protests, stoking speculation the turmoil in the country may ease. Qatar’s stocks advanced.

Net-long positions in oil held by managed money, including hedge funds, commodity pools and commodity-trading advisers, increased 29,928 futures and options combined to 201,941, according to the CFTC report.
[...]

Oil is Iran's Curse

During the past few weeks, Iran's Islamo-fascistic regime has been in the spotlight and some of the issues that I wasn't really aware of have drawn to my attention.

I've been thinking about the causes and the origins of the problems, and also looking for reasons why these issues have not found a solution yet.

My conclusion is that all the problems of today's Iran find their origin in oil: oil is Iran's curse. And here is why:

• If Iran had no oil, the British and American wouldn't have put the dictatorial Shah in power to get access to cheap Iranian oil and create BP.
• If Iran had no oil, the American's wouldn't have pushed Saddam Hussein — their Iraqi ally at that time — to invade Iran (and lead to a 10-year-long war, killing millions and destructing the whole economy) after the revolution that forced the Shah to leave (and the Brits to lose their access to oil).
• If Iran had no oil, the current Islamo-fascistic regime would have no funding and would have collapsed a long time ago and maybe democracy would finally have reached the Iranian people.
  

Oil and the Islamo-fascistic regime [my analysis]:

With official unemployment at more than 20%, and 70% of the people being less than 30 years old, it's difficult to find any source of income for the government. Add the fact that there's no efficient way for the government to enforce and collect taxes to people who are not employed by major corporations. Add that 4 to 5 million Bacij 'black shirt' militia are on the government payroll, on top of the normal military and police forces (total population in Iran is 70 million). Finally, add the government itself and corruption.
How do you pay for all this? You have only one real source of revenue: oil and then the printing press. The government is massively printing money, but the dollars and euros (required to buy oil) pouring into the economy are providing income to be spent on their payrolls and are also preventing the Iranian currency, the Rial, from collapsing. It is also obviously allowing a massive wealth transfer from the people to those in power. With no oil, the Rial would have collapsed and those in power would be long gone.
The easy way for the international community to get rid of the Islamo-fascistic regime would be to just embargo the Iranian oil. But that would mean that the rest of the planet would have to finance this action (by paying a higher price for oil). Even though this kind of action would have been far less costly than the US war in Iraq for example — and would also bring a lot of good karma instead of hatred — it is unlikely to ever happen due to the unability of the politicians to make difficult decisions.

Shah Pahlavi and BP:

BP started out as the Anglo Persian Oil Company and was a de facto Whitehall department after Winston Churchill converted the Royal Navy ships from coal to oil. BP's confrontation with Mossadegh's Iran was the first postwar Middle East oil shock three years before Suez and led to a joint venture CIA-M16 countercoup to replace Mossy with Shah Raza Pahlavi, a self styled King of Kings who played ball with Big Oil till his own overthrow in 1979.

Iran - Iraq war:

See Wikipedia article for a description of the war.

Read:

• Confession of an Economic Hitman (amazon.com - amazon.co.uk)
• The Secret History of the American Empire (amazon.com - amazon.co.uk)
  

Look: nice ads!

UK	UK	US	US

BP accept to receive $2 a barrel in Iraq

Last week, Iraq open an auction for oil companies to bid how much they would be willing to receive for each barrel of oil they would extract. The outcome of this auction is quite interesting.

Here are some quotes from an AP report:

Chevron Corp., the second-largest U.S. oil company behind Exxon Mobil Corp., said it decided not to submit a bid in the opening round, but didn't rule out doing so in future auctions. [...]
The first field on offer was the day's sole success story. But also underlined the government and the companies' widely differing expectations. Two consortiums, headed by British giant BP and Exxon Mobil, submitted offers for the Rumaila oil field — the largest prize on offer with 17.8 billion barrels in crude reserves. The Exxon Mobil-led consortium, which included Malaysia's Petronas, requested $4.80 per barrel for production over the minimum, while BP wanted $3.99 per barrel. The ministry was willing to pay $2 per barrel. BP agreed to match the ministry's price and won the contract for Rumaila.

Exxon Mobil, in a move mirrored by other companies throughout the day, refused to revise its bid. "Our numbers were not far from reality, and proof of that is that BP accepted our price for Rumaila," al-Shahristani said after the auction. He said he believed oil companies inflated their requests to cover security companies' fees.
But dollars aside, interest was much thinner than Iraqi officials anticipated."It's been nearly 40 years now that Iraq has failed to live up to its oil potential," said Daniel Yergin, a Pulitzer Prize winning author and chairman of IHS CERA, an energy consultancy. "It's not a foregone conclusion that these arrangements will, in themselves, do what needs to be done. It's only a beginning, and it's an uncertain beginning."
No bids were offered for the Mansouria gas field in Diyala province, home to some of Iraq's worst violence. Only one bid was submitted for each of the Bai Hassan and Kirkuk oil fields in the north, the Akkas gas field, and the Missan fields — three adjacent fields offered as one bloc.
China's CNOOC led the consortium bidding for Missan, and sought a payment of $21.40 per barrel over the baseline minimum output level. Iraq said it was willing to pay $2 per barrel.
The Zubair oil field attracted four consortiums, while the West Qurna Stage I field in the south drew interest from five groups led by France's Total, Russia's Lukoil, Spain's Repsol, Exxon and CNPC. Again, in the case of West Qurna, the bids were as much as 10 times more than what the government was willing to pay.
Officials had earlier said that any fields not agreed on would be re-offered in subsequent rounds. Al-Shahristani, however, said the top offers on all the non-awarded fields — except for Mansouria — would be presented to the cabinet for review.
The step was clearly aimed at saving the process. But it embraced the same solution that has stoked parliamentary ire.
Some lawmakers have argued that al-Shahristani's insistence on having the Cabinet approve the deals, instead of the parliament, would render the deals unconstitutional.
The political wrangling was largely an effort by the country's various political blocs to secure a stake in Iraq's oil fortunes.
But whatever its roots, the dispute has done little to calm international oil companies' angst.
The firms were already worried about Iraq's security situation, the lack of a new national oil law and the government's argument that deals struck independently with the semiautonomous Kurds in the north are illegal.[...]
The minister, however, has insisted he was working for the country's best interests. Iraqi officials have estimated that based on crude oil at $50 per barrel, the companies could have earned around $16 billion in total. Iraq, meanwhile, would have brought in over $1.7 trillion.
The company response to the bidding sends a clear signal to Iraq, said analysts.
It says "the companies will still be there, but they've made it clear what their baseline is, and that they can't go into the red even to get access to Iraqi oil," said Ciszuk. "The risks are just too great."
AP Business writers Tarek El-Tablawy in Cairo and John Porretto in Houston contributed to this report.

One very good reason to be bullish on Oil

I mentioned mid December that I was bullish on oil, and I started to grow a position in various oil and oil-related commodities/stocks.

Now that the quarterlies season has started, here's what I've noted so far:

• BP: net loss of $3.3 billion in Q4
  
• Chevron: $4.9 billion in Q4 thanks to hedging
  
• Exxon: Big drop in profits in Q4
  
• Shell: Big drop in profits in Q4
  
• ConocoPhilips: net loss of $3.2 billion in Q4
  
• Valero: net loss of $3.3 billion in Q4
  

What is interesting here is not that Exxon, Shell or Chevron made money or even that their profits dropped, this is normal. What is very interesting, is that companies which didn't hedge their production made big losses. This means that the current prices are below the cost of production, and that huge losses like these are not sustainable. The consequence should be a major rise in prices of crude.

If you have seen some other major oil companies that I missed, please post a comment.