100% Manipulation?

From the Detroit Free Press:

Oil prices go sky-high, but don’t fear $5 gas

If oil prices reach $100 a barrel for the first time, does that mean gasoline will be $5 a gallon?

Analysts say no — gas won’t even hit $4, because oil supplies are good.

This is 100% manipulation by the financial players … and the price of oil at this level isn’t justified by the fundamentals,” said Fadel Gheit, a veteran oil analyst with Oppenheimer & Co. in New York.

Fadel Gheit is probably the most quoted oil analyst in the world, and yet has been consistently wrong on the direction of oil prices for 5 years. It reminds me of Daniel Yergin, who wrote The Prize: The Epic Quest for Oil, Money and Power. Despite a track record of being wrong on the direction of oil prices, he is still the “go to guy” when someone wants to know where oil prices are headed. One wonders if their clients have been asking for refunds lately.

In answer to the essay title, no, it isn’t 100% manipulation as Gheit claimed, but I think he is correct that $90 crude isn’t justified by the fundamentals. The long interest is certainly high and growing, and that alone will drive prices higher as a self-fulfilling prophecy. But there are legitimate supply concerns that OPEC hasn’t yet answered, and it is the expectation of what this could mean that is putting the pressure on prices. If OPEC doesn’t respond soon, $100 will just be a speed bump. If they do, prices will probably drift back down to the $70’s.

But if oil prices hang around at this level for long, come spring you will see gasoline prices again setting record highs. $4 is not out of the question. After all, the price of gasoline is not entirely dictated by the price of oil. Last spring we saw a disconnect as refinery capacity couldn’t keep pace. So even if oil supplies are adequate in the spring, but gasoline inventories are still this low, yes, we will probably see $4 gasoline.

3 thoughts on “100% Manipulation?”

  1. It seems few “oil experts” believe that $90 oil is justified by fundamentals. But there we have it.
    It is a bull market. Bull markets go where they go. The NASDAQ hit 5000 in 1999. The Nikkei Dow hit 40,000 in 1984(?). Both are still well below their peaks.
    Oil is not stocks. So, it may be a poor analogy.
    We also have the real problem of Thug Oil. The “states” (tinpot despotic fiefdoms, run by cruel elites) which control oil are not the sorts of places you get rational, hardworking leadership and companies, who honor contracts and free speech.
    (We may all wonder by what stroke of luck we were born in liberal Western democracies, for all of their flaws)
    An excellent website (which unfortunately I used for investment direction) is http://www.radford.edu/~wkovarik/oil/3unconventional.html.
    If you look at this website you realize how silly Peak Oil is. We have gobs of oil and heavy oil. Venezuela may dwarf KSA, with just its reserves in the Orinoco trench. There have also been articles in the WSJ about KSA’s heavy deposits which KSA have never even tallied up. but in many fields heavy deposits dwarf light deposits.
    Recently, even Iran’s reserves grew from 90-odd billion to 130 or so billion barrels. That was because they got a just a few foreign oil companies in to develop.
    But geology is not politics. The roll call of oil states is enough to make you want to join another race. Iran, Iraq, Libya, KSA, Russia, former SU states, Venezuela, Mexico.
    How sad is Mexico? They have huge oil deposits, and have not developed most of their continental shelf. They have let Canterelli decline. They have not installed available equipment to separate water from oil. Now, even though they have a huge oil depsoits and oil is at $90 a barrel, El Presidente Bush is asking the US Congress for $500 million to help fight nacro-rulers in Mexico. The elite in Mexico so far has been content to take the oil money and bask in luxury. Living standards for regular people are lower than 30 years ago.
    The emergent narco ruling class will likely jostle, then join the existing ruling class. You will have two corrupt heads instead of one.
    Do not expect much more oil from Mexico. Especially as the price rises. Higher oil prices decreases the need for corrective action. The elite lives well, so why worry?
    It is a perverse incentive for perverse people.
    The same story can be told about nearly all oil states, with variations only in circumstance and names. Corrupt, cruel, uninspired.
    I have changed my mind on oil markets. The world may be in odd time, when we have a backward bending supply curve for oil. The higher oil prices go, the less oil will get pumped as Thug States are happy with their lot in life. The need to improve and develop is actually reduced. No, this is not long-range thinking. It is the Thug Life.
    In short, it does not matter too much how much oil we have. It matters where.
    I still think this is a passing problem. Incredible new technologies are emerging, in those countries which rougly practice free press, enterprise, human rights, contract law etc. Those nations will always flourish, by the way. They adapt. The biggest word in business, life, or a nation. We adapt because we have discourse, and learn what to do, and we are roughly free.
    GM plans to introduce the Volt in 2010, a PHEV. If not them, then some other company will do something similar: A car which does not primarily depend on liquid fuel.
    About 70 percent of oil is used in transportation. This is problem solved. It is only a matter of time.
    Another huge user of energy is lighting. Again, problem already solved, New light bulbs are here or coming which will result in declines in lighting electricty demand, not increases.
    These are just two technologies. They are hundreds more, and possibly alternative fuels.
    Certainly, alternative energy from solar, geothermal, wind, nukes is more than possible, it is being done, and will accelerate.
    We will actually obtain (in Western democracies) higher and cleaner living standards.
    The Thug States, having developed nothing, will likely sink back down.
    Some call it the curse of oil.
    But Canada is not afflicted.
    It is the curse of Thuggism.
    PS RR: How about a few words on motor gasoline demand in USA?

  2. Venezuela may dwarf KSA, with just its reserves in the Orinoco trench.

    I think Venezuela, more than any other OPEC member, intends to use oil as an economic weapon against the U.S. And because of the mismanagement of the fields there, production is declining so Chavez needs more money to keep his social programs going. So he will continue to argue for higher and higher oil prices. He was calling for $100 oil when it was $60. I think he will soon be calling for $150 oil.

    COP is probably about to take Venezuela to arbitration, as XOM did. I would have my eye on their Corpus Christi Refinery as a start for compensation for the expropriated assets.

    How about a few words on motor gasoline demand in USA?

    I have been intending to do a post on this. I have read various accounts that demand is down, or demand is up, but less than normal. I will have to plot the data to see what the actual situation is.

  3. Yes, Venezuela is a perfect example of a thug state. Not because it is socialist –- so is Norway, Great Britian or Canada, to greater or lesser extents. Unfortunately for citizens of the world, thugs come in left-wing, or right-wing stripes, or theocratic stripes, or even monarchial (KSA).
    The thug states are doing well on higher oil prices caused by their thuggism.
    At some point, thug production will decline enough they will want to boost output. They will need Westerners. Unfortunately, since a deal is never a deal in Thugland (contract law and courts are of the kangaroo variety), it is not clear who will develop the Thug fields.
    There may be regime change, but solutions are a generation away.
    Our savior is Peak Demand. Already, motor gasoline use, in four-week periods, is lower than year-ago figures. That’s in the USA. Other developed nations are also decreasing consumption.
    The battle lines are Peak Demand vs. Thug Oil.
    Eventually, Peak Demand will win. Demand can fall for years and years. Sooner or later, the thugs will wnat more money.

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