WTI Breaks $98 As Disconnect From Commodity Complex Widens

Tyler Durden's picture

Having tracked each other almost tick-for-tick for much of the last few weeks, WTI crude has disconnected dramatically this week from the rest of the commodity complex. We mentioned the disconnect yesterday and see three potential reasons: 1) Unwinds from long EU risk hedges due to margin calls, 2) the escalation in the Iran-Israel shenanigans, and/or 3) the weakness of the IAEA report. It seems that after last night's dismal macro data from Europe that this is not the sign of growth that so many would like it to be - but has all the consumption-deflationary impetus we have become accustomed to.

Chart: Bloomberg

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GeneMarchbanks's picture


If anybody would like to explain the action in WTI the last 48hrs I'd be... thankful surprised?

Mr Lennon Hendrix's picture

Peak production of oil happened years ago, and the SPR release coupled by JPM's shorts against their tanker (of the east coast) could only last so long.

GeneMarchbanks's picture

Appreciate the info but it's not applicable to this schizo action. War rumor? maybe. The technicals are out of whack here and something stinks.

Mr Lennon Hendrix's picture

Thank you for saying so, and it is just my opinion, but why would war spike oil and not gold?  We know that gold is the heart of the economy, and it would be a way for the West to leverage above the East (the East does not have the claimed gold that the Western Central Banks have).  Why would corn, and soy spike otherwise?  Drought, crop failure, and inflation.  We know inflation is pricing in more everyday.  So the main reason for oil's spike is that the fundamentals are once again driving price action.  Supply is the underlying fundamental.  Supply is decreasing.  Price is rising.

data's picture

"Thank you for saying so, and it is just my opinion, but why would war spike oil and not gold?"

A number of reasons:

Tanks and planes don't run on gold but  a fighting army does does use a massive amount of petroleum.

A war is likely to affect oil distribution and production.

Iran is the 4th largest oil producer and war would damage its fields and really hurt production

The Strait of Hormuiz  (a major oil chokepoint... 33% of the world's seaborne oil shipments)  could be shut down.

Gold production will be affected very little by war.  Iran is not a significant producer of gold.  Most of the gold production is far away from Iran:

1 China 320,000 2 United States 223,323 3 Australia 222,000 4 Russia 205,236 5 South Africa 197,628 6 Peru 182,390 7 Indonesia 127,716 8 Canada 97,367 9 Ghana 97,197
CrazyCooter's picture

I think his point was that if it really was conflict driven, there would be other correlated bets which would also generate gains. So, in absenece of those other bets, war gets marked off the possibility list.

On the contrary side, I see peak oil as a macro issue, or a slow steady upward push in price as production slowly falls behind demand. So I am skeptical that there is some behind the scenes news that isn't public yet driving this trade.

I don't have a horse in this race, but I do appreciate that perspective as I haven't considered it before and certainly will going forward.



data's picture

"I think his point was that if it really was conflict driven, there would be other correlated bets which would also generate gains. So, in absenece of those other bets, war gets marked off the possibility list."

It depends on the correlated bets. Those markets can have their own dynamics that obscure the change  or it can be a issue of timing...the change isn't visible...yet.

Which correlated bets are we reffering to?

Mr Lennon Hendrix's picture

You will see, if anyone goes to war with Iran, gold will spike with oil.

r101958's picture

ALL......read this very good article by Orlov (Nov 5, 2011) that puts it all together.


data's picture

"You will see, if anyone goes to war with Iran, gold will spike with oil."

So  you are saying that all modern wars correlate with a spike in oil and gold?

Far more than war affects those prices. These are complex markets with many forces.

What if there is gold price suppression occuring at the same time war is breaking out?

Perhaps that is occuring now and it is limiting our ability to see the future war in the gold price?

Also, think of  gold during the first Iraq War from 2 August 1990 – 28 February 1991. The price movement isn't that heavy in correlation to the war.  The year 1990 with started with gold at $399 and ended at $385.  

In contrast, think of the price drop in gold  induced by  Paul Volcker in the 1980's. That was no outbreak in peace that induced the tumble in gold.  

Mr Lennon Hendrix's picture

Peak gold production happened in 2001, so the price will rise anyway because of supply constraints.  Throw in demand, and the price is rising very quickly, especially considering the massive deflation hitting housing, etc.

But when the world goes to war with a country like Iran (Iran is better equipped than Afghanistan, Iraq) then you will see a spike in gold with oil. 

You will see.

Cdad's picture

WTI is now WAAAAAAAY out over the tips of its skis.  

CrashisOptimistic's picture

This is not religion.  Physicists and Engineers aren't talking about belief.

The underlying reason why oil is not understood is because there are two words of the English language that Economics views as synonomous.

They are "demand" and "consumption".

Economics thinks those two words are the same thing.  Petroleum geologists know that they are not.

It is, and will now be forever, a world where you can want oil and demand oil and be willing to pay for oil, and not get it.  There's not enough for 7 billion people, at any price.


ratso's picture

Peak oil is just another myth that just won't go away.

Mr Lennon Hendrix's picture

Read "The Party's Over" and get back to us.

r101958's picture

Also recommend 'The Long Emergency' by Kunstler and/or 'Crash Course' by Martenson and/or 'Twilight in the Desert' by Simmons and so forth. I see there are still quite a number of folks out there that need to do some studying about this subject. It is too easy to buy in to all the alternative energy hype being bandied about. All the while not understanding what EROEI is nor the affect it has on our debt based economy and standard of living. Also, too many scoff at the term Peak Oil only because they do not really understand it. It does NOT mean running out of oil. It means peak of oil production (in this case conventional oil).

CrazyCooter's picture

Oil 101 by Downey is a must have reference. Read it if you want to follow oil. The breadth of knowledge I have gotten from that book on how the oil industry works (mechanically) is indispensable. He explains refining, API, different types of ships used to carry cargo, you name it.



csmith's picture

It means peak of oil production (in this case conventional oil).


What does it matter if we've discovered enough gas and gas liquids to last the next 100 years? Swap the systems over to run on gas and we're good to go.

Flakmeister's picture

Peak oil means peak liquid hydrocarbon production.... conventional vs unconventional doesn't matter...

And no, we have not discovered NG and NGL to run this country for 100 years.... quite listening to propaganda and educate yourself.

You do realize that the US is still a net importer of NG and that peak US NG production was back in 1970? Do you?

Ragnar24's picture

The Peak Oil crowd always seems to ignore advances in extraction technology and the political motivations prohibiting drilling (which would increase production).  The price mechanism will always be there as well: high prices will encourage development projects in remote regions, which will then bring supply online (forcing a drop in price).

Oil is no doubt a finite resource, but geopolitics, monetary policies, and environmentalism all distort when peak production will actually occur.

Mr Lennon Hendrix's picture

On Extraction:

Oil is a finite resource, so if you increase extraction then you quicken the depletion.

The House of Saud, the Swing Producer, peaked production in 2009.

Flakmeister's picture

Agreed... clearly way over his head...

Ragnar24's picture

Are we not talking about GLOBAL peak oil? Not peak oil for one field?

I didn't realize the Peak Oilers of the 70's anticipated the rig construction TECHNOLOGY or the sky-high prices that would enable Deepwater Horizon to drill some 30 years in the future. I didn't the realize they accounted for advances in computer mapping TECHNOLOGY that found those deepwater reserves. And remind me... did the US government block shallow water wells that would have allowed all that tech to be refined at shallower depths?

And I'm sure that BP's expectations for oil PRICES back in 2000ish had nothing to do with its decision to invest in all that expensive TECHNOLOGY that would ADD to GLOBAL PRODUCTION capacity.

So when i say extraction tech I'm referring to oil sands, deep water, and other "hard to reach locales". Oil producers don't start drilling in the arctic until production has PEAKED in Saudi Arabia -- that doesn't mean there's no oil to extract in the arctic, it simply means PRICE dictates how capital-intensive the extraction elsewhere can be. So no shit Saudi fields are depleted... they've been the easiest places to extract with old technology.

But now producers have to move to more difficult locales, innovate efficient ways to extract it, and prices will rise until the drilling and distribution are justified.

But I'm sure BP went straight to the deepest part of the Gulf merely because it was prettier way out there (or maybe DC/EPA didn't want to see rigs close to shore and so extraction tech hadnt been tested ufficiently at shallow depths).

And is it possible that the Oil embargo of '73 made arctic projects of that day profitable that otherwise wouldn't have been (and therefore ADDED to GLOBAL production capacity)?

Do you not think that once Saudi's are tapped out -- causing prices to skyrocket -- that Americans may decide to tell the EPA to fuck off and we'll see Alaska get drilled with latest advances in tech? But that wouldn't add to GLOBAL production now would it?

Flakmeister's picture

So many errors, hard to say where to begin....

In fact I am not even sure what is the purpose of the above post...

Ragnar24's picture

The point was to shut you up so it worked. You can't offer one fact to refute my original argument that forecasts for the DATE of peak oil continue to be revised farther into the future.

Until you can offer a single reason, please refrain from making pointless posts.

Flakmeister's picture

You are in way over your head.... I suggest you simply STFU before you make a bigger fool of yourself.

An exact date does not matter, especially given the mounting evidence that it is in the rear view mirror....

You are aware that discoveries peaked in the '60's... and we have not had a year where we have discovered more than we have extracted since about 1980....

Ragnar24's picture

Great! So you agree: we haven't extracted more than discovered since the 80's. Now try to focus here... this is where you need to use your brain...My contention was simply WHY that's been the case.

One more time: i simply argued that DISCOVERIES don't matter as long as they aren't being DEVELOPED due to REGULATIONS/GREENPEACE, TECHNOLOGY, or COST.

If even one of those impediments is removed from the equation, would or would not annual output increase? It's that simple. But I wont hold my breath that you'll be able to offer one intelligent comment that directly addresses that fundamental point.

Flakmeister's picture

Is your reading comprehension that bad... We have pulled out more than we have found for 30 years despite dramatically increasing the expense and difficulty....

The Tupi find increased developable and proven reserves by about 2%, won't/can't change the peak....

The peak occurs when the outright printing of money cannot increase the supply... Last time I looked that is where we are.

How much do you think has been spend developing new fields in the past decade? What are the time lines?

Go and educate yourself about places like Kashagan, the eastern OCS, the geology of the Bakken and the like and then get back to me....

Ragnar24's picture

PAY ATTENTION: What do you think would be a cheaper field to develop and distribute in an unregulated, free market world: a land-based ANWR or what we know was the ultimate cost of a Deepwater Horizon rig floating atop 5,000 feet of saltwater with unproven technology (because regulations made even shallow water cost prohibitive)?

THAT is my THE point. BP overspent on the development of Horizon because REGULATIONS pushed them to ultra deep water and away from land (e.g. ANWR) or shallow water. Had regulations not forced production away from easier fields, then the total cost of global production would be far less (particularly after accounting for cleanup of accidents that result from unproven technology that can't evolve from shallow to deep)

And money Printing has nothing to do with supply, it distorts DEMAND.

Flakmeister's picture

You clearly have no idea what you are talking about....

BP went there because that was the best field they could find, period, end-of-story

Educate yourself.... or go elsewhere. Preferably the former, but if you insist on being ideologically held captive to a wrong position  I'll settle for the latter. 

 The US is the most drilled place on the planet... the oil is gone. Do you know how many rigs are currently in operation?

Ragnar24's picture

Holy shit. I've given you ample opportunity to educate me. I've encouraged you to do so. Instead you've chosen to repeat almost exactly what I contend: that Horizon was the best field BP could drill.... but after all this you still refuse to address the question of WHY it was the best?

I will say it one final time: my explanation for the WHY is that regulations and geopolitics play an outsized role in which fields get drilled first. The response then is that producers either invent new technology or wait for prices to rise until extraction is profitable with existing tech.

BP applied both responses. It undertook the risks of Deepwater Horizon because ANWR wasn't an option. And one more time: WHY was it not an option? Environmental regulations.

Flakmeister's picture

Google around, ANWR is not the pancea you are making it out to be.... You are assuming that there is a large amount of oil there...There isn't, turns out it is predominately NG. As an introduction, have you read this


Piss on Wiki if you like, but it is a gateway to the USGS studies if you are so inclined....

It was the best field given that if poking a hole is going to cost $500 million, there had better be a good chance of finding a lot of oil...

You are assuming that there are significant plays in shallower water that are off limits, there are not. The seismic studies point to the lower Tertiary as having the best plays

Here is something recent on the GOM


To put in perspective 28 Gbbl found in the GOM represents 1 year of world demand that will take 30 years to extract....

Here, this came out today


the above discusses what is seen as the basis of the Perry Energy program...follow the links 

The material is there, I cannot spoon feed you....


Edit: Here is a post from an insider at NA link above


In following the theme of a broad over view I’ll offer my personal perspective of exploration of conventional reservoirs in the Gulf Coast Basin. I’ll not focus on the numbers either. HO and others have painted that canvas quite well. Instead I’ll stick with the business side of drilling. In the end it doesn’t matter what potential reserve numbers are tossed out if the wells needed to develop that oil/NG aren’t drilled. And remember I’m just talking about conventional reserves.

As many know my privately owned company drills only conventional oil/NG targets in the onshore/offshore shelf in the Gulf Coast. We’ve drilled about $300 million of wells in the last 3 years. All of those prospects were generated by other companies. It takes many years to establish a prospect generating shop and put a viable drill program together. We didn’t want to take the time.

There is a whole subset of companies that don’t actually drill the prospects they generate. We call them “promoters”. They employ the staff: geologists, geophysicists, engineers and landmen. They buy $millions in seismic and spend $millions more leasing the prospects. Often this effort leads to dead ends: a lead doesn’t mature to a viable prospect or, even if it does, the leases can’t be acquired for a number of reasons.

Then my cohorts and I evaluate all the prospects that fit our business model. The trade when we buy such a deal: cash to cover actual expendatures such as seismic and leases, some more cash to cover their overhead and the “promote”. Typical promote is “third for a quarter”: I pay 1/3 of the cost to drill the well but only earn 25%. In essence the generator gets 25% of the well drilled for them at no cost. If it’s a dry hole they haven’t lost any money but have covered all their cost, including their salaries, and made a little cash. And if that $8 million well that they didn’t risk a penny to drill nets $80 million they get $20 million in “mail box money”.

The take away is that there is a great incentive for a promoter to do his thing if there is a market for his prospects. With current high prices there is a good bit on incentive. Yet come 31 December I’ll turn back about $40 million of my budget due to a lack of prospects to drill. Texas has more prospect generators than the rest of the world combined. Given the unique nature of ownership of minerals rights in the US we have many times the number of promoters in Texas as the rest of the world. Every promoter in Texas and La. knows my company and the big fat checkbook we have.

And we can’t find enough conventional prospects to drill. That should give some sense of what little conventional reserves may be left. We’ve actual begun our own prospect generation effort in the offshore GOM shelf. Bought $10 million in 3d seismic out there and will pull together some consultants to work it. Once the govt cut back on the permit prcess the promoters that worked offshore cut back their efforts significantly. They weren't going to invest 100’s of $millions with the uncertainty of when they might get leases/drilling permits. Even our efforts will focus solely on prospects that can be drilled from existing platforms…permitting new platforms takes even much longer. Even with that hedge we don’t expect our drilling effort will be in full swing until 2013.

Yes: there are conventional oil/NG reserves left to develop in this country. Just not nearly as many as were drilled to generate our current production. This fact is THE reason the public oils are going after every shale play they can…they have no choice. There aren’t enough conventional prospects left to support half the companies in the oil patch IMHO. The public companies have to replace their produced reserve or their stocks take a hit from Wall Street. They would much more prefer to drill for the prospects my company goes after: we make 2 to 3 times the profit many of the shale players do even with relatively low NG prices. Though their profit margin would be better most couldn’t begin to replace their reserve base. Some folks dislike the public oil companies but without their efforts we wouldn’t be seeing the gains in US production without their desperate attempts to support their market caps.

My company would be more than glad to drill the unconventional plays…Once oil and NG reach sustained prices of $150/bbl and $10/mcf. The question still remans though: can the economy sstain such costs?

r101958's picture

Good post. Technology does help however, one might ask why conventional production has not increased in current active fields with all this new tech. Also, new tech increases EROEI. We might also ponder the following; if there is so much oil available, why are we drilling 5000 ft under the floor of the GOM? Why are we talking about drilling in Antarctica? I agree that leaving energy policy in the hands of the pols in D.C. is about as intelligent as......well, leaving the economy in the hands of the pols in D.C.

EnglishMajor's picture

I bet you also really like those fracking commercials about "getting America back on track".  We will be sure to let all of the ex military psy-ops guys who now work for the natural gas industry know.


Mr Lennon Hendrix's picture

Natural gas will never replace crude. 

ffart's picture

I notice the peak oilers always come out whenever something related to our horrible political system or mismanaged economy comes out. It's almost like they're paid shills that are trotted out to take people's attention away from how utterly destructive to our standard of living government has become.

"The money supply has tripled in the past 3 years, and now there's threats of war and capital controls all over the planet. Obviously commodities are skyrocketing because production has peaked and not because of the fucking HORRIBLE state of our economy and how debased our currency has become."

Flakmeister's picture

The reason we come out is that if the only people posting here were clueless asshats like yourself we would be even worse off than we are...

Consider it a form of community service on our part....

Testudo321's picture

Maybe plans to bomb/invade Iran are in final stages...


CPL's picture

The oil sands are out of diesel...again.  With no pipeline in place that how oil is getting transported.


Basically the price hike is to pay for the pipeline.


Told you guys a week ago.  $167 per barrel is the target.

CrazyCooter's picture

I have been thinking 150+ for almost a year now. It won't happen until there is an "event", but because of production/consumption tension I don't think the price comes down after the event; its going to ratchet up and stay there.



CrazyCooter's picture

Oh, I looked but didn't find your previous post on oil ... if you have it handy I would read it ...



Oilbug's picture

increased rail capacity was opened up from the Bakken to gulf coast refineries, the gap should narrow between WTI and Brent as more Bakken oil can be sold into the brent market as opposed to the WTI market

slaughterer's picture

War, simple as that.  Premonitions of WW III.  

Oh regional Indian's picture

Probably true.

Tomorrow is definitely acharged date. 11/11/11

We shall see, eh?


Caveat Emptor

Mr Lennon Hendrix's picture

You will know war is approaching when crude and gold spike together.  Until then, it is based on supply/demand and the raging inflation that is consuming the world.

Oh regional Indian's picture

Mr LH, war is already here. Look what Gold has done since Late 2001. And oil?


Flakmeister's picture

Golds bottom was about $250.... Oil was about $6.... oil is up 20-fold, gold is up 7-fold....

Oh regional Indian's picture

I'd say that tells us we've been at war, no? A continuous war in a booming economy, oil leap-frogged on that massive consumption surge. 

Now an expanding war will take over the deflating connedsumer.


UP Forester's picture

Booming economy?

Oh, right, the Afghani-Dubai-Mexico-U.S. Heroin economy.