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Crude Realities of Speculation

From RedOrbit: High Oil Prices, It’s all about Speculation:

“Thunder Horse started pumping from a single well on Saturday and on schedule to have the field online by yearend. Thunder Horse alone will increase overall U.S. oil and gas production by 3.6%. Add British Petroleum’s Atlantis platform that started up last year, and the boost grows to 6.4%.” — Houston Chronicle, June 16, 2008

“[U.S.] demand for oil over the first five months of the year was off 2.5%* from last year.” — American Petroleum Institute, June 18, 2008, Associated Press Online [*Translation: We are using approximately 525,000 fewer barrels of oil per day]

Given that Thunder Horse will do 250K barrels per day and Atlantis goes to 200K barrels, plus both of them together do 400 million cu. ft. of natural gas (together) this should seriously increase supply to the US. The US imported 10 million barrels a day (approx) so there’s a 5% cut. They use 20 million barrels per day and if this plus the .575 millin, plus an economic slowdown due to the credit crisis, we may be talking of a lowered import demand of a total of 2M barrels per day from the US.

“Asian refiners cut West African crude oil imports in June. Asian imports will fall 36%* to 830,000 barrels a day this month from May’s 1.3 million barrels per day.” — Bloomberg, June 17, 2008 [*Translation: Another 470,000 barrels a day of mostly light sweet crude rejected by the market.]

India consumes about 2.5 million barrels per day and China around 6. See this excellent map for how lopsided the oil world is.

Post olympics and the worldwide slowdown, how will the demand look like?

“Daily shipments of North Sea Brent crude will rise 8.6% in July. Tankers are set to load 175,097 barrels a day of Brent crude next month, up from 161,300 barrels a day scheduled for June.” — Bloomberg June 9, 2008

Just in the articles I cited, [Excess oil in the market] comes to 1,989,000 barrels of oil a day. That does not include the upcoming Saudi Khursaniyah field that will open in August with another 500,000 barrels per day in production. Some shortage, huh?

…Now is also a good time to note that on June 20, Saudi Arabia announced that its Khurais oil field would be online by this time next year, and that would contribute another 1.2 million barrels of oil per day to the world market.

Uhm. Someone said there’s a supply problem? This is not counting the 30 million barrels Iran has floating on tankers in the persian gulf, the huge ass gas finds of Reliance getting operational this year and the next. And think worldwide, there is gargantuan supply out there.

And the final bit is ultra interesting:

One last thought on speculation in the oil market. In 2006, 100% of those who purchased oil contracts lost money because of the market’s contango [meaning spot oil prices were less than the contracted price on the date of delivery]. In the fall of that year, when banks started demanding that margins be paid on those losing contracts, oil collapsed back to nearly $50 a barrel. In only 18 months, we’ve forgotten that lesson, too.

Now, is crude oil a mega problem in reality or is this another big Enron kind of market scam? There may not be a single entity behind it but if you think about it, both Dick Cheney and George Bush benefit from oil tremendously (on a personal level). My funda is that if you have to think of conspiracy theories, think of the wildest ones possible. So Bush and Dick do nothing to stop the speculation because they benefit from it and indeed they fuel it too. They fabricate news, they make statements that keep markets in turmoil. And speculators make lots of money on it. And when elections are over this year, they have sold and booked profits and suddenly everyone sees why there’s oil, oil everywhere, and can you please take it back because we don’t need no more of it.

But even without that conspiracy theory, the future for oil looks bleak. This is therefore the time to say that “peak oil” is close by, in the same sense that “peak sensex” was close by in December 2007. The graphs, at least, seem to say so, and as we’ve seen, the fundamentals too.

But there will be a rise before the fall. Wear protective clothing. Someone’s gonna get hurt real bad, both ways.

  • Mumbai Journo says:

    >So what do you think are Cairn India’s prospects in the coming months when oil prices collapse? The company is pulling out oil from Ravva at $1.75 per barrel (yes!). Its Rajasthan oil fields when it goes into operation next year will give oil at less than $ 3 per barrel.

    So should one sell Cairn now and buy on declines or hold and buy more when it falls. What if Cairn strikes more oil?

  • Deepak Shenoy says:

    >Will Oil prices drop to levels that makes Cairn unprofitable? And what is the total cost Cairn incurs per barrel? If Cairn’s net cost is the amounts you mention, there’s no reason to assume it won’t make profits – and if you make an EPS calculation how much P/E does it command at today’s prices?

    These are the questions to answer before doing anything with Cairn. And remember it’s a Nifty stock and has been only undergoing losses so far.

  • Mumbai Journo says:

    >Cairn’s own guidance assumes that oil prices would rule at $ 60/barrel.

    Right now the market is pricing the discovered oil reserves Cairn has in the Rajasthan block.

    That’s one reason I wonder if one should take some profits off the table while oil is still irrationally higher.

  • சாமான்யன் Siva( says:

    >During the last the US elections, Gurumurthy told the same – oil price is UP to benefit US Prez.

  • Mahendra Naik says:

    >Swaminathan S.Aiyer came out with a smilar analysis in last Sunday’ TOI. He predicted oil at $100 by December.So what would be your call on the sensex assuming such a scenario materialises.

  • Mumbai Journo says:

    >If oil prices decline to even $110-120 the Sensex will see a huge relief rally. Of course a lot of punters will mistake it for a bull run and lose their shirts…..

  • Anonymous says:

    There is news that US may pass legislation to limit how much companies can speculate on oil trading in commodities market.

    Do you think if US passes this kind of legislation, Oil will fall ?
    or they will just go and trade in other commodity exchanges ?