We had pointed out that usage of oil had dropped over 10% during the first oil shock. While the price hike itself led directly to conservation, and this time we have an easing price environment, global economic conditions were not as difficult as today’s.
From Bloomberg:
Crude oil fell below $59 a barrel in New York for the first time since March 2007, and gasoline tumbled, on speculation the International Energy Agency will cut its 2009 oil-demand forecast because of slowing economic growth.
The IEA, which coordinates energy policy in 28 developed countries, will reduce the estimated growth in global demand for a third month in a report tomorrow, according to four former IEA analysts. The euro-area economy will probably contract 0.7 percent next year, Morgan Stanley said in a report.,,,
Crude oil for December delivery declined $3.40, or 5.5 percent, to $59.01 a barrel at 11:15 a.m. on the New York Mercantile Exchange. Futures touched $58.32, the lowest since March 20, 2007. Prices have tumbled 60 percent since reaching a record $147.27 on July 11.
Gasoline for December delivery declined 8.28 cents, or 6.1 percent, to $1.2851 a gallon in New York. Futures dropped to $1.2766 a gallon, the lowest since the contract began trading in October 2005….
“The view of the market is very pessimistic,” said Addison Armstrong, director of market research for Tradition Energy in Stamford, Connecticut. “The only news I foresee that can move prices higher is a cold spell, which would boost heating oil demand, and that would have only limited impact.”
The IEA already has cut its 2008 forecast about 1.3 million barrels a day in seven revisions this year. Last week, it published a summary of its annual World Energy Outlook, slashing its 2030 projection by 9.4 percent to 106 million.
The Organization of Petroleum Exporting Countries cited falling demand for its Oct. 24 decision to reduce production by 1.5 million barrels a day. OPEC ministers will discuss the market situation when they meet next on Dec. 17 and may agree to another supply cut then, the group’s president, Chakib Khelil, said on Nov. 8 in Algiers.
“This is a tough time for OPEC because of the demand picture,” Mueller said. “Every time they cut production they are building up spare capacity. There’s also a risk that they may make cuts and prices still won’t rebound.”…
Gasoline stockpiles probably increased 200,000 barrels from 196.1 million barrels the week before, according to the survey. Supplies of distillate fuel, a category that includes heating oil and diesel, rose 1 million barrels from 127.8 barrels the week before, the survey showed.
The department is scheduled to release its weekly report on Nov. 13 at 11 a.m. in Washington. The report is being delayed by a day because of today’s Veterans Day holiday.
Brent crude oil for December settlement decreased $3.63, or 6.1 percent, to $55.45 a barrel on London’s ICE Futures Europe exchange. Futures touched $54.92, the lowest since Jan. 30, 2007.
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Unlike 1973, we now know that oil price shocks can happen, and we know what to do about it. Demand elasticity is thus presumably higher now.
Re: prick hike
This is LHC economics and nothing makes sense!
fyi…this is the IEA’s 7th revision to its demand estimates ytd.
arggg..nvrmnd..i missed that sentence in the article.
While the prick hike itself…
Oh Yves! There goes the G rating here! :)
Man oh man, at least this typo was funny….thanks!
What goes up, must come down…
In other news, possibly related to this blog:
Obama's Bailout Bunch Brings Us More of the Same: Jonathan Weil
http://www.bloomberg.com/apps/news?pid=20601039&sid=aNCFKvAMUQ6w&refer=home
Let us for a moment ask one small question. If the Dollara falls what would happen to the price of oil? It would go up. In the long term Oil will go up.
Oil shares put in their lows well over a month ago, and they ( XOM, RDSA, BP) show no sign YET of taking those lows out. My view is that Peak Oil is real and that this oil takedown as savage as it has been represents a cyclical bear market within a secular bull.
In short, it’s probably one of the great buys of several lifetimes. I am now preparing to don a rubber outfit for all the rotten fruit that is about to be hurled my way.
At some point within the next 4 to 6 months, one has to buy DXO. The supply side of oil is getting ravaged as much or more than the demand side. What will make the next oil spike even more acute is the credit crisis that has enveloped the world and is causing big oil projects to be mothballed left and right. The Canadian oil sands, once touted as having “more oil than Saudi Arabia” and which currently account for 2 MBPD of U.S. imports, have been the hardest hit by the credit crisis
and collapsing oil prices. Having a highly energy intensive production process, Canadian oil sands are not economically feasible when the price of a barrel sinks below $80 per barrel. As Qatar’s oil minister recently warned, oil prices below $70 a barrel will cause a new supply crisis. “Under this scenario, future demand will face a shortage and there will not be enough investment to cope with demand increases.” He is correct. We are setting ourselves up for major future supply constraints. The general public doesn’t understand this and most are not aware of the seeds being sown.
Exacerbating the situation for America in particular is that this energy crisis is building at a time when our national debt load is ballooning out of control. Unlike in the 1930’s, the U.S. is no longer a creditor nation nor energy independent. As RobertM73 alluded to, a dollar crash will cause oil to skyrocket.
Need I say more:
“Fresh sources of oil equivalent to the output of four Saudi Arabias will have to be found simply to maintain present levels of supply by 2030, one of the world’s leading energy experts has said.
Fatih Birol, chief economist of the International Energy Agency (IEA), the developed world’s energy watchdog, told The Times that the depletion of existing oilfields meant that vast new investments would be required to satisfy the demand for oil.”
Merrill Lynch put out a global economic report last week in which it dubbed Australia the riskiest economy in the world. Counter-intuitive as it seemed, Nigeria was rated the safest.
Titled “Everything you wanted to know about the world” the Merrill economics team drew on 62 indicators from the 60 countries.
Australia was ranked riskiest on a table of rankings deduced from seven indicators. These were the current account financing gap, foreign exchange reserves/short-term external debt ratio, exports to-GDP ratio, private credit-to-GDP ratio, private credit growth, loans-to deposits ratio and banks capital-to-assets ratio.
http://business.theage.com.au/business/deep-in-foreign-debt-20081112-5msv.html?page=fullpage#contentSwap2
Im not sure why some have such a hard time with this. Economic development as we know it is built on cheap oil. As oil gets more expensive, it decreases economic activity, too expensive it crashes the economy.
Once the economy crashes, oil supply will loosen and price will go down until economic activity picks up. However unlike the early 80s, this time(place your bets when) as economic activity picks back up oil will go up simultaneously, there will be no lag. We now have an oil yoke on all future economic growth.
Here’s a good report by Barclays Capital, showing how serious, bleak really, the decline in non-opec production has become.
And on Friday the IEA will release, and Im not kidding their first real look at global supply, and according to leaks its not good. Till this point, the oil industry and its analysts have only been concerned about demand, as I guess the magic of economics would provide the supply. Oil economists have recently come to understand the reality of geology.
Eduardo, your opinion that this is merely a lull in a long-run, secular bull oil commodity market is commonly held, I would say.
I do not agree with this assessment. The reason that I don’t agree is the natural gas supply situation, which is extremely bearish for prices. Oil and gas are not short-run substitutes, but they can substitute for each other in the long run (and they have). Over time, it makes no sense that BTUs (or GJs if you’re not American) can be priced differently (allowing for convenience, transportation, storage, and volatility).
2008 lower 48 natural gas production increased 8% year-over-year. We haven’t even come close to tapping out North American natural gas supply. Internationally, natural gas is even earlier in the growth curve. Liquified natural gas (LNG) growth will add another North America in the next five to ten years.
And when all else fails, there’s coal.
There is plenty of evidence that the world is running out of $20 oil. There is considerably less evidence that it’s run out of $40 or $60 oil.
Finally, as Yves has mentioned over and over again, the IEA “forecasts” are lagging indicators, both supply and demand. I use them to show where we’ve been, not where we’re going.
A question, Yves. Why do you say that the current economic environment is worse than in 1979? I’m going off my memory here, but oil was about $110/bbl in current dollars, energy intensity of GDP was triple what it is now, and we were just off a massive losing war (worse than Iraq) and in an existential fight for survival against the comuniss. Inflation was running 12% a year.
Countering that, you won a hockey game in upstate New York.
Are things going to be worse this time?
Oil crashing is NOT inflationary. Gold also plunged today, as I have predicted in this forum to widespread disbelief.
Inflation expectations, as measured by the indicia most widely used, are clearly crashing. Look at the Michigan surveys recently and TIPS.
What most Americans cannot understand, including Ben Bernanke, is that deflation is EVERY bit as pernicious and difficult to eradicate as inflation. You CANNOT simply “reflate” it away at will.
Bernanke was wrong.
But they will surely learn.
Welcome to the Great Global Depression. It is now inevitable.
We can look forward to 12%-15% unemployment in the USA in 2010, far more than the overrated Roubini is willing to publicly commit to.
Stay away from gold. Turn off your television and learn. It’s a done deal. We can’t stop history.
Two chief causes: failed mathematical models (assuming Gaussian distributions on derivatives) coupled with HYPERleveraging of that catastrophic mistake.
Turn off your TV and learn.
Matt Dubuque
To some oil was a bubble independent of the financial panic that has now developed at the same time. What would have normally been a price break back to $40-50 a barrel over two years has been compressed into several months.
Putting aside the premature talk about depressions etc my only hope is that oil stays down for the foreseeable future. Besides easing the pain at the pump it might lead to my earlier predictions coming true—when the bubble burst Chavez will be swinging from a lamp post and Imadinnerjacket will disappear. I have not given up!
I understand that the dollar/oil is a great trade…but from a fundamental standpoint, i don’t see how/why they should should be inversely linked.
Doesn’t PPP neutralize this?
And even then, why not just do a boring old fx hedge if the dollar is depreciating?
In other words, while the correlation is a reality, i’m still not convinced the dollar’s movment and oil are inversely causal.
In other words, while the correlation is a reality, i’m still not convinced the dollar’s movment and oil are inversely causal.
That’s because I think you’re smart, mxq. (1) OPEC monopolists will maximize revenue, not price. (2) If the price of oil gets too far from its short run fundamentals, the longs would just demand delivery, as happened this year in Sept (Aug?).
I think this is one of those cases where two financial contracts are correlated except when they’re not.
@ Matt Dubuque:
>> Gold also plunged today,
Gold was off today as measured in USD, you are correct here. However, it was flat as measured in Euros, flat as measured in Pound Sterling, up as measured in Roubles, up as measured in SA ZAR, up as measured in Aussie $'s, up as measured in Rupees, up as measured in Brasilian Reals, etc.
In other words, for most of the world, gold was either up today or flat. Indeed, for most of the world, gold has provided a quite stable store of value over the last 60 days, six months, one year, five year, ten year periods, 50 year, and 500 year periods. Which is what it is supposed to
The US dollar, of course, has been, in general, a terrible investment over most of these same time frames.
You can't see this because, presumably, you've got your head trapped in a US-centric worldview.
Such blinkered outlooks never bode well.
macndub wrote:
“The reason that I don’t agree is the natural gas supply situation, which is extremely bearish for prices. Oil and gas are not short-run substitutes, but they can substitute for each other in the long run (and they have). Over time, it makes no sense that BTUs (or GJs if you’re not American) can be priced differently (allowing for convenience, transportation, storage, and volatility).”
2008 lower 48 natural gas production increased 8% year-over-year. We haven’t even come close to tapping out North American natural gas supply. Internationally, natural gas is even earlier in the growth curve. Liquified natural gas (LNG) growth will add another North America in the next five to ten years. “
– I don’t know what you are reading, but it’s not what I’m reading, which says, in effect, and no offense intended, that your conclusion is without merit. It’s not that the stat you offer on year over year (’07 to ’08) production in natural gas isn’t accurate, but, going forward, it will not provide the long term relief you assert.
“And when all else fails, there’s coal.”
You may have not have heard President elect Obama say that he is going to, no pun intended, and here I paraphrase, bury the coal industry. We’re not in Cheney Bush land anymore. Coal is not an option.
Consider this part of the previous post.
http://www.321energy.com/editorials/chaize/chaize110408.html
VIV,
Thank you very much for posting that Barclay’s oil report. I really appreciate it. Where does one find these?
Matt Dubuque says: We can look forward to 12%-15% unemployment in the USA in 2010
We can also look forward to elections in 2010, and if unemployment is anywhere near 12%, you can bet Congress will cut taxes and raise spending so as to send the budget deficit surging past $2 trillion. We can also look forward to President Obama selecting a Fed chief then. If Bernanke wants to keep his job, then he will dutifully monetize much of this $2 trillion deficit. Anyone who doubts the combined powers of fiscal and monetary policy to combat deflation doesn’t understand anything about economics, and anyone who doubts the willingness of politicians to take the inflationary road out so as to avoid the pain of deflation doesn’t understand anything about politics.
BTW Japan is not an example of the failure of monetary/fiscal policy. The Japanese simply didn’t try hard enough. A debt/GDP ratio of 200% isn’t inflationary? Fine, try 300% or 500% or 1000%. Print enough money, and you’ll get inflation. The reason the Japanese didn’t try to generate inflation is that they had other ways of ameliorating the pain of deflation (such as allowing banks to keep bad loans hidden on their books for decades at a time, etc). We could similarly try to paper over the deflation, but that doesn’t seem to be likely. Just look at what the Fed and Treasury are doing right now, and extrapolate forwards. That $700 billion bailout is just the first step…
Sorry viv, I meant to thank JoeC!
SilverDollar
Matt,
This is your LAST warning. I told you to quit making stuff up here.
Gold did not plunge today. It is now $736 an ounce. It has been slowly, if anything, basing higher and higher. When it went down in the recent past, the lows would be around $700 (it went as low at $680), then $720ish, then $730ish, now $735-40ish, The high on its trading range have also been moving up, even as oil has been trading down.
I am NOT advocating gold. I think many people buy it for reasons that may not make any sense. But I am NOT going to tolerate ANYONE dispensing false information out of narrow self-promotional interests. I also delete spam comments for various market timing services when I find them.
Matt,
Understanding that no single definition is sufficient, the BLS provides a set of ‘alternative’ unemployment measures with every monthly report. While the U-3 measure, which is the official, (i.e. headline), unemployment rate came in at 6.5 percent last month, the broader U-6 measure posted 11.8 percent. If the old U-7 had not been discontinued years ago, I’ve little doubt it would be in the mid-13s.
The US Dollar is the new gold. When you look at trading in long term and the history of money, you will hopefully realize that gold and dollar share the same functionality in their ‘creation’ and use. However, since these are ‘created’ by persons and their value is controlled by both security and confidence (not what they can actually be used for beside their function as currency), dollar hold an edge over gold since the two great powers (USA and China) have selfish reasons to protect the value of the dollar. The gold is now viewed as only an insurance against Armageddon but even that I would question.
I stand to see what will be the reaction by the rest of the world (Central Banks). Will they accept the dollar or revert back to Gold (Unlikely). Then if so, the gold has absolutely no value as currency and should be value the same as other metals such as platinum.
I personally think Oil will take the place of gold (clique) as a new insurance against Armageddon. It is much more useful than gold.
Folks who constantly talk down gold do so at their own peril. I urge you to read the work of Antal Fekete
on the subject.
Sorry, forgot to include last month’s Intl Labor Organization (ILO) 2008-09 estimates which expect global unemployment to increase by 20 million while “the number of working poor living on less than a dollar a day could rise by some 40 million – and those at 2 dollars a day by more than 100 million”. (Somavia, ILO, 20 October, 2008)
Given the still expanding/deepening of crisis, not unlikely the above cited numbers will prove extremely conservative and modern crisis management techniques prove their practical ineffectiveness.
Worth considering: What is a Crisis of Overproduction