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Why Oil Has Peaked
Texas tea has undergone the perfect storm over the past month, with the Middle Eastern dominoes falling one by one. It was the worst case scenario times five, and all of a sudden my once outrageous claim that crude would hit $100/barrel by the end of first quarter seemed positively conservative. On Friday, we faced a “Day of Rage” that threatened to topple the Saudi regime, a 12 million barrel a day peak exporter.
Don’t kid yourself. The real price of crude oil really topped out at $120/barrel last week. That is where both Brent and Louisiana sweet werre trading when you adjust for the term structures in the futures market. The $107 you saw trading on your screen on NYMEX is for delivery in Cushing, Oklahoma, where prices have been driven artificially low by a glut of crude coming down from Canada and North Dakota being dumped in a market where there is no storage. According to the CFTC, the net long of 268,000 oil futures contracts in the market would fill all the storage in Cushing six times over.
But Saudi Arabia is not Tunisia, Algeria, Egypt, or Libya. The latter countries had shaky regimes that were established during the postwar era that were built on sand. Saudi Arabia has been around a lot longer. It is based on a series of inter-tribal marriages between tribes that took place during the early 1920’s that remain rock solid today. Being the wealthiest country in the region, the Saudi’s had a lot more money to spread around to keep everyone loyal. This is why Al Qaida has made absolutely no inroads there for the past 10 years.
This is all a long way of explaining why Friday’s event in Saudi Arabia amounted to a big nothing. In fact, I don’t think we are going to get much more out of the entire Middle Eastern crisis. The Libyan civil war seems to have quickly stalemated. The military there is actually quite small, as Khadafi sought to minimize the threat to his own regime by a coup‘d etat. After all, that’s how the young colonel gained power himself in 1968. And no one on either side has any experience fighting, or organizing a military campaign of any kind.
There are other factors to consider. Even a token release of oil from the strategic petroleum reserve, which the administration seems to be considering, could be a real price killer. This is how the last two great price oil price spikes ended. Ben Bernanke’s QE2 ends on June 30, which has poured hundreds of billions of dollars into gold, silver, agricultural commodities, and yes, oil. The end of this program could cool the hugely inflationary pressures on all “hard” assets.
So I think that oil is peaking here for the time being. All of the $23, or 27% increase in the price of oil in the last four weeks has been about fear. Only 1 million barrels a day, or 1.2% of daily global consumption has actually been disrupted, and that can easily be made up by boosting Saudi production, which they have already generously offered to do. Anyone in the oil industry will tell you that, considering only the true supply and demand for oil, the price should be about $70/barrel.
Mind you, I am still a card carrying “peak oiler.” I think it is just a matter of time before we hit $150/barrel, and then $200. But we have covered an awful lot of ground on the upside in a very short time, so it is time for a rest. I think we are going to see $90/barrel before we see $150.
There may be a trade here for the nimble. You can look at the inverse oil ETF (DNO). You can buy out of the money puts on the oil futures. I think $100 out three months would be a nice cheap strike. My favorite would be to buy puts on the Oil ETF (USO). Here the ETF with the world’s worst tracking error will work to your advantage to the downside.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page
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Some more details from Charles Nenner. Also a weaving together of Martin Armstrong and Nenner's forecasts.
http://goldandsilverlinings.com/?p=263
***** "This is why Al Qaida has made absolutely no inroads there for the past 10 years." *****
Al Qaida, enjoys huge, Huge!.. HUGE!! support from Saudi Arabia!!! in the form of Monies Pledged to support on going operations.. and Al Qaida is not the only threat.. Saudi Arabia is now in the mist of stirring up a grass roots movement against itself and thusly againt the U.S. in the form of Quelling demonstrations in Bahrain.
This will cause Iran to support (thru new and even more monies) the destruction of Saudi interests.
The Shiites are the "MAJORITY" in Bahrain, not the minority..
The Minority is ruling with an iron fist, that always goes well.. and with Iran having all those new petro dollars to spend.
I think that a major part of this fluff peice is missing..
All is not well and even more importantly, all will not be well.
Fucking Quote me.
“The Saudi's should know for a fact that Tehran will use all the power and potentials at its disposal to halt the oppression of the people of Bahrain,” said Hossein Naqavi, a member of Iran's Majlis (parliament) Committee on National Security and Foreign Policy, quoted by Fars News Agency on Wednesday.
http://www.presstv.ir/detail/170289.html
Re Why Oil Has Peaked
Why boastful MHFT may be wrong yet again~
WTIC targeting $135
http://stockcharts.com/freecharts/gallery.html?%24WTIC
Haven't found a way to profitably invest in oil yet. Not for want of trying/looking
- futures contracts: need big money, deep pockets; contango problem; not for the small investor who will always get screwed in the futures markets
-oil ETFs: none of them track crude oil well; contango problem
-ETFs of drilling/equipment companies: may track oil well for a bit, then they don't
-individual large cap producer stocks: bad if they have significant properties in MENA
- small cap oil explorers: low success probability
- uranium was a lot easier until last week
- geothermal stocks have been blasted- don't know why
I've given up on energy and am sticking to precious metals.
Jack Sheet; agreed re PMs but have you had a look at the Canadian producers like SU? They have the unquestioned advantage of being a lot closer and a lot stable-er than our ME friends.
I just trade metal ETFs. Mines and oil platforms can be nationalized and miners and oil producers subjected to clawbacks by politicians. Just my $.02.
Many thanks for the suggestion (Suncor). It had a good run up to 47.3 c$ but now dipped to 42.5 so that seems like an opportunity. Oil sands make sense given diminishing yields of light sweet crude worldwide, and Canada has both the properties & the expertise.
Have you heard of XOM>54.91?
The Rockefeller Brothers have - at one time their largest holding
Still targeting 98~
http://stockcharts.com/freecharts/gallery.html?s=xom
Buy a share for your kid without commissions, fees or spreads:
http://bit.ly/eSwvct
Many thanks for the information.
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Welcome JS
Agreed. After looking into the energy investment realm, my conclusion was essentially the same as yours --- short of personally buying a tanker or twelve full of oil and holding them, there seems no reasonable way to directly and straigtforwardly invest in the inevitable future rise in the price of crude. The oil and natural gas ETFs, in particular, are a complete joke; they appear to track cotton or copper as closely as, or perhaps better than, they track their supposed underlying commodities.
PBT, HGT, SBR
great article especially considering oil is getting cheaper an easier to find.
"oil is getting cheaper an easier to find"
Care to elaborate? "Cheaper" is open for debate (depends on whether one has money or not), but, "easier to find," really? It's back to bubbling up in the fields of Pennsylvania? Apparently GOM operations are just for fun...
hey great call- wanker . so with the whole nuclear industry under a huge cloud (no pun intended) -where are we going to get our energy from ?
short term no question - oil.
watch oil products spike .crude prices to double.
the world has changed since last week for the worst -Tokyo will be like those Aztec temples -abandoned
I saw the video of the security troops executing that unarmed protester in Bahrain over on Keiser's website. The people with the wealth and power are ruthless and have little respect for human life outside of their own clan or class. We'd like to think we've come a long way as a species, but in reality we're just as barbaric as we ever were, for exactly the same reasons.
madhedgefundtrader talks his book and inadvertently kicks the "peak oil" hornet's nest. I guess Japan's crisis is sending the price of oil in the wrong direction.
With Japan in shambles and Germany drowning with the Euro and a lack of destinations for its exports, aren't the USA Primed for resurgence?
Can't we "TRY TO TAKE OVER THE WORLD Pinkie?"
What should we be doing to leverage the state of things?
Will we?
Can We?
Where is the market? US is already under water; Germany, as you note, is drowning in the Euro and Japan is in Shambles. That leaves who? China? No. India? India is starting to cool off. UK? Not bloodly likely...
Have we hit peak automobile in the US? peak shoe production? US production of many things has decreased...not do to the physical limitations of raw materials, but due to more favorablke conditions for production in other parts of the world...cheaper labor, less regulation, less land restrictions etc.
World oil production is greater now than ever. Worldwide reserves are greater now than ever before.
peak oil = promotion to justify ridiculous foreign policy, carbon tax schemes and general centralization of power.
Well, I know we've hit peak idiocy now.
+1
But we keep discovering and refining so much more just when we thought......
peak idiocy and peak shrill ....pass the ear muffs please
And you strap yourself firmly in that very camp!
Again, how can you claim to have superiority when you can only address things in two dimensions?
How about a factual debate? I'll use ONLY simple MATH (unless you think that MATH is some sort of conspiracy).
I don't know what gobbledy gook numbers you base your affirmations on. Conventional liquid oil : 73 MBPD since many years. Other forms of oil based derivatives : 10 MBPD Plateau. This is a recognized ongoing plateau. That will deplete by 2025-2030. Conventional Oil consumption is resource limited now. All new sources of fossil fuels are either non conventional HC (tar sands, frack schist gas, etc...). As for NG reserves they are strong in ME and Russia. But they cannot be traded like liquid HC. Pipelines link Russia to EU and China. Iran/Kazakh/Turkmen now building pipelines to India. Their production cannot meet expected demand in BRIC nations, let alone Other budding EM countries. Wake up time! Even with Japan down we stay resource strapped. Coal is expensive to gassify/liquify. So is Tar sands or Orenoque oil. It's up and up, the HC fossil fuel price. And its NOT planet friendly...As for Frack schist gas...make it clean and planet friendly. Then we'll talk turkey on it.
City of Heroes is superior to World of Warcraft, so that statement cannot be true.
City of heros cannot carry WoW's jockstrap. There is a reason that WoW dominates the MMORPG industry.
PLEASE DO NOT FEED THE TROLL
Oops, never mind
Believing Saudi is akin to the UAE or Kuwait in being able to buy loyalty is false. The Saudis are in a very precarious and complicated position. If you're not a part of the 40 thousand strong royal family, you're useless and expendable. With a 26 million person population, Saudi could fall overnight. Don't underestimate the sheer number of people and demonstrated hatred of the Saudi government by its people.
Exactly! The divide between the "haves" and the "have nots" is increasing. The CIA Factbook (https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html) projects the Saudi population to grow at 1.536% in 2011. At this rate it'll take 45 years for them to double their population.
It's only a matter of time, not "IF."
Oil was never that hot to begin with. It has been lagging everything which tells me, net net, its been losing for the last few months. This is an old chart but still.....
* Oil is at $89 a barrel, up 21% in the last year.
* Gold is trading at $1,413, up 23% in the last year.
* Silver is trading at $30, up 66% in the last year.
* Copper is trading at 4 per pound, up 26% in the last year.
* Corn is trading at 573 a bushel, up 49% in the last year.
* Soybeans are trading at 1,300 a bushel, up 23% in the last year.
* Wheat is trading at 779 a bushel, up 41% in the last year.
* Pork is trading at 104 a pound, up 23% in the last year.
* Beef is trading at 106 a pound, up 28% in the last year.
* Cotton is trading at 130 per pound, up 78% in the last year.
* Sugar is trading at 29 per pound, up 32% in the last year.
* Coffee is trading at 205 per pound, up 40% in the last year.
Didn't you learn your lesson?
+25% in stocks/government bonds/real estate = good and normal, poised to continue
+25% in gold/silver/oil = huge bubble!!!
This is how the sheeple and madhedgefundtrader think.
I don't think so. He uses the traditional spelling.
I'm moving my money to nuclear
I agree we're headed lower over time, although we may see some spikes yet from here.
One thing not mentioned, and that is particularly relevant now, is that before the devastating earthquake, tsunami and nuclear crisis in Fukushima, Japan was the 3rd largest consumer nation of oil on the planet, behind only the U.S. and China.
Japan consumed 4.4 million bpd.
I do not know how one would be able to project the rate of change expected in Japan due to what is a total and complete lack of clear information (for obvious reasons), but who could argue that this figure won't be or can't be cut by at least 1/3 or maybe even 1/2?
Consumption by both consumers and industry will be scaled back in massive fashion just based on infrastructure damage alone.
I always expected volatility to be the key theme for 2011 and 2012, and I still believe that Bernanke and the world's central bankers have everything rigged together with bubble gum and scotch tape, and that when it breaks, it's going to be a spectacular break.
You didn't think it through.
It's just a small section of the country in the north that lost roads. Driving will persist elsewhere.
Then what do you think powers the big Caterpillars that will show up in about 3 months to start spending that $300B they are creating.
And thennnnnnn, do you really think they will rebuild those reactors? They hate coal. So guess what will power the new electric generators that replace the reactors.
Don't think that's right. It will take an enormous amount of oil to rebuild, and to replace the oil lost in the N. Japan coastline floods, and more oil to run hydrocarbon-fired steam/electric generators throughout the island. Filled ships are standing by.
And what of trade becoming impacted because of refusal to travel a contaminated shipping lane in air or on water? Perhaps Japan can pay with gold for expedited delivery.
BTDYet?
Oil peaked in 1979. Since then, this has been an ongoing sham of pretense that Saudi tap opening could swamp the world with cheap oil. We can thank good old Ronald Reagan for that as he initiated 'de-regulation' and the FIRE economy, (smoke-stack USA is dead, long live financialized new USA, fed on zero interest FED and WS). And his noble sons, all true purple clad Caesars, busy building the NWO, aided and abetted it by revoking G-S! Now the chickens are coming home to roost as the new tigers (BRIC), are hungry to play catch-up ball with USA/EU. 4 times US consumption of fossil fuels, as future global demand predicts, is the roadmap off the cliff into the void of post-industrial jungle anarchy. We lost THIRTY years of R&D from 1979-2011, for finding cost efficient alternatives, to the Middle east oil patch mirage, now fast becoming a mad, cannibalized, alligator swamp. Now the whole world looks like the Fukushima nuclear plant where we desperately try and bridge the energy gap, the fatal nuclear trap, with puny alternative energy options, like dumping water from a helicopter on burning, decaying fissile poison...or aiming a water canon on the barn door of a meta-Tchernobyl barn house.... We never learn...just like proud, greedy Agamemnon. So we will find out what Homer intends to do with our disposable future...trashed into a bin of garbage the size of the globe and its green-house gassed stratosphere. Brave new world without a clean future.
Unless you are a Mad hatter from Alice in Wonderland who can only see the end of your nose and prefer MSM stock prose to ZH bare back poetry. Then you jaw-breakingly yawn short and bowel-shakingly fart long. But I know nothing about a putt that isn't aimed at the hole, as staying short is never in as it's never up.
Dude...chill...
Natural gas will get us through this...trust me. The world has tons of the shit...we're just waiting for oil to be too much of a pain in the ass to overcome it's being the better...more economical...of the two. We'll be able to live off of NG for another 100 years. By then, hopefully, we'll have discovered a new energy technology...dilithium crystals or some shit...
Don't panic...
Besides, the global depression that's coming will KILL the demand for oil. We'll lose 1/4 the population...demand will go down. Dramatic population decrease...it's the ONLY way out. You're here...you'll probably survive. It's the poor welfare idiots who we need to flush...and they will. It'll get a little dramatic, some violence, but "we" will win in the end. And we'll start over...begin the next bubble...
100 years? Not even close. Don't Count on Natural Gas to supply our energy
http://www.theoildrum.com/node/7460
we've enough oil, coal and natural gas (of each) to last 1,000 years plus
...swallow the industries snake oil about 'running out' like good little zombies
"we've enough oil, coal and natural gas (of each) to last 1,000 years plus"
At what rate(s) of consumption? If it's anything other than zero then you'll need to work those numbers: look up "law of 72" (for larger growth rates it's closer to 70).
People really need to get this point, otherwise all arguments are merely two-dimensional and faulty.
Unfortunately, natural gas does not have the energy density to do everything, but it could definitely get us around.
Regarding the "new energy technology", two questions, 1) who is funding it? and 2) no matter what, the laws of thermodynamics will remain intact (you will never get something for nothing, in fact you won't break even when it comes to energy).
Either way, humanity is about to get a lot more efficient and a lot thinner.
I agree, eventually (after enough deaths) we start over.
You can synthesize diesel or w/e out of nat gas at around $1.50 a gallon with todays prices of nat gas. Takes a pretty pricy plant though, and people are afraid nat gas will go up or oil down. I wish they'd get on it, or god forbid the government do something smart for once...
time to harness Dark Matter & Energy
http://science.nasa.gov/astrophysics/focus-areas/what-is-dark-energy/