Myths Driving Speculation

May 6,  2008 -- The pace of spinning up the price of crude oil is accelerating, possibly to the last leap upward before it crashes. Afterall, $200 per barrel oil, as forecast by a major investment house today, is no way for the Republicans to win the election in November.

Someone sent me the following link. This article is very much on point. The entire system of pricing is a bit more complex, but their comments about the integration of the markets and unregulated speculation are important. http://www.globalresearch.ca:80/index.php?context=va&aid=8878

Here's a few comments regarding stories investment analysts are telling to drive prices higher:

Russia's production is decreasing - an indication of an impending shortage. Wrong. Think of it this way: a producer cannot produce oil unless there is an immediate demand. Since the world's Strategic Reserves are nearing capacity, and few refiners are willing to try to operate with tanks full of $120/bbl oil, production around the world must necessarily be reduced to match demand. And at $120/bbl, demand is diminishing, not increasing. Thus, production MUST decrease -- and it is. The result? more oil in the ground for future production -- i.e. EXCESS SUPPLY

Supply disruptions on single oil fields will cripple crude oil supply. These type of disruptions have been happening since oil was first discovered. In general, world oil production is operating below capacity right now. So a loss of production in one place will be made up from another source. Unlike the situation in the 80's, most refineries are now able to refine a wide range of crude oils, making it easier to substitute one crude oil another.

A million barrel decrease in US inventories is an indication of shortage, justifying an increase in prices. This rationale is clearly unsubstantiated hype. A million barrel decrease can be explained by one tanker that has not docked yet to unload its inventory. Theoretically, oil and product suppliers could swing the data by simply slowing down or speeding up tankers so deliveries arrive before or after the day of reporting to the EIA. Furthermore, refineries would not normally fill their tanks with high priced imports unless they were sure the price would continue to rise. On the other hand, vertically integrated oil companies do want to receive all of their domestic production at maximum price. It's a balancing act to optimize profits that has nothing to do with the overall availability of crude oil in the world market.

Low product inventories mean there is a shortage of products. If you take a look at the inventory management right now, you will see that refiners have drawn down product inventories, a possible indication that they want to be positioned to refine oil at maximum rates to draw down crude oil inventories fast if and when prices turn. They will buy oil to refill tanks as prices decline. Theoretically, as refineries buy more oil, reports of increasing inventories should push oil prices down, although recently investment advisers have been successfully in spinning stories about the "increase in demand" to the news media that sustained of speculation upward despite the data. EIA Data (scroll down to "figures")

There is an overall shortage of crude oil. Actually, the world has plenty of oil. In it's annual report, Exxon reports 40 years of proved reserves -- a situation that certainly would not light a fire under the company to go out and confirm more of the reserves they have already identified, but not fully quantified at market prices (proved).

Asia and China are driving demand beyond supply. Wrong again. While China did build a new, big refinery that needs imported oil, it will be years before they build out a network of roads and sell everyone cars to the extent that their demand will be significant as compared to US and other OECD demand. Asia still needs roads and cars too.

The EIA Short Term Demand Forecast: http://www.eia.doe.gov/emeu/steo/pub/3atab.pdf - shows World Supply is expected to outpace demand for 2009, realizing of course, that ideally, supply of a liquid product would match demand as closely as possible.   

Comments

[PAUL]

This gas crisis is so out of hand, that I've resorted to drastic measures. Recently I converted my 04 Cadillac to utilize water as fuel from an easy to install kit, I obtained online from a company called Water4fuel.info

[Vardis]

It can't just be the fault of investors that the oil price has recently been $145 and down to $67?

[George Clemen]

Vardis - In my view, it was the speculators in the oil market that drove the price of oil up to $145. Throughout the year, there has been no significant change in the availability of oil to refineries and US refineries, in particular have been operating at lax levels while maintaining the supply to retail without difficulties. The temporary shortage of gasoline at some stations in the Southeastern US appears to be related to a problem in the delivery system, not the lack of product. I expect crude oil prices will eventually settle back to at least $45 this next year, maybe lower if the world economy continues to slow down.

Unfortunately, as has happened in the past, all of those alternative energy projects that got started will probably go back on the shelf for awhile.

-George

[sanath]

I do agree that the reason for high prices are caused by technical factors, and only the Speculators are responsible for high oil prices.