Oil Prices, OPEC and the Financial Markets

Ipcw_led_tail_lights_02_06_escalade "It's a warm spring day in Vienna, and OPEC delegates meeting in the former imperial capital seem more relaxed than they have been in months. There is less behind-the-scenes skullduggery than usual. Instead, it's an opportunity to hold leisurely dinners with colleagues, or even take time out to watch Barcelona beat Manchester United in the European Champions' League soccer match on TV. And why not? The oil market, deathly ill just three months ago, has recovered faster than just about anyone—including OPEC—expected, with prices now above $63.50 per barrel. "They are jubilant," says Kamel Al-Harami, a Kuwaiti oil analyst.

It came as no surprise that with prices moving up OPEC saw no reason to change production levels at its May 28 parley. "Stay the course," the Saudi Oil Minister Ali Naimi shouted cheerfully as he left OPEC's glassy blue and white building to take in the sunshine. OPEC's medicine for weak markets announced late last year—a series of cuts amounting to 4.2 million barrels per day—seems to be working, even though demand remains limp and inventories are near record highs. "We worry less when prices are improving," says the Algerian Energy Minister Chekib Khelil. He added that he thought rising prices were sustainable if the European economies follow what OPEC sees as signs of improvement in the U.S."  Business Week


Time to start up the oil wars again on SST.

If Business Week is to be believed, OPEC restraints on production (their right), market action and investor belief in future higher prices are raising price per barrel in spite of low demand and massive inventories. 

OK.  Now let's hear from the "Peak Oil" people as to whether or not these rising prices reflect the undeniable long term shortages of hydrocarbons.

My Escalade is still purring along nicely on Regular gas.  pl

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24 Responses to Oil Prices, OPEC and the Financial Markets

  1. Cieran says:

    My Escalade is still purring along nicely on Regular gas.
    And my Mountain Goat Route 66 is still purring along nicely on Regular glycogen!
    So is it time for a discussion of peak carbohydrates?

  2. JohnH says:

    Peak oil or not, production will not keep pace with demand during the economic recovery. The cause is simple: Most oil reserves are controlled by foreign governments. If you’re a government, you’re by definition not a profit maximizer. You only need enough oil revenue to fund your budget. And with oil prices rising again, oil producers can look forward to increased prices, not increased production, funding their budget increases.
    In addition, increasing production is risky–it might cause prices to drop as it did in the 1990s, putting governments of oil producers under severe pressure.
    Of course, the solution to all these supply problems was supposed to have been dramatically increased oil production from Iraq and maybe Iran, too. Lets hope the neocons finally learned that you can put a gun to an oil producer’s head, but you can’t make him produce…
    Policy makers are clueless on how to address oil producers’ lack of incentive to produce more. Over time, increased prices will take care of the problem. Increasing prices will also dash any hopes for a strong economic recovery.

  3. Charles I says:

    Our economies are on way shakier ground than we like to admit, so our consumption will be greatly attenuated (consumables that explode excepted).
    And yet, lo these last 25 fat years, we’ve never reached sufficient North American refining capacity at any price, as our bucolically named “driving season” resets the price soon after we do the clocks each spring. A perennial profit, like the flooding Nile, but they never spit out quite enough gas. . .
    Notwithstanding the astounding goings on in various and sundry “markets” and their devilishly complex transformation of all our lolly into their trillions, there is a actual supply problem of debatable parameters and urgency WHATEVER. All those Chinese and Indian cars, computers HDTVs and air conditioners will not run on rice, coal or nukes alone.
    Gold is up TWENTY dollars today hit $979, $913 not ten days ago. Can’t run your car on it, but a bar never hits empty.

  4. Leila Abu-Saba says:

    I’ve decided nobody really knows what’s going to happen, so I’m not going to worry about any of it.
    However I am growing herbs and tomatoes in the garden, and am plotting to expand capacity for next year to include calorie foods. We could keep chickens, too. And everybody should store food for a crisis: at least FEMA’s recommended 2 week minimum. More, if you can.
    Whatever does happen, learning old skills of frugality and self-help would benefit all, peak oil or no.

  5. zanzibar says:

    IMO, the recent rise in oil prices has very little to do with supply and demand but everything to do with concerns about Bernanke’s dollar debasement. All this “quantitative easing” and growth in the Fed balance sheet has to go somewhere. Usually it chases the inflating asset. With all major economies reflating it seems that this go around “money” is flowing to the next market leaders – China, Russia, Brazil, India while leaking out of the “safe haven” US dollar Treasury market.
    When we discussed the financial crisis last September I was convinced that our government would choose to reflate once again. I also was convinced that with the bailout of Wall Street bank managements and bond holders we would slide down a slippery slope of bailing out the politically well connected. The Fed has now committed or guaranteed over $12 trillion and embarked on a program of monetization. Obama has projected many trillions in deficits over the next several years with many independent estimates of $2 trillion deficit in this fiscal year. This debt cannot be funded at low rates and the Fed cannot buy it to keep a lid on rates without whacking the dollar. Essentially we are in the early stages of an unfolding funding crisis. As I have opined before the Paulson/Geithner plan which is now the Obama plan to risk the credit worthiness of the US in order to protect politically powerful private interests will have unintended consequences that will exacerbate the negative impact on working Americans.
    I will not be surprised if in the future we have capital controls to prevent capital flight, expropriation of private property, forcible purchase of Treasury bills by pension funds and 401Ks and other extreme measures worthy of an out of control banana republic. This is not tinfoil hat territory when you consider that secured bond holders in Chrysler and GM have had their senior claims subordinated at the behest of the government. The rule of law is out the window.

  6. Stormcrow says:

    OK. Now let’s hear from the “Peak Oil” people as to whether or not these rising prices reflect the undeniable long term shortages of hydrocarbons.

    You’ve excluded the middle.
    It’s more than possible to think that “Peak Oil” will have a long term impact, and still consider that production cuts and plain old-fashioned bubble mentality in the markets is what’s pushed gas prices to more than 120% of what they were in December, 2008.
    I doubt you’d still be driving that Escalade a decade or two hence, even if you were 20 years younger.
    But I also seriously doubt that “Peak Oil” is responsible for what we’ve seen over the last 6 months.

  7. Eric Dönges says:

    My Escalade is still purring along nicely on Regular gas.
    Good for you. The fact remains that oil reserves are finite and demand will rise until it exceeds production – it is just not certain when this event will occur. Prudence would demand that we stop wasting oil and look for alternative energy sources while we still have abundant reserves. Unfortunately, too many people think because everything is alright now it will be alright in 20 years time, so we don’t have to do anything now.

  8. William R. Cumming says:

    Energy is almost completely overlooked as a factor in the economic collapse IMO! This is a gross oversimplication but I do think when regular gas hit $4.00 a gallon a year ago the Amercian consumer woke up finally and said to themselves this is here to stay and I better adjust. Forced to drive by the car culture and econmic arrangements demand was not all that inelastic as the econmists might say. Not so easy to trade of gas purchases when your daily commute is over an hour. Anyway, unable to sell house, likelihood of job loss, and other factors scared the you know what out of the average Joe and Jill. So now with continued Job Losses, continued foreclosures, and continued economic restructuring with the federal government supporting off-shoring by its bailout policies the US is NOT going to be a great demand driver. Who will be? Will the oil producers themselves as PL points out often subsidize their economies with oil price controls. This also promotes the ability of those countries governments to not have to deal with their own citizens. Everyone seems to think the worst is over on the economy and demand for goods and services will increase. Personally by the time GDP next has a real quarterly increase, much less making up for damage of 2008, politics and economics in this country and many others may be dramatically different. But also I doubt sincerely whether in my lifetime (age 66) we will see oil ever again dropping below $50 a barrell. But could be wrong! Is the US the last holdout on nationalizing energy? State capitalism? I would have bought GM and Chrysler at their actual stock price and converted them to mass transit vehicle production because we are never again going to see car sales in the US above 15 million a year.

  9. otiwa ogede says:

    aaah, I have waited long for this moment to pat myself on the back for predicting that the oil price average would not drop below $50pb. Anyone remember? No worries.
    However recent gains do seem fragile and i think another steep price drop is due. Conversely prices might retain their current high, and even accelerate, if the value of the dollar is negatively affected by the Feds quantitative easing.

  10. cletrasteve says:

    Regardless of why oil prices are where they are today, our energy approach, our copper approach, our market approach, our foreign country approach, are all the same. American exceptionalism. Use and abuse with our God-given rights as the citizens of the sole country of answers for the rest of the world. As you argue for a respectful interaction of peoples with different cultures, why should we also not have responsible resource use in a world of limited land/air/water/minerals/life-forms. The first is not necessary, though ethical. The second is mandatory and ethical. Visit Germany today. You need neither an Escalade nor Smart Car to have greater mobility than we have here in the land of exceptionalist consumption. Yes, many countries are scrambling to commit or hord natural resources. This will be the true survival battle in the years to come. But, while much of the EU is aggressively addressing sustainable use, even our economic recovery is focussed on re-invigorating hedonistic consumption. The result of this consumption can only be but more wars to obliterate our resource and culture competitors.

  11. David Habakkuk says:

    ‘IMO, the recent rise in oil prices has very little to do with supply and demand but everything to do with concerns about Bernanke’s dollar debasement.’
    An interesting recent comment on the FT Alphaville site suggested essentially just this — that hedging against dollar debasement plus inflation was driving the recent rise in oil prices — providing some interesting charts.
    (See http://ftalphaville.ft.com/2009/03/23/53869/oil-the-great-inflation-hedge/.)
    Does this make it sustainable? Hard to say, particularly while Bernanke’s helicopter money could produce rapid inflation, it could equally well prove impotent against deflation. Meanwhile, it seems highly likely that grossly overoptimistic anticipations of the success of these policies in sustaining economic activity is causing overoptimistic forecasts for short- and medium- term oil demand.
    Caught between the desire to prevent dollar depreciation damaging their exports, and fear that it may be unstoppable, Chinese and other central bankers have shifted purchases to short-term Treasuries. As a result the Fed seems to be losing control of longer-term rates, which determine mortgage rates — which is very bad news for the housing market, and thus for prospects of economic recovery.

  12. josephdietrich says:

    In theory, peak oil will result in a long-term trend of price increases, assuming demand for oil remains constant or increases. In practice, there will be a lot of noisy variation in both directions caused by a variety of factors. Since the world has been able to produce around 85-86 mb/d of liquids as recently as 2007-2008, and since demand has dropped to around 82 mb/d, the current prices are almost certainly a reflection of OPEC manipulation. Only the most pessimistic of peak oilers think production is going to decline that quickly. The test will be when demand starts to go up again. Then we will see if the world production can keep up.

  13. curious says:

    Oil will keep climbing in straight line up till $80. That’s the chinese budget price. Unless Obama satisfy Saudi demand to give Palestinian a state. So far OPEC is not kidding about it.
    Which pretty much means. W shape recession, since Bibi is not budging. I don’t think Obama can for two state issue. He still think he can charm the Saudi. But they are not amused.
    At $66 for another few week, the expected effect from huge stimulus pretty much gone.
    Oil prices rose for the fifth trading day in a row on Friday as the U.S. dollar hit a five-month low against the euro.
    Crude prices have jumped around 30 percent this month, the largest monthly rise since March 1999, boosted by expectations of a global economic recovery later this year.
    Light, sweet crude for July delivery rose 1.23 dollars, or 1.9 percent, to settle at 66.31 dollars a barrel on the New York Mercantile Exchange, after touching 66.47 dollars, the highest since early November.
    On the foreign exchange market, the dollar weakened beyond the 1.41 mark against the euro for the first time this year, making oil an attractive investment alternative.
    Meanwhile, some positive economic indicators in the United States, Japan and India also boosted the oil market on Friday.

  14. R Whitman says:

    The price of oil is not predictable. Not one of the people who read and comment on this blog predicted $35 oil on March 1 and $65 oil on June 1.
    I challenge any reader to predict the price of oil on Oct 1, 2009 and Jan 1, 2010.
    I and my associates with more than 50 years each experience in the oil industry would not even try. If we needed oil then we would buy futures now.

  15. Dave of Maryland says:

    My Escalade is still purring along nicely on Regular gas.
    Try a tank of mid-grade. Not that much more money. My Toyota runs better on it.

  16. Dave of Maryland says:

    If oil is worth fighting over, then it’s worth nationalizing. Why commit public money & blood for private financial gain?
    It struck me yesterday that when people say that World War II ended the Depression, what they mean is that financial recovery cost the lives of 400,000 Americans. We paid for our prosperity in blood. I don’t think we should have to pay that price again.

  17. N. M. Salamon says:

    the history of oil from 1900 – to peak oil video [approx 80 min in 8 sections]:
    Peak oil Power Point Presentation from Oklahoma [Simmons & Co}

  18. greg0 says:

    I was wondering why the Canadian dollar dropped so low 3 months ago. Lots of oil in them there tar sands! It has since risen by 30%.

  19. graywolf says:

    As your boy Obama continues to print money to bring us into his full-blown socialism,inflation will drive up the price of dollar-denominated commodities.
    Voila:no demand increase, higher gas prices, courtesy of Obama multi-trillion debt.

  20. curious says:

    Israel cabinet to Obama: Why don’t you bite me.
    Arab states: $80/barrel.
    Israel defies US settlement freeze call to it’s own detriment
    It’s kind of surprised me that Israel has defiantly rejected US demands to halt all settlement activity in the occupied territory of the West Bank, as the Obama administration tries to set the stage for a two state Middle East peace solution. Senior members of Israel’s cabinet have broadcast their refusal to bow to American demands, with officials accusing Washington of preferential treatment towards the Palestinians. Interior Minister Eli Yishai of Shas told his fellow cabinet ministers today that the US demand on settlement activity was tantamount to “expulsion. Science Minister and Habayit Hayehudi head Daniel Herschkowitz even went one step farther Sunday into the fringe, in referring to US President Barack Obama’s demand to freeze all settlement activity, even that ensuing from natural growth:

  21. zanzibar says:

    Thanks for The FT Alphaville link. Commodities prices seem to have a strong link with the dollar. You may recall that as the deleveraging accelerated last Fall the dollar strengthened as money fled commodity markets into the safe haven of Treasuries.
    A problem with the words inflation and deflation is of course semantics. Milton Friedman (Greenspan’s and Bernanke’s economics guru) defined it as “inflation is always and everywhere a monetary phenomenon”. On the other hand the popular perception is that inflation is the increase in the level of the consumer price index (which of course has been manipulated by government statisticians for donkeys years). What is a fact however is that the Fed and other central banks including the Swiss, Brits, Swedes, etc are increasing their monetary base at warp speed. My own view is that at any given moment in time some markets/asset classes are inflating while others are deflating.
    The challenge currently as an investor is the massive and unprecedented intervention by governments in the markets and the arbitrary abrogation of the rule of law under the rubric of “saving” the financial system.
    We have commodities, emerging market debt and equities across most markets inflating while US real estate, Treasury bond market and the USD are deflating. Household debt growth is contracting along with S&P 500 profits and consumer spending but tax rates, college tuition and health premiums continue to rise along with government borrowings.
    Despite partisan rhetoric, total debt as a per cent of GDP began its acceleration in the 80s under Reagan and continued to climb under both Republican and Democratic administrations and Congresses. Dick Cheney gave us the famous “deficits don’t matter”. George Bush doubled the national debt in his 8 years and now Obama plans to double that once again in his first term.
    Leverage gave us an “enhanced” standard of living. Under normal circumstances we would have reset back to real economic values and productivity but the powers that be are having a go at the “mother of all” reflations to prevent that reset. Paulson/Bernanke/Geithner in the final months of the Bush administration unleashed the policy of substituting the taxpayer balance sheet as the creditor of first and last resort. Team Obama has run with that ball.
    I have always believed that these policies will lead to increased instability and unintended consequences and not the sustained long term recovery. If monetization was a panacea then Zimbabwe would be the richest nation on the planet. It now seems that the Fed is in the early stages of being trapped. It may have to make a choice at some point between the Treasury market and the US dollar. Whatever the choice it may lose both. I believe we will see increased volatility as the forces of inflation and deflation battle it out while the dollar as reserve currency comes under pressure with nothing to take its place in the near future. Buy and hold may not work for another decade. The best risk reward trade is to be short the taxpayer and long political stupidity.

  22. curious says:

    This is scary. $68. (Geithner in China and nobody is minding the shop?)
    Crude oil for July delivery gained $2.27, or 3.4 percent, to $68.58 a barrel at 3:01 p.m. on the New York Mercantile Exchange, the highest settlement since Nov. 4. Prices are up 54 percent this year.

  23. curious says:

    Oil spikes above $70 for first time this year
    Oil prices broke through the $70 per-barrel barrier Friday and more forecasters are broadening expectations for an upward swing in crude.
    Benchmark crude for July delivery lost 37 cents to settle at $68.44 on the New York Mercantile Exchange, finishing the week with a gain of nearly $2 a barrel. Earlier in the day oil jumped as high as $70.32 per barrel, the highest since October.
    Oil prices have been soaring for months despite a massive surplus of petroleum and natural gas. A large amount of speculative money has flowed into the markets, according to government reports, potentially taking advantage of a weak U.S. currency.

  24. josephdietrich says:

    In a similar vein to what curious commented on June 5th:

    Oil’s ‘Endless Bid’ Returns
    Oil has been rallying because of the weakness of the dollar and because of the specter of impending inflation. …
    Yet in the last several sessions, the dollar has found some amazing strength, and gold, the best proxy for inflation, has come down quite a bit. So what is going on with oil?
    What’s driving oil now?
    It’s the endless bid. …
    The endless bid is what I’ve begun to call the incessant, unrelenting and often unreasonable desire of investors to have exposure to oil. In commodity index funds, through ETFs and directly in futures markets, there is a renewed interest in having oil as a part of every investor’s portfolio. …
    And now, it’s baaack … and makes any estimate of a target price for oil a total shot in the dark, a complete guess, practically unrelated to any economic forecasts or supply/demand estimates.

    Interesting article, well worth a read. I’m in the “peak oil” camp, insomuch as it is a finite resource that is already increasingly difficult to obtain — hence the current “20,000 leagues under the sea” drilling at the limits of our technology compared to the “poke a hole in the ground in the Texas desert and get a gusher” of the past). However, the article is the beginning a convincing argument on why prices are the way they are now.

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