The Oily Rollercoaster

[Sigurd]

The speculative price of oil is a good indicator of global manufacturing growth. While I would agree it got carried away at $140 a barrel, having it at about $115 indicated future worldwide manufacturing increases in line with where economic indicators were pointing oh so long 6 months ago. It's current tank price is just one more indication of how much blood is in the water and how much fear-selling is going on. It should be below $100, but it's current level is a bit extreme.

It is quite difficult to say what the norm price should be on oil.
In 2003 the price were around $25 a barrel and it dipped to $70 which were a spike. I remember that in 2005 the normal price would be between $35 and $45 a barrel.

That the average price in 2008 were $110 (September) is an extreme and we shall see what it lands on when the year is complete.

The oil nations ability to deliver is the main determinant for the oil price. Take that factor and combine it with the demand for oil and you might get a roller coaster when the following happens:

- China asks for more oil than they have previously.
- A refinery in Texas burns.
- A rig in the North Sea spills 25 000 tons of oil into the Sea.
- The American consumers think that petrol is too expensive and cut down on their driving.
- A pipeline in Nigeria gets blown.
- A war in an area close to an oil pipe.
- OPEC decides to either increase or decrease their production.

It is not about the combined oil resources in the world. We have a basic knowledge of how much oil we have, and this knowledge is semi classified. This is not the determinant today. It might be in 20 years time. Today it is all about the ability to get the oil to the market and the demand for it.

[Oleander Ardens]

Well I speculated in oil around 120, because I thought we would see a sharp comback before the recession kicks in. That after I was bearish about oil early in 2008 because I forcasted a recession back then. One of my few mistakes lately, fortunatly.

OPEC will now try to stop the fall of oil, we will see if they are capable off. On the one side the fall of oil is a godsend/marketsend in this recession. But it will seriously hamper many investements, because companies will think that they won't be profitable in the long term. Especially if the cost of credit is so high, if you get one. Critical here is the investment in oil refineries. Sigurd already made the point about delivering the refined product to the market.

Personal outlook:

As demand has slown down in the USA and to a lesser extent in Europe, and the increase of it in China and India we can assume that in a matter of year roughly 5-7% of the world's forecasted demand has been cut. This reduction accounted for a roughly 50% drop in oil prices. With an ever increasing number of individuals who consume a ever greater amount of oil, and the peculiar situation of the dollar (huge deficit and so on) oil prices will potentially increase greatly in the future. Throw in the investment crunch in the industry and the supply side is not so rosy long term. I'm starting to feel bullish about oil, even if think it can still go down 10-15$.

BTW: Just found a good article about the oily issue

OA