SI
SI
discoversearch

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor.  We ask that you disable ad blocking while on Silicon Investor in the best interests of our community.  If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.
Strategies & Market Trends : Mish's Global Economic Trend Analysis
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  
To: russwinter who wrote (17658)12/5/2004 10:19:15 AM
From: mishedlo  Read Replies (1) of 116555
 
Discussion on the latest drop in oil
From Rien on the FOOL

Rien:
If anybody thinks that this drop in the last two days was due to "funnymentals" then they are off their rocker. Since I do not think that these people are nuts, I can only conclude that they are pushing some agenda. However I can only speculate what the motive is. My "best" WAG is that the saudies cannot continue exporting at todays levels.

Mish:
Depends on what you call funnymentals.
Unusually warm weather (record low heating degree days I believe) for November in the US had to slow the demand for heating oil by quite a lot. This was a very lucky break. Combine that with slowing of growth in China and then a bunch of long spec liquidation on the news and voilla, oil price drops.

Of course those are short term funnymentals, not intermediate term funnymentals. I am going to define short term funnymentals as 1-3 months and intermedate term funnymantals as 4 months to lets say 3 years (or however long it takes to bring additional supply online (a new oilfield or additional rigs) starting from where we are now. If that number is shorter or longer than 3 years adjust my intermediate term accordingly. Long term is anything beyond intermediate term. Note too that the definition of "intermediate term" will be in slow flux(probably gets longer) as the rate of change in bringing additional supply online is likely to change over time as oil depletes and new sources are harder to find.

For whatever reason some people on my board seem to think peak oil is a myth so we will ignore long term funnymentals for now. Finally we need to define short term capacity and I will define that as the capacity we have been pumping on average for the last 3 months or so but it is quite likely that short term capacity is slowly but constantly dropping. If demand exceeds short term capacity, prices rise. Because of a lucky break on weather, perhaps short term demand has dropped to a decent % below short term capacity. Voilla a short term funnymental drop that makes sense even though the interemdiate term outlook (assuming no worldwide recession) is bleak.

I 100% agree with your assessment that Saudi can not right now, without bringing more fields or rigs online, continue pumping at current levels. Perhaps they have more fields or proven reserves they are hiding but I do not think those can be brought on in the short to intermediate term. Actually, by my definition they can not bring them on in the intermediate term. I also doubt they increased their pumping output at all recently. It was either just talk, or sour that nobody really wanted.

OK, Let's see if we can make sense of Kuwait bitching about $44 oil when there is an "official" target of $28-32 oil. Here is my thought.
There are several possibilities:
1) Saudi sold forward oil at those prices and lots of it. Perhaps to China perhaps to others that understood long term need. Kuwait was smarter. They did no such thing. Therfore Kuwait would just assume see the price in the $40-50 area since that price did not decrease the real intermediate term (non weather related) demand for it.
2) The long term price target of $28-32 is a blatant lie. It was priced low enough to keep extra long term supply (if it really exists at all) from being developed. Perhaps it is low enough to prevent development of oil shale and other such sources.
3) Some combination of 1 and 2. This is my guess.

Now lets briefly look at the long term. Until I see some real evidence that peak oil is not a problem AND progress is being done to bring that "theoretical supply" on the market, the intermediate term price of oil based on funnementals of supply vs demand is likely to go up unless the world economy collapses.

Mish
Report TOU ViolationShare This Post
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  

HomeMailHotSubjectMarksPeopleMarksKeepersSettings
Terms Of UseContact UsCopyright/IP PolicyPrivacy PolicyAbout UsFAQAdvertise on SI
© 2025 Knight Sac Media.  Data provided by Twelve Data, Alpha Vantage, and CityFALCON News