naked capitalism

Anonymous says:

Wasn’t it just a couple of weeks ago that GS was calling for 150?

Bob_in_MA says:

Yves here. Demand then didn’t just fall, it fell by about 1/6.

I think that’s a little high. A small drop in demand can account for a large drop in price. Even here, I think gasoline demand is down 4-5%.

patrick neid says:

Classic bubble analysis, price and time, rate of change and pattern recognition all suggested earlier in the year, when crude was trading $130-$140, that $50-$60 was in the cards. The only question then, would it reach $170 first.

Prices tend to return from whence they started in about 1/3 the time putting us at a low in about 1 1/2 years.

The same analysis was successfully used in the tech and housing bubbles. Said analysis is usually dismissed by the fundamentalists primarily because it does not correspond/stands against the news of the day and the top is always in hindsight. Not to mention it is Technical analysis–voodoo as they say!

To adherents however, what is known is the outcome and what it is going to look like as it unfolds. Sadly when bubbles burst there is absolutely nothing that can heal the splatter except for time and contraction.

Anonymous says:

What if the biggest swing producers, at about 10MM
barrels each, Russia and Saudi, one of which is awash
in an excess of soon to be junk currency, decided to
leave some oil in the ground? It’s not like they need
the extra revenue. They may have learned, in the past year, that they can get more producing less. And for all the supposed supply increases coming, there are
a lot of fields dropping precipitously, like Mexico, and
slowly, like Venezuela and the North Sea. Just a thought.

mxq says:

Anon @ 304: “What if the biggest swing producers, at about 10MM
barrels each, Russia and Saudi, one of which is awash
in an excess of soon to be junk currency, decided to
leave some oil in the ground?”

I think this is the exact type of uncertainty that should mandate a scarcity premium above and beyond the marginal cost of production. Scarcity premium was actually a discount for much of the 80’s and 90’s. So if I’ve learned anything in the last 5 years, its that finite things need to have a scarcity premium, regardless of how abundant they may seem at any one time.

FairEconomist says:

Oil has a crazy short-term inelasticity. The elasticity is something like 1/15, so a 4% drop in demand produces a 50% drop in price. Especially in combination with long-term demand destruction from the big spike, a global recession could get oil to $50 easily.

Anonymous says:

Last time I looked, oil was an oligopoly, not an enterprise subject to the “laws” of perfect competition.
Yes, there are some small producers who will pump so long as revenue exceeds cost, and a few “poor” nations who will produce in the same way. They just do not control the margin between too much and just enough.

Anonymous says:

There are a lot of smart people at UBS. George Magnus comes to mind. But if I were to bet my future,
in the middle of the biggest banking debacle in a long long time, I wouldn’t cast my lot with the management of UBS. Not after $40B and counting.

Yves Smith says:

This is from memory, which is why no link above, but in the oil shock, demand fell from something on the order of 69 million barrels a day to 57 million barrels a day. I am pretty certain the delta was 12 million barrels a day, not as clear whether the peak was 69 or 67 million.

I am certain I read this, but it must have been a non-web source, presumably an analysts’ report I can no longer locate.

Anonymous says:

Drill Baby! Drii……oh never mind.

Yves Smith says:

joe c,

Thanks a lot. I’m not as familiar with commodity market sources as I am with financial markets sources. I was off in my recollection, but not horrifically so.

SlimCarlos,

Western countries still in aggregate are the biggest consumers, although obviously to nowhere the same degree as before. The delta in demand has come from emerging countries, which is why they were a focus of discussion in the price spike. And since in turn much of their increase in demand has been export driven, that is gong to fall in a global recession too, possibly not to the same degree.

Moreover, there were cuts in subsidies in emerging economies, in Vietnam, India, China, Thailand, indonesia. That impact is still rippling through. China in particular has basically indicated it intends to move to market pricing, since it belatedly recognizes that subsidizing energy makes its manufacturers energy inefficient, which will put them at a competitive disadvantage in the long term. The fall in prices gives them leeway to move faster on that front if they choose to.

Mitesh Damania says:

Youtube “Lindsey Williams” $50 and find your answer

Juan says:

EIA indicates that world Consumption fell from 65.22 mbd in 1979 to 58.78 in 1983, not recovering the ‘79 level until 1988 at 64.97 mbd.
http://www.eia.doe.gov/emeu/aer/txt/ptb1110.html

which, from a price perspective, is somewhat besides the point given the shift in price formation regimes from OPEC to futures markets.

should it develop, crisis forced decoupling, as a breaking down of global assembly lines and world trade should not be seen as conducive to higher crude oil prices, even within a futures centered price regime.

EvilHenryPaulson says:

The Merrill analyst must not have been covering mid-east oil production for long, because without needing to check I can tell you that even if oil were $150 and rising that they could not produce new net 3mn/bpd

New supply is coming from outside of OPEC, Saudi Arabia was going to add 1, maybe 2, million new barrels by early 2009 for the first time in a decade. Russia may export a lot but they are exhausting their reserves faster than any other country in history.

A significant portion of that _marginal supply_ that was added actually came from the American midwest where small pumping stations were reactivated and their average basis was $80/barrel.

From a former leader project manager/engineer in the Alberta tar sands: 10 years ago anything above $8/barrel was gravy. Capital, operational, and tax costs accounted for.

What has changed there is the tax structure, operational costs are probably triple, and capital costs 5 times what they were 10 years ago. All of those costs are rather sticky and so cutting production will happen. For all of their publicity the synthetic crude derived from the tar sands were 2mn/bpd and supposed to rise to 4-5mn/bpd in the next 5-10 years. That is enough market size to set the market price in the US today without further declines from the Gulf of Mexico

I like the idea mentioned above of measuring the oil price delta associated with financial crises.

Oil demand could drop 10% globally and crude oil would not drop below $60/barrel due to recent investment and operational costs. Also sovereign governments that control/produce three quarters of the world’s oil have realized that it doesn’t hurt to leave the oil in the ground to get a better market price — and they know personal greed if nothing else.

Anonymous says:

If the dollar is down 10-15%, and oil is traded in dollars (please don’t excoriate me if I’m wrong), doesn’t that me that today’s oil price of about $93 dollars a gallon is the same as last months price of $102-108 per gallon? Many reasons this may have happened (inflation finally hiiting produced goods, thus core, and thus US convincing partners to aid, etc.). Will be interesting to see late Novenber.

Darren says:

Sean Maher: “Commodities always gravitate to their marginal production cost in a demand downswing”

You’re forgetting scarcity rents. Introductory Natural Resource Economics.

Richard Kline says:

So EvilHP, my back of the cranium number was $60/bbl, so I’m glad to see some actual analysis to support that ‘pattern recognition’ in the apt phrase of a commentor above. I do think that will be the bottom, but we’ve go a good chance to bounce off it while all the various trajectories—up, down, and twistwise—in the financial space re-jigger themselves.

When the book gets written on the cocaine-paced commodities bubble of 07-08, it’ll be a great read. I suspect we’ll find the same ibank and hedgie villains at the bottom of that heap as with all the rest of our woes.