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TheGarcipian (33.76)

Consumption Junction, Part Two



May 28, 2008 – Comments (7) | RELATED TICKERS: EWZ , XOM , COP

I’m still doing my own investigation into this matter, but I’ve read/heard that there might be (is?) some oil price manipulation being done by the oil futures markets. Here’s just another point on the curve, for whatever it’s worth:

An interesting article, but I don’t believe (yet anyway) that the rise in oil prices is strictly and wholly due to the realm of some unnamed agents in oil’s nether world (futures market). I think the truth lies somewhere in between that scenario and the one of an imbalance in the supply-and-demand curve. Certainly, the supply shortage may not be as bad as some people would have us believe, but if our stock piles (tanks?) of oil did grow by 33 million barrels since January, that’s only an extra 8 hours of oil consumption gained over the past 5 months. Woo-hoo! Don’t spend it all at one stop light, America.

And sure, perhaps the USA’s oil demand is expected to decline in 2008, but by the author’s own admission, that decline is estimated to be only 190k bbls/day. So out of 21.5M bbls we use everyday, the estimate (which I suspect is the rosiest one they could come up with) has us saving a whopping 0.88% via the demand drop-off. Whoa. That’s some steep cliff of conservation. (For those of you only marginally paying attention here, that was sarcasm). Meanwhile, China alone is expected to increase its consumption by 400k bbls/day, completely wiping out our paltry suggestion at conservation and putting on a few afterburners to boot, doubling in usage what we Americans would suggestively save. True, this is not a “surging oil demand” by China, but it is an upward trend for the demand curve. So again, I think the truth lies somewhere in between.

You’ll also note there were no numbers mentioned in the report for other increases on the world “demand side”. What about India’s increased demand? Korea’s? How much do they add to this curve? What about Brazil and Latin America’s continued growth?  How much affect do large run-ups in the oil futures market really contributed to oil pricing? Is it a one-to-one increase, or only 20%, or something in between?

There is probably some gouging going on in oil futures, but like shorting stocks (in an inverse-analogy sort of way), if the price run-up is so great so fast, eventually there will be some short of whiplash effect. We’ve seen this in the past, but perhaps to a lesser degree. Every summer, the gasoline prices rise (and heating oil falls), and every winter the heating oil prices rise (and gasoline falls a bit). People stay home in cold weather, heating their homes, but in nice weather, they drive more and take family vacations. Big surprise there.

I need to keep digging and reading, but right now, I’m still leaning a bit more to the supply-demand curve being out of whack, spurred into frenetic circles of climbing prices by traders on the futures market. In other words, I’ve not bought into the whole conspiracy theory that this is completely the fault of oil futures. However, if you have a differing opinion with backing story link references, please post them. I’d like to be more educated on this subject (but given my limited time, I may not be able to respond right away, if at all). In the meantime, we can still keep true to what I’d posted earlier: conservation is one avenue that we’ve not really touched upon since the 1970’s. If anything, the linked story above does confirm the consumption figure that pegs the USA with a current consumption in the neighborhood of 21M bbls/day. That’s a lot of Jed Clampett’s, sonny!

(NOTE: EWZ is included in the ticker symbol links at the top of this blog because one-quarter of its portfolio is invested in Petroleo Brasileiro (PBR, the national oil company of Brazil.)

7 Comments – Post Your Own

#1) On May 28, 2008 at 6:18 AM, TheGarcipian (33.76) wrote:

Whoops, slight miscalculation on my part... the oil that we've stock-tanked since January is 33 million barrels (according to this story), which at our daily consumption rate of 21.6M bbls/day equates to 1.5 days of extra oil (not 8 hours; sorry, I was using the world consumption rate when I did that division). Nonetheless, it's not a stellar amount put aside...

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#2) On May 28, 2008 at 8:44 AM, saunafool (< 20) wrote:

While a 0.8% decline in consumption may not be much, it is the reversal of a 25 year trend. For a long time, American consumption has been growing at 1.4% per year, even through a good part of 2007.

The question is whether or not this is recession driven or conservation driven. My guess is that it is a little of both. Oil prices are not going to reverse over night because of it, but there is one thing I do know. The only thing Americans can do to make oil prices fall is to use less oil.

Maybe prices still go up because demand growth in the rest of the world grows faster than our consumption declines. But, we have zero leverage on the production side of the equation until we change our consumption patterns dramatically.

Our net petroleum imports are 12 million barrels per day. We can drill every state, every ocean, every lake, every sea, mine every ounce of shale, and more and we will never be able to produce what we consume. Right now the exporters have us by the short hairs and they know it.

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#3) On May 28, 2008 at 9:44 AM, FourthAxis (< 20) wrote:

I'm still in limbo also.  Here is an article from Mish: Quantifying Commodities Speculation

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#4) On May 28, 2008 at 12:33 PM, TheGarcipian (33.76) wrote:

Saunafool, I agree with you.

4thAxis, I'll give that article a read later today or tomorrow. Thanks for the pointer. 

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#5) On June 01, 2008 at 3:32 AM, JonBarleycorn (69.66) wrote:

Not too long ago I did an analysis looking at the point at which the fuel savings from a hybred (45 mpg) would justify replacement of my 1998 Avalon (26 mpg). As I recall gas prices would have to rise to $6 to $8 per gal to justify the switch. (Dealer wants $2000 over invoice, etc.)

I'd be supprised if those price levels were not reached within a year or so.

Likewise, as I recall (I'm too lazy to do the math), inflation adjusted gas prices are not yet at historical levels. Sooooo, how can we be put out by commodity brokers doing the same kind of analysis and making a buck on the price surge?

Wouldn't it make more sense to join them?


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#6) On June 02, 2008 at 10:48 PM, TheGarcipian (33.76) wrote:

Hi JB,

I remember that discussion we had. I think it was under some talks we exchanged in your (my?) selection of HYBT.OB (now HYBR.OB). You can't view my pitch on HYBR.OB unless you go to my "ENDED" section because I'd closed it way back on 11/26/2007, but in any case, yes, I figured gas would have to get to about $7-$8/gallon in order to make it feasible for me to drive an electric car. However, that calculation may have been somewhat faulty because it was based on paying an extra $10k-$12k for the similar sized electric car. Someone's since pointed out to me (about 5 months ago) that may not be the case anymore. However, I'll bet there's a rush for electric cars now, so you may very well find the additional surcharge of switching to electric to be driven by free enterprise! The laws of supply & demand have not been repealed yet...

I guess what I'm trying to say is that gasoline may very well still have to reach $7-$8 per gallon to make it worthwhile (financially speaking only) to switch to an electric car.  

No, I don't think gas prices are at historical levels either, if you adjust them for inflation. And yes, I agree with you: join the commodity brokers if and where you can. But make no mistake: it's going to be a wild ride, not for the faint at heart or those living on fixed incomes. A lot more speculation than fact in that camp, for sure. I'm still invested in PCU & ACH in real life, and I'm hoping they will continue upwards. I'm also invested in oil (XOM, MDR, HERO, etc.) and others to take advantage of the inevitable increasing of prices for this dwindling natural resource. 

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#7) On June 03, 2008 at 8:08 PM, JonBarleycorn (69.66) wrote:

Hi Gar,

Sorry, I had forgotten we had had that discussion.

I guess my real point is that $6 - $8/gal gas is gonna come sooner rather than later & $4/gal is gonna seem cheap.

I have had a bit of exposure to commodities trading as well as college courses from 2 of the best traders going, and, there are ways to mitigate risk (such as having more capital behind your trade than is required by the exchange).

But no, I would have to find another wife were I to try that again.

In real life, I have been on the sideline since the summer of 2007, and, I think this market has a long way to go (down).

Personally, I think oil equipment is the way to play the scarce resource game.

I like PCU, however, with respect to ACH, I have to go along with Jim Jubac with respect to incipient Chinese economic developments (sorry, I can’t find the link. But he was pointing out, among other things, the draconian measures China is having to take to ensure the success of the Olympics).


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