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May 15, 2009 – Comments (7)

Mish has a post about how wholesale prices are declining, but what got my attention in the post is that it is the second time recently that I have read about increasing oil storage happening.  That means that oil is not being consumed and when storage capacity runs out it should put downward pressure on oil prices.  It is interesting that prices have increased when there is so much demand destruction.  I speculate that in the shorter term that some businesses figure it is better to store it when they have the capacity to store it and prices are low relative to the recent price bubble.

I had a look back at my posts about oil and demand destruction.  I was early in predicting the price going down, but not wrong in my evaluation of the fundamental reasons that we would have to see what has happened.  I think oil was around $100 when I wrote that post and it continued up to $147 before retracting.

Looking back there was a post about demand destruction and Opec's response to that, their desire to see oil back at $75/barrel.  Opec can desire that and work on reducing their supply with that goal but I tend to think they will have to also reduce output to make up for an increase in new supply from other places to succeed.  I doubt that they can control the price without first letting it go down and stay down for a while so it knocks the competition out.  I believe that Canada's tar sand oil is nicely profitable at $75/barrel.  Drilled oil is much cheaper to extract then tar sand oil.  All the new projects coming online likely carry debt loads that need to be paid back so they are not likely to reduce supply and so there is why I think Opec will have to reduce supply even more in order to succeed.

I still think oil is a good bet long term, but shorter term I tend to think the lower prices will be around for a while. 

7 Comments – Post Your Own

#1) On May 15, 2009 at 8:51 AM, garyc27 (< 20) wrote:

CBS's 60 minutes did a invetigative report on the cause for Oil's high prices last year.  On September 22, 2008 oil went up overnight by $25 a barrel.  There was no supply and demand issues that warranted that increase........other than speculation by the very companies American Taxpayers are bailing out...Wall Street.

http://www.cbsnews.com/video/watch/?id=4713382n

I have been following Ed Wallace, an automotive writer and contributing writer for Business Week.  He has been a guest on WOR 710 radio over the past month talking about the glut of crude and he questions the rational for today's prices.

http://www.businessweek.com/lifestyle/content/apr2009/bw20090421_862314.htm

 

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#2) On May 15, 2009 at 9:22 AM, dwot (97.03) wrote:

Thanks for the links morgan.

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#3) On May 15, 2009 at 10:01 AM, dudemonkey (40.73) wrote:

I'm hoping the lower prices stick around.  There are a couple of companies in the Oil & Gas services and Integrated Oil industries that I've liked for a while.  I picked them up over the past year and would be happy to pick up more should Mr. Market decide they are out of favor.

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#4) On May 15, 2009 at 10:08 AM, TDRH (99.76) wrote:

Supply is very fragile.   Located in areas that are relatively unstable, based on the dollar which I expect(ed) would decline in value, which it has not.  A shift could be sudden and explosive.   Short term you may be right, but I am letting it ride.

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#5) On May 15, 2009 at 12:17 PM, TMFDeej (99.46) wrote:

I completely agree dwot.  The recent strength in oil, its rally to near $60/barrel, has been very perplexing to me.  Storage is at record highs and consumption is still falling. 

I think that the recent move in oil has been more along the lines of a rising tide lifts all ships move along with the stock market in the hopes that the economy has bottomed.

I don't envision oil falling much below $50, if at all, but I don't see how it can rally significantly from here in the near future either unless there is some major weakness in the U.S. dollar or a rapid recovery in the economy, neither of which I expect in the near-term.

Long-term, many of the trends that caused oil to rise last year (other than the scummy manipulation by the likes of Goldman) such as the eventual peak of easy to find, cheap, light oil, and increasing demand from emerging markets will cause prices to rise.

I actually have a position in a company in your neck of the woods as my long-term oil play, PWE.

Have a great weekend.

Deej

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#6) On May 20, 2009 at 9:19 AM, JakilaTheHun (99.94) wrote:

Good blog.  I'm in agreement.  I'm lowering my position in USO and USL for my simulated portfolio today.  Long-term, I think oil continues an inevitable march towards $70 - $80/gallon, but short-term, I think a retreat is definitely likely given the excess inventory levels.

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#7) On May 21, 2009 at 3:24 PM, Vet67to82 (< 20) wrote:

Good points ... you may want to check out my blog posts:

Current Crude Pricing and Outlook

   and

 Crude Supply and Bottlenecks 

 

 

 

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