Chart of the Week: Oil Futures and the Markets

As the charts below
show, has oil not only traded higher but futures contract looking several years
ahead are also appreciably higher. In the recent past, nearby future contract
were higher but distant futures contract contemplated lower oil prices. That
has begun to change over the past quarter.

Oil Futures and the Markets



High oil prices are no
longer being looked at as a “temporary event of uncertain duration.” Between
China‘s growing use of petroleum, their global
attempts to assure a study supply, the
Iran situation, high Oil may be a
persistent part of the market’s future (Notice no one is even talking about
post hurricane recovery anymore).


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What's been said:

Discussions found on the web:
  1. pjfny commented on Jan 23

    How long does “temporarily” high oil price have to last to make the CPI ex oil and food become CPI ex food?

  2. joe commented on Jan 23

    Anyone notice reports on Friday that Kuwait, who holds 10% of world’s oil reserves, may actually be sitting on ony half of what they had previously stated…Hmm, there goes 5% of the world’s oil…

  3. fatbear commented on Jan 23

    Speaking of post-hurricane recovery, the MMS has wound down the reporting sched to only bi-weekly (next set due on this Wed) – in the meantime, here’s the quote from 1/11/06 (in short, it isn’t getting better):

    Today’s shut-in oil production is 396,786 BOPD. This shut-in oil production is equivalent to 26.45 % of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD.

    Today’s shut-in gas production is 1.805 BCFPD. This shut-in gas production is equivalent to 18.05% of the daily gas production in the GOM, which is currently approximately 10 BCFPD.

    The cumulative shut-in oil production for the period 8/26/05-1/11/06 is 114,042,425 bbls, which is equivalent to 20.83% of the yearly production of oil in the GOM (approximately 547.5 million barrels).

    The cumulative shut-in gas production 8/26/05-1/11/06 is 585.308 BCF, which is equivalent to 16.036 % of the yearly production of gas in the GOM (approximately 3.65 TCF).

    At this rate, the GOM will be back to pre-hurricane production just in time for next hurricane season.

  4. B commented on Jan 23

    I saw that article on Kuwait. Apparently a confidential document someone SUPPOSEDLY got ahold of. I am highly suspicious of that story in a country where leaking such a thing would likely result in your arm getting cut off. Or at least, that is what a buddy of mine who used to work in Rhyad, SA said. ie, Is it street myth?

    It’s a fine line but I hope oil prices find a high price that doesn’t crater the economy. Once and for all, we need to innovate our way out of this OPEC mess. It’s almost criminal that the American policitians continue to keep our economic vibrancy in the hands of such unstable, undemocratic governments for forty years. This time, it really needs to end differently. If our leadership won’t do anything about it, maybe our entrepreneurs will. Btw, want to see something cool.

    So, GM, Ford, Chrysler, Honda, Toyota, Nissan, Mercedes, Volkswagon, BMW and Renault have cumulatively spent estimates well beyond $600 billion in R&D over the last thirty years. I’ve seen estimates over $1 trillion. Some little rinky dink entrepreneur comes up with a $20K, 330MPG car. The auto industry isn’t exactly innovative. Btw, the lunar program in the 60s cost $100 billion and we created whole new technologies and industries. Yes, time value of money but still………pathetic.

    Barry, I really had to chuckle reading that link to Yardeni & Bernstein. Yardeni said that he has been a bull most of his career and he attributes it to a happy childhood. I’d like to see the statistical analysis taht shows the correlation between market performance and his happiness. That has to be one of the most hilarious statements on investing I have ever read. He continued to recommend equity exposure around 70-80% throughout the bubble. I feel like I am reading about NBA coaches. Regardless of their record, the inner crowd is recycled time and again into new coaching opportunities.

  5. anna commented on Jan 23

    One scary thing is the degree that guerillas are now targeting oil production. Not just in Iraq, but in central Asia and Nigeria. It is estimated that currently 5 billion barrels are threatened. This is combined with the threat of cutbacks by Iran and Venezuela if we rattle our sabers too loud.

  6. George commented on Jan 24

    One scary thing is the degree that guerillas are now targeting oil production

    You got that right. They really have us by the balls until we get our appetite for petroleum under control. The guys that say it’s unpatriotic to drive an SUV have a point. And ‘B’ above is right- the best scenario for the US is oil prices that stay high enough to spur innovation, but not high enough to tank the economy. (good luck on that if we invade Iran…) GM & F have cheap gas to blame for their current woes. Well, that and a persistent lack of vision, aided and abetted by a lack of leadership in Washington.

  7. B commented on Jan 24

    I’d like to forward a theory based on some comments on this board. It’s about oil and commodities. It’s nothing new and it’s surely not my original thinking. But, I think there is some merit to it.

    The commodity futures market was created as a method for business to be transacted in a free market forum. The traditional players in these markets are commercials. These are the actual producers and users of a particular commodity. For sugar, it might the Hersheys and it might be large sugar cooperatives. For copper it may be Freeport McMoran and it might be China. For oil, it might be Exxon and Southwest Airlines. All common sense.

    As prices rise and fall, producers and consumers of particular products buy and sell to lock in pricing, hedge against unwanted price moves or hedge to protect current prices. Airlines to hedge fuel bets, although idiotically most don’t, and for Hersheys it might be to take advantage of lower sugar prices or to lock in low prices before a hurricane damages a large amount of the Americas sugar crops. A significant amount of this trading actually results in the buyer or seller actually transacting business. ie, They don’t push around paper or trades, they actually take delivery of product at the end of a contract, as an example.

    Now, we have a tremendous amount of liquidity globally that is sloshing around for returns. That liquidity drove the Nikkei up 40-50% in a matter of months. That money is looking wherever it can for a return. The pressure on this money is intense because they charge, let’s say, 20% of the profits and a 2% fee for managing that money. So, is that money going to sit in a stagnant or declining US equities market over the last five years? Hmmm….Monthly price action is the tightest in 50 years for American equities. ie, Prices aren’t moving appreciably in either direction.

    So, where does that money go? With negative real interest rates, it is logical that economies are going to grow quite rapidly in developing countries. Corporations are throwing all of the money that used to be spent on US production in developing markets. The natural implication is a higher demand for copper, oil, iron ore, platinum, etc. Industrial commodities.

    So, if you are looking for a return, where are you going to invest that also affords you the world’s best transparency and liquidity? In the American commodity futures markets? So, what you see if one would analyze these markets is there are a tremendous amount of dollars in these markets from people other than the traditional buyers and sellers that use this as a place to transact business. ie, Traders. Hedge funds and big trading firms. Money that doesn’t actually buy or sell oil but just pushes the price up and down. So, what has happened is every move is magnified because so much money is chasing news, trends, etc. As many have stated, China was growing faster when oil was $10 a barrel. Is it really global demand driving oil? Lee Raymond, the Chairman of Exxon say there is no shortage of oil and never has been. T Boone Pickens says oil should be at $40 because we are awash in it. Oil availability is at multi year highs within the US market. But you say China is going to consume all of the world’s oil and we are going to run out. Maybe. Maybe another reason to push the price around a little more. Remember, for a matter of a handful of thousands of dollars, one contract controls 8,000 barrels of oil. That’s 320,000+ gallons of oil. The profit potential for the investment is staggering.

    One could argue we now have crisis in the middle east but when haven’t we had crisis in the middle east? Did we just wake up and realize we had a problem? We didn’t have the same risks when oil was at $10 a barrel five years ago?

    The open interest and amount of dollars in the commodity markets has exploded driven by liquidity looking for a return. ie, Much of this pricing is driven by traders. Is copper really in so much demand that it has gone up by 3X? Platinum by, what, 5X? Eventually, I believe they will be crushed and demand will collapse. The weekly charts look alot like very bearish megaphone patterns. Now, I wouldn’t base my retirement on that prediction but are commodities going to stay high forever? Is there precedence for it? Never. What if, just what if, we aren’t running out of oil? There may be a risk premium for oil but many smart people would argue it isn’t $70 a barrel. $70 a barrel is created by…… market………..manipulation? Just a thought to consider. A thought that many extremely smart people believe to be a fact.

  8. Eric A. commented on Jan 24

    This has been implicit above—I’ll just say it out loud. Right after a few bad hurricanes back in summer of 2004, climatologists starting explaining in public that the global weather system has entered a cyclical phase which includes increased hurricane activity in the Gulf of Mexico. The summer of 2005 lent support to this hypothesis. The phase can supposedly last a decade or more.

    Combined with super-warm ocean surface temperatures in the Gulf (“like taking a bath” and “hurricane fuel” are two memorable phrases uttered by scientists), we can also expect those hurricanes to be of higher intensity. Again 2005 exemplifies this.

    Are energy buyers tired of seeing price spikes every time a hurricane rolls through and scatters our little toy boats and rubber duckies?

    Speaking of global weather, here’s another story worth repeating: some scientists are predicting a recurrence of the Little Ice Age (13th-17th centuries, northern Europe, Greenland and northeastern North America) due to Arctic melting flushing the northern Atlantic with fresh water, thereby causing the northern end of the gulf stream to contract. (This was the grain of truth in the premise of the recent movie “The Day After Tomorrow”.) It seems clear that this would increase the price of winter heating oil, for example (though I wouldn’t worry about stepping out for the mail and freezing solid in one’s tracks).

    Both of these examples illustrate the aptness of Barry’s title “global weather volatility” over “global warming”.

  9. Anil Sachdev commented on Oct 10

    can anyone tell me how can one value the price of a contract of the fuel oil or bunker oil futures as they are being launched in different exchanges especially the delivery and cost of carry expenses

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