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Why Oil Prices Are About to Collapse

By The Oil Drum | Thu, 12 January 2012 23:35 | 46

All is not as it appears in the global oil markets, which have become entirely dysfunctional and no longer fit for its purpose, in my view. I believe that the market price is about to collapse as it did in 2008, and that this will mark the end of an era in which the market has been run by and on behalf of trading and financial intermediaries.

In this post I forecast the imminent death of the crude oil market and I identify the killers; the re-birth of the global market in crude oil in new form will be the subject of another post.

Global Oil Pricing

The “Brent Complex” is aptly named, being an increasingly baroque collection of contracts relating to North Sea crude oil, originally based upon the Shell “Brent” quality crude oil contract that originated in the 1980s.

It now consists of physical and forward BFOE (the Brent, Forties, Oseberg and Ekofisk fields) contracts in North Sea crude oil; and the key ICE Europe BFOE futures contract, which is not a deliverable contract and is purely a financial bet based upon the price in the BFOE forward market.

There is also a whole plethora of other ‘over the counter’ (OTC) contracts involving not only BFOE, but also a huge transatlantic “arbitrage” market between the BFOE contract and the US West Texas Intermediate (WTI) contract originated by NYMEX, but cloned by ICE Europe.

North Sea crude oil production has been in secular decline for many years, and even though the North Sea crude oil benchmark contract was extended from the Brent quality to become BFOE, there are now only about 60 cargoes each of 600,000 barrels of BFOE quality crude oil (and as low as 50 when maintenance is under way) delivered out of the North Sea each month, worth at current prices about $4 billion.

It is the ‘Dated’ or spot price of these cargoes – as reported by the oil price reporting service Platts in the ‘Platts Window’– that is the benchmark for global oil prices either directly (about 60%) or indirectly, through BFOE/WTI arbitrage for most of the rest.

It will be seen that traders of the scale of the oil majors and sovereign oil companies do not really have to put much money at risk by their standards in order to acquire enough cargoes to move or support the global market price via the BFOE market.

Indeed, the evolution of the BFOE market has been a response to declining production and the fact that traders could not resist manipulating the market by buying up contracts and “squeezing” those who had sold forward oil they did not have, causing them very substantial losses. The fewer cargoes produced, the easier the underlying market is to manipulate.

As a very knowledgeable insider puts it….

The Platts window is the most abused market mechanism in the world.

But since all of this short term ‘micro’ manipulation or trading (choose your language) has been going on among consenting adults in a wholesale market inaccessible to the man in the street, it is pretty much a zero sum game, and for many years the UK regulators responsible for it – ie the Financial Services Authority and its predecessor - have essentially ignored it, with a “light touch” wholesale market regime.

If the history of commodity markets shows us anything, it is that if producers can manipulate or support prices then they will, and there are many examples of which the classic cases are the 1985 tin crisis, and Yasuo Hamanaka’s 10-year manipulation of the copper market on behalf of Sumitomo Corporation.

When I gave evidence to the UK Parliament’s Treasury Select Committee three years ago at the time of the last crude oil bubble, I recommended a major transatlantic regulatory investigation into the operation of the Brent Complex and in particular in respect of the relationship between financial investors and producers, and the role of intermediaries in that relationship.

I also proposed root and branch reform of global energy market architecture, which in my view can only come from producer nations and consumer nations collectively, because intermediary turkeys will not vote for Christmas.

A Meme is Born

In the early 1990s, Goldman Sachs created a new way of investing in commodities. The Goldman Sachs Commodity Index (GSCI) enabled investment in a basket of commodities – of which oil and oil products was the greatest component – and the new GSCI fund invested by buying futures contracts in the relevant commodity markets which were 'rolled over' from month to month.

The genius dash of marketing fairy dust that was sprinkled on this concept was to call investment in the fund a ‘hedge against inflation’. Investors in the fund were able to offload the perceived risk of holding dollars and instead take on the risk of holding commodities.

The smartest kids on the block were not slow to realise that the GSCI – which was structurally ‘long’ of commodity markets – was taking a long term position which was precisely the opposite of a commodity producer who is structurally ‘short’ of commodities because they routinely sell futures contracts in order to insure themselves against a fall in the dollar price; ie commodity producers are offloading the risk of owning commodities, and taking on the risk of holding dollars.

So, in 1995 a marriage was arranged.

BP and Goldman Sachs get Married

From 1995 to 2007 BP and Goldman Sachs were joined at the head, having the same chairman – the Irish former head of the World Trade Organisation, Peter Sutherland. From 1999 until he fell from grace in 2007 through revelations about his private life, BP’s CEO Lord Browne was also on the Goldman Sachs board.

The outcome of the relationship was that BP were in a position, if they were so minded, to obtain interest-free funding via Goldman Sachs, from GSCI investors through the simple expedient of a sale and repurchase agreement - ie BP could sell title to oil with an agreement to buy back the oil later at an agreed price.

The outcome would be a financial ‘lease’ of oil by BP to GSCI investors and the monetisation of part of BP’s oil inventory. Such agreements in relation to bilateral physical oil transactions are typically concluded privately, and are invisible to the organised markets. However, any risk management contracts which an intermediary such as Goldman Sachs may enter into as a counter-party to both a fund and a producer are visible on the futures exchanges.

Due to the invisibility of the change of ownership of inventory ‘information asymmetry’ is created where some market participants are in possession of key market information which others do not have. This ownership by investors of inventory in the custody of a producer has been termed ‘Dark Inventory’

I must make quite clear at this point that only BP and Goldman Sachs know whether they actually did create Dark Inventory by leasing oil in this way, and readers must make up their own minds on that. But I do know that in their shoes, what I would have done, particularly bearing in mind that such commodity leasing is a perfectly legitimate financing stratagem that has been in routine use in the precious metals and base metal markets for a very long time indeed.

Planet Hype

The ‘inflation hedging’ meme gradually gained traction and a new breed of Exchange Traded Funds (ETFs) and structured investment products were created to invest in commodities. In 2005, Shell entered quite transparently into a relationship with ETF Securities which enabled them to cut out as middlemen both investment banks and the futures market casinos, and with them the substantial rent both collect.

Other investment banks also started to offer similar products and a bandwagon began to roll. From 2005 to 2008, we therefore saw an increasing flood of dollars into the oil market, and this was accompanied by the most shameless and often completely misleading hype, and led to a bubble in the price.

There was (and still is) no piece of news which cannot be interpreted as a reason to buy crude oil. The classic case was US environmental restrictions on oil products, which led to restricted supply, and to price increases in oil products. Now, anyone would think that reduced refinery throughput will reduce the demand for crude oil and should logically lead to a fall in crude oil prices.

But on Planet Hype faulty economic logic – the view that higher product prices are necessarily associated with higher crude oil prices – was instead used as justification for the higher crude oil prices which resulted from the financial buying of crude oil attracted by the hype.

You couldn’t make it up: but unfortunately, they could, and they did.

More worrying than mere hype was that a very significant amount of oil inventory had actually changed hands from producers to investors. Only those directly involved were aware that below the visible part of the oil market iceberg lurked massive unseen ‘Dark Inventory’.

Greedy Speculators and Hoarding

The pervasive narrative among people and politicians, and which is spread by a campaigning press, is of ‘greedy speculators’ who are ‘hoarding’ commodities and ‘gouging’ consumers in search of a transaction profit.

There is no better example of this meme than the UK’s Daily Mail scoop on 20th November 2009. Here we saw pictures of shoals of some 54 shark-like tankers loaded with oil and lurking off the UK coast with millions of barrels of ‘hoarded’ crude oil, some of them having been there since April 2009. The Mail’s story was that these tankers were full of hoarded oil whose greedy owners were waiting for prices to rise before gouging the public.

The reality was rather different.

The motivation of the investors involved was not greed but fear. The Fed had been busily printing another trillion in QE dollars to buy securities and the sellers, and other investors aimed not to make a dollar profit but rather to avoid a dollar loss.

So they poured $ billions into oil index funds and similar products and the oil leases/loans which accommodated these funds’ financial purchases of oil had the effect of raising forward prices and of depressing the spot price, thereby creating what is known as a market ‘in contango’.

When the forward price is high enough in a contango market, what happens is that traders will borrow money to buy crude oil now, and sell the oil at the higher price in the future. Provided the contango is high enough, they will cover interest costs and the cost of chartering and insuring the vessel and its cargo, and lock in a profit for the trader at the end.

This is exactly what traders did through the summer of 2009, until the winter demand by refineries for crude oil and a reduction in the flow of QE dollars into the market combined to see the stored oil gradually delivered to refineries and the sharks depart the UK shores.

The point is that the widely held perception of high oil prices being the fault of hoarders and greedy speculators is – apart from very short term ‘spikes’ in the price - entirely misconceived. And even when speculators do dabble in oil markets, they are almost always pillaged by traders and investment banks with much better market information, which is probably what is happening right now.

The Bubble Bursts

In 2008 there was an influx of genuine speculators in search of short term transaction profit. The motivation of inflation hedgers, on the other hand, is the avoidance of loss, which leads to different market behaviour and the perverse outcome that they have been responsible for causing the very inflation they sought to avoid.

The price eventually reached levels at which demand for products began to be affected and shrewd market observers began to position themselves for the inevitable bursting of the obvious bubble. But those market traders and speculators who correctly diagnosed that the price would collapse were unaware of the existence of the Dark Inventory of pre-sold oil sitting invisibly like an iceberg under the water.

Traders who had sold off-exchange Brent/BFOE contracts or deliverable WTI contracts found themselves ‘squeezed’ because title to the crude oil which they thought would be available at a cheaper price to fulfil their contractual commitment had been ‘pre-sold’ to financial investors. This meant that they had to scramble to buy oil at a higher price than they had expected.

The price spiked to $147 per barrel, and then declined over several months all the way to $35 per barrel or so, as many of the index fund investors pulled their money out of the market in late 2008 and joined a stampede to the safety of US Treasury Bills. What was happening here was that the Dark Inventory which had been created flooded back into the market, and overwhelmed the market’s capacity to absorb it.

Convergence and Futures Pricing

The oil market price is – by definition – the price at which title to dollars is exchanged for title to crude oil.

But there is very considerable debate among economists about the effect of derivative contracts on this spot market price, and whether it is the case that the futures market converges on the physical market price or vice versa.

Now, in the case of a deliverable exchange futures contract, a price is set for delivery of a standardised quantity of a particular specification of a commodity at a particular location within a specified period of time. If that contract is held open until the expiry date and time then there will indeed be a spot delivery and payment against documents at the original price. In accordance with the exchange’s contractual terms.

But the key point is that this futures contract will not be held open to the expiry date at the original price unless the physical market price – which is set by physical supply and demand – is actually at that price at that specific point in time. If the physical price is lower or higher, then the futures contract will be closed out through a matching purchase or sale and a profit or loss will be taken.

I managed the International Petroleum Exchange’s Gas Oil contract for six years, which was deliverable in North West Europe, and the final minutes of trading before contract expiry were Europe’s greatest game of ‘chicken’.

Moreover, no IPE broker in his right mind would dream (because the broker was responsible to the London Clearing House for defaults) of letting a financial investor with no capability of making or taking delivery hold a position into the last month before delivery. And if a broker was not in his right mind, it was my job to act under the exchange rules to ensure such positions were liquidated.

In other markets, the ability to own physical commodities – eg. through ownership of warehouse warrants – is much more straightforward for investors. But the logistics of oil and oil products are such that financial investors are simply incapable of participating in the physical market. In my view, the use of position limits for financial investors in crude oil and oil products is of little or no use if the clearing house, exchange, and brokers are doing their job.

Finally, now that the US WTI contract is just the tail on the Brent/BFOE physical market dog, this discussion has moved on, since the ICE Brent/BFOE futures contract is in fact settled in cash against an index based on trading in the BFOE forward market, with no physical delivery. It is simply a straightforward financial bet in relation to the routinely manipulated underlying BFOE physical market price – ie., the question of convergence does not arise.

Anything but Dollars

With interest rates at zero per cent, and with the Federal Reserve Bank printing dollars through QE, a tidal wave of money flowed into equity and commodity markets purely as an alternative to the dollar, and they did so through a proliferation of funds set up by banks.

Note here that the beauty of such funds for the banks is that it is the investors who take the market risk, not the banks, and the marketing and operation of funds has become a very profitable use of scarce bank capital.

So a flood of financial purchasers of oil were looking for producers willing and able to sell or lease oil to them.

Producers in Pain

Producing nations who had massively expanded their spending in line with a perceived ‘sellers’ market’ paradigm where they had the whip hand, were badly hurt by the 2008 price collapse and OPEC took action to restrict production.

But might some OPEC members or other producing nations have gone further than this?
What is clear is that the price rose swiftly in 2009 and then remained roughly in a range between $70 and $90 per barrel until early 2011 when twin shocks hit the oil market. Firstly, there was the supply shock in Libya which saw 1.5m bbl per day of top quality crude oil leave the market, and secondly, the demand shock of Fukushima, which saw a dramatic switch from nuclear to carbon-fuelled energy.

My thesis is that Shell directly, and others indirectly, were not the only ones leasing oil to funds. I believe that it is probable that the US and Saudis/GCC reached – with the help of the best financial brains money can rent – a geo-political understanding with the aim that the oil price is firstly capped at an upper level which does not lead to politically embarrassing high US gasoline prices; and secondly, collared at a level which provides a satisfactory level of Saudi/GCC oil revenues.

The QE Pump Stops

In June 2011, the QE pump which had been keeping commodity and equity markets inflated and correlated stopped, and price levels began to decline. Consumer demand – as opposed to financial demand – for commodities had also been affected not only by high prices, but by reduced demand from developed nations for finished goods. In September 2011, more than $9bn of index fund money pulled out of the markets for the safe haven of T-bills.

What happened as a result was that the regular rolling over of oil leases, and the free dollar funding for producers of their oil inventory ceased. So the leased oil returned to the ownership of the producers, while the dollars returned to the ownership of the funds.

Since the ‘repurchases’ were no longer occurring, the forward oil price fell below the current price, and this ‘backwardation’ was misinterpreted by market traders and speculators. They believed that the backwardation was – as it usually is - a sign that current demand was high and increasing relative to forward demand, whereas in this false market the current demand is unchanged but the forward demand is decreasing.

As in 2008, speculators and traders were again suckered too soon into the market, and this led to profits at their expense to those with asymmetric information, and a ‘pop’ upwards in the price as they were forced to close speculative short positions. My information is that a major oil market trader was successfully able to ‘squeeze’ the Brent/BFOE market on at least two occasions in late 2011 precisely because they were aware of the true situation of inventory ownership, and the rest of the market was not.

As an insider puts it……

You can’t have proper price discovery when half of the inventory is being sold elsewhere at a different price. On exchange physical doesn’t even exist. Futures are converging to physical, but only the physical which is visible for Platts assessment.

….pointing out that transactions in respect of physical ownership of oil do not take place on an exchange, and that there is effectively a ‘two tier’ market. Only a proportion of spot or physical Brent/BFOE transactions therefore actually form the basis of the Platts assessment of the global benchmark oil price.

Enter Iran

In my view, there is little or no chance of military action against Iran, and having been to Iran five times in recent years, and as recently as two months ago, there is much I could write on this subject.

While financial sanctions have been pretty smart, and increasingly effective so far, the medium and long term effect of the proposed EU oil embargo – which will in fact affect only a pretty minimal and easily accommodated amount of demand which is evaporating anyway – is more apparent than real.

While there would undoubtedly be a short term price rise – cheered on by the usual suspects – in the medium and long term the embargo will act to reduce oil prices. This is because Iran will necessarily have to sell oil at below market price to China and others, and since the market is over-supplied, particularly in Europe, this will undercut market prices generally.

Mexico has routinely hedged oil production for years, and Qatar – who are very shrewd operators – began to do the same in November 2011 since they expect the price to fall this year. In the short term the Iran ‘crisis’ is in my view being hyped for all it is worth to entice yet more unwary speculators into the oil market so that other producers may sell their production forward at high prices while they last before the inevitable and imminent collapse.

Current Position

If you believe the investment banks – who all have oil funds to sell to the credulous – Far Eastern demand is holding up, supplies are tight, and stocks are low, so prices are set to rise to maybe $120 or above in 2012, even in the absence of fisticuffs involving Iran.

I take a different view. I see real demand – as opposed to financial demand and stock-piling, such as in the copper market – declining in 2012 as the financial crisis continues at best, and deepens at worst, particularly in the EU. Stocks are low because bank financing of stock is disappearing as banks retrench, and it makes no sense for traders to hold stocks if forward prices are lower than today’s price.

As for supplies, US crude oil production is probably higher, and consumption lower, than widely appreciated. Elsewhere, there is plenty of oil available now that much of the Dark Inventory has been liquidated, and this liquidation was probably why in November 2011 we saw the highest Saudi monthly deliveries in 30 years.

Finally, we see North Sea oil being shipped – for the first time since 2008 – half way around the world to find Far East buyers. We also see Petroplus, a major independent Swiss refiner, crippled by inflated crude oil prices, and shutting down three refineries because demand for its products has disappeared, and it can no longer finance crude oil purchases now that banks have pulled its credit lines.

In my world, refineries closed due to reduced demand for their products imply a reduction in demand for crude oil: but not, apparently, on the Planet Hype of investment banks with funds to sell.

History does not repeat itself, but it does rhyme, and my forecast is that the crude oil price will fall dramatically during the first half of 2012, possibly as low as $45 to $55 per barrel.

Then What?

As the price collapses we will see producer nations generally and OPEC in particular once again going into panic mode, and genuinely cutting production. We will also see the next great regulatory scandal where a legion of risk-averse retail investors who have lost most or all of their investment will not be pleased to hear that they were warned on Page 5, paragraph (b); clause (iv) of their customer agreement that markets could go down as well as up.

At this point, I hope and expect that consumer and producer nations might finally get their heads together and agree that whereas the former seeks a stable low price, and the latter a stable high price, they actually have an interest – even if intermediaries do not – in agreeing a formula for a stable fair price.

We can’t solve 21st century problems with 20th century solutions and I shall address the subject of resilient global energy market architecture in my next post.

This is a guest post by Chris Cook, former compliance and market supervision director of the International Petroleum Exchange.

By. Chris Cook

Source: The Oil Drum

Leave a comment

  • Fred Banks on January 13 2012 said:
    The difference between me and other students of the oil market is that I have ALWAYS been right - except for a short period in l985 - and those other people often get things wrong, even if they are right a large part of the time.This article can thus be described It reminds me of a talk I gave in Singapore recently, a brilliant talk, and suddenly somebody was talking about Iran. The oil market isn't about Iran friends and neighbors, half baked economists talking about speculation and derivatives, or for that matter Treasury Bills. It's about supply and demand in the oil market reaching a point where OPEC can control the oil price.As I am going to point out in another brilliant talk that I am going to give soon, there was a straight line between _____ and the trillion dollars that OPEC collected last year. And anybody who makes the mistake of talking about Iran this time is going to hear a few things that they dont want to hear.
  • Philip on January 13 2012 said:
    Now, I'm sure this is a highly intelligent and well written article. However for those of us ignoramuses entirely unconversant with the markets and investments in oil could someone e.g. our very own Ferdinand (Fred) Banks PLEASE summarise all this in a few 'idiot style' paras for unconversant idiots like myself...?Many thanks in advance...
  • Scotty on January 13 2012 said:
    Just who are you Fred Banks??
  • Mr. Cain Thaler on January 13 2012 said:
    Philip:It means the oil markets were correct in going down in August. However, if the author's speculation is correct, some oil producers who lend out oil to financial groups are legally bound to someimtes repurchase a huge amount of stock at any price.Hence, the price squeeze we've witnessed since October is caused by repurchase agreements, not demand, and the market will experience a secondary fallout now that those terms have been met.To the author: many thanks for the insights. I got my face boxed in in October betting against oil since that previous July. This could explain so much; the arrangement would create a sort of sink of demand, which transforms into a well which provides power to the system even after the most obvious supply (consumer demand) is cut off.
  • Fred Banks on January 13 2012 said:
    Scotty, I'm the leading academic energy economist in the world, unbeatable in a seminar or conference, although damned sick and tired of hearing simple ideas/concepts turned into something complicated.I am sure that the author of this article is a serious person, but the insights that Mr Thaler is so pleased at receiving are for the most part totally and completely irrelevant.Look at the time-line on the whiteboard at my next lecture. In l998-99 the people in the OPEC executive suite in Vienna looked at the oil price, and asked each other if the time had arrived - the time to take control of the oil price. The answer was yes, and that answer was correct.They did not talk about the dollar price of oil or doughnuts, but instead probably left the building and proceeded to my favorite gin joint in Vienna wheb I was working for Uncle Sam. Once there they engaged in deep intellectual exchanges with the...uh, hostesses.
  • Snowshoe on January 14 2012 said:
    Go Fred Banks!! Are you able to leap tall building in a single bound as well?
  • udman on January 14 2012 said:
    Mr. Banks, where do you see oil prices for 2012?
  • Fred Banks on January 14 2012 said:
    I'll take that as a compliment, Snowshoe.I'm in the final stages of training for my gig in Spain, and believe me, I won't be taking any prisoners.I repeat: the author is probably a serious and intelligent person, but he has taken a simple topic and made it difficult. I did that sort of thing when I was just a good lecturer, but it doesn't work if you want to be a great lecturer. The logic of the oil market is simple and straightforward, and I am dumfounded that people want to turn it into rocket science.
  • JMac on January 14 2012 said:
    There's no way Fred Banks is real. No real person could be that full of themselves. That character is surely taken from an Austin Powers movie or something of the sort. It's just not possible. I call bink.
  • Philip on January 14 2012 said:
    Well, thanks guys! It seems I got my answer and very illuminating it was. ;-) :-)
  • AJ on January 14 2012 said:
    Amazing, thanks for the news'crude oil price will fall dramatically during the first half of 2012, possibly as low as $45 to $55 per barrel.'will be back on this page in June.
  • Fred Banks on January 14 2012 said:
    For students of game theory, $100/b is probably what is - at the presebt tune -called a 'focal point'. The OPEC leadership has come to the conclusion that if the oil price is too far beneath that value, they will do what men have to do to get it back up. After all, they want to bank another trillion dollars this year, plus a little more to compensate for inflation.The key thing though is that they do not let it get too much higher at the present time, because if it does you can forget about a macroeconomic recovery for those countries that need one. In point of truth however, I believe that the intelligence of the OPEC people is far far above that of most of their customers, and they will understand that it is pointless to let the oil price escalate.Satisfied
  • Bob White on January 14 2012 said:
    Fred Banks, I believe you missed the question that was asked. Where do you see the oil prices heading in 2012?Thank you.
  • Simonp on January 14 2012 said:
    #13 I gather from reading #12 that Fred sees the price of a barrel of oil around $100 in 2012
  • Fred Banks on January 14 2012 said:
    I haven't missed the question, Bob. Assuming that OPEC is rational, and they want another trillion dollars, they will try to keep the oil price around 100 dollars, and assuming that they dont spend too much time in the 'Orientale' - which I think was the name of the place - they will succeed.So the oil price is NOT going down. By the way, the WTI price is now just below 100, and the Brent price is 108. Now a question for you Bob: what is the composite oil price?
  • Philip on January 15 2012 said:
    JMacFred Banks is the very real Ferdinand Banks. He is a real well qualofied energy economist. Google Ferdinand Banks and see what comes up. He is the real McCoy, does know his stuff, and is quite entertainingly full of himself but I prefer his style to that of an academic technocrat. I've had my run-ins with him, but overall I respect his judgement and his experience and enjoy his wildly OTT personality. He even makes me LOL on occasion. Thank you Fred/Ferdi. Do you prefer Fred or Ferdinand? I know you call yourself Fred here but is that just short for Ferdinand? ;-) :-) :-*
  • Pablo Crude on January 15 2012 said:
    8) Fred Banks, or whoever you are, are certainly not the leading energy economist and totally missed basic fundamentals. Perhaps you should consult a real energy economist such as Michael Economides. The great thing about guys like you is that you are proven to be idiots with your own predictions and timelines, no one has to do it for you."and my forecast is that the crude oil price will fall dramatically during the first half of 2012, possibly as low as $45 to $55 per barrel" Really???! Shag that Baby
  • Bruce Levin on January 15 2012 said:
    I never thought that oil prices were so complicated. If prices get to $45 per barel it should represent a buying opportunity of a lifetime especially if oil stocks (OIH, XLE, etc) follow the price of cruce as they have in the past -Natgas could go to $2. How is $45-$54 calculated? Why not $31 or $64? Is there a basis for it or just an educated quess? If it is a calculated number is the 45-54 spread a standard one standard devition spread? Thanks for the article. I will never look at oil prices the same way again.ps. Do you have a date forecast?
  • Fred Banks on January 15 2012 said:
    I tell you what Pablo, baby. I'm going to appoint you the leading energy economist in the world - academic or otherwise - and leave it to you to explain to the author of this nutty article why, if the oil price declines to 55 dollars a barrel, it means that OPEC has decided that less money is preferable to more money.Thanks for the endorsement, Philip. Yes, I am the real deal, but I wonder if maybe I shouldn't find some other stage for my song and dance. You see, if Mr Crude and his clones are allowed in the joint, I wonder if there is going to be any room for poor me.Anyway, keep up the good work Mr Crude and others, and to be perfectly truthful, I really and truly enjoy the ad hominen.
  • Jed Clampett on January 15 2012 said:
    Pablo: If you'd spent even a minute looking online, you'd see that there is indeed a Ferdinand Banks and his writing style is identical to that of the previous commenter. It's you Pablo, that remind me of my nephew Jethro, not Mr. Banks.
  • Dustin Coupal on January 16 2012 said:
    Anything less than $100 US dollars per barrel barely buys a polish on a Bugatti in Dubai in today's world. The rise in oil price is largely a factor of a devalued US dollar. It used to be $80 was a good target, now $100 is barely acceptable. Watch for $120 coming up next to theaters near you as the US has the printing presses on high-speed printing out more and more greenbacks.
  • James Kovalsky on January 16 2012 said:
    :lol: Mr Banks is now speaking for the Saudis suggesting they are targeting $100 oil but the Saudis themselves were stating a target of $80. Tough decision whom to belief.
  • James Kovalsky on January 16 2012 said:
    A very fine article which is only tainted by the foolish commentary.
  • Philip on January 16 2012 said:
    Hi Fred, you're very welcome! Please don't leave this neck of the woods. If Mr Crude and his clones do enter the joint all you have to do is to begin one of your brilliant lectures :eek: ;-) :lol: and vthey will undoubtedly retreat in disarray :cry: :sad: :-* Thank you Ferdinand for making oil matters less obscure than they might otherwise be to us poor uneducated folk...!
  • Pablo Crude on January 17 2012 said:
    Heres what the rest of the "uneducated folks" have to say.

    Investors’ Average Oil Price Predictions For 2012 & 2013
    2012 2013
    WTI Brent WTI Brent
    Goldman Sachs $112.50 $120.00 $126.00 $130.00
    JP Morgan $95.00 $120.00 $100.00
    Citigroup $110.00
    Societe Generale $103.00 $110.00
    Morgan Stanley $105.00
    Deutsche Bank $95.00 $115.00 $108.00 $120.00
  • Pablo Crude on January 17 2012 said:
    I wonder if Freddy the economist has bet any of his own money on his predictions? I wager not. Far too often guys like this suffer from paralysis of analysis and never practice what they preach. Its easy to give advice, but will Freddy be bettin the farm on future put options? NAH!
  • CR8054 on January 17 2012 said:
    If you think oil will drop to 40 or 50 dollars a barrel, you must be smoking whacky tabacky. With all the trouble in the middle east, peak oil, plus a recovering economy in America oil will mostly rise to 140 or 150 dollars a barrel by the end of the year. I expect gas prices to reach 5 dollars a gallon by Memorial Day and remain high all summer. The era of cheap oil and gasoline is OVER.
  • Richard on January 17 2012 said:
    I can see a paper collapse to around $50 being feasable. If the Saudis et al don't sell oil at that low a price, they can make up their 'losses' later at an even higher price.

    Personally, I'll stick to Canadian producers that pay good dividends, and not worry about it... way too complicated...
  • ron on January 17 2012 said:
    Interesting to read comments from someone with blinders on. Anyone bothered to look at demand coming from SE Asia? Anyone considering that half the planet is still in strong growth mode? China announces 8.9% growth and yet the handwringers come out - that China has been growing ~9% for nearly two decades (consider the compounding effect of that) and is now only at the beginning of the typical big growth spurt that happens when incomes rise. How about India's 1+B? Are they really going to continue to ride around on oxen while they use cell phones?

    While I have no doubt the oil markets are massively manipulated, the idea that oil will fall to $45 for any length of time is preposterous nonsense. Cost of production for marginal producers is ~$60+ these days. Most offshore isn't profitable at $45. So who would be selling oil at $45? OPEC? Because why? All they'd have to do is cut production a few million bpd (as they did in '08) and the market would quickly go into deficit - and all that imagined "Dark" supply would soon evaporate (oh, but we were told that already happened in Nov 11 - when the Saudi's sold record amounts of oil - but to whom, and where did all that oil go - where are all the tankers being parked offshore full of all that Dark Oil???)

    As for the quaint notion that closure of a few refineries implies slack demand, that's a hoot. In the US, they shuttered hundreds of refineries in the last 30 years - yet demand rose steadily - the remaining refineries were expanded in their place. Only recently has refinery demand declined, but almost all due to ridiculously incompetent and useless requirements to substitute ethanol for ~10% of gasoline supply - a cynical move by the Corn (maize) lobby (aka big agribiz) to prop up prices/profits under the guise of "green" energy.

    And did anyone notice that the Saudi's just announced a new 400,000 bpd refinery they want built? I presume just so they can add supply to what we are told is an already over-supplied market...silly Saudis - they are so dumb they simply want to build refineries rather than spend that cash on their harems...
  • Baron Von Hamburger on January 18 2012 said:
    For anyone to believe that OPEC or any other supplier is in a position to just name the price is comedy at its best. If it was that easy they would have done this a hundred years ago. The real reason oil is high is because a myth has been perpetrated on traders today that peak oil is here. Now that price has gone high more traders who missed out want in on the action (seen here by comments like, if it went that low it would be the buy of a lifetime). It is all too reminiscent of the 70's (it's different this time, peak oil, High prices here to stay, heck we even dusted off the old Iran story). I remember how that played out when I was filling my car with 75 cent a gallon gas circa 1995. This bubble will eventually blow over. Fred Banks is a legend in his own mind. Seems like the oil bubble isn't the only thing full of hot air.
  • cl17 on January 19 2012 said:
    i hope we do see oil crash to $30 -

    it would wipe out - once and for all - the crooked monarchy-states in the middle east.
  • Stanley on January 19 2012 said:
    What QUACK Chris Cook is for writing this article. There is reality and there is the Politics. The reality is that YES, there IS A GLUT. The U.S. EXPORTED record amounts, YES, EXPORTED of refined fuels last year. (LA Times article). But the constriction is artificial to boost prices and record profits. Keystone pipeline not renewed is one way, the Gulf oil spill was planned, and the made up and fictional tension and crisis in mid-east. OIL prices will not collapse because THEY need it as high as possible to precipitate inflation and cause change reaction with higher interest rates from inflation and crash Euro the Dollar. To end the Dollar as Reserve currency. Oil prices will go higher even though there is a glut to this end. The constriction in supply is fictional not real. CHRIS COOK is wrong, there will be no collapse in oil. Especially, once the TRUE Iran oil embargo kicks in, and Europe loses its source of 18% of it's oil. It will put pressure on Brent and WTI to make up the difference and that will cause prices to skyrocket not collapse.
  • Castiel on January 20 2012 said:
    Bring me the brilliant head of Fred Banks! Forget about that Garcia fellow...
  • Jason Emery on January 20 2012 said:
    The author is using a broken yardstick ($ or Euro) to measure oil price. Why not use real money, gold bullion. As measured in gold, the price of WTIC has been basically flat for three years.

    In other words, oil, as well as gold, are accurately reflecting the massive increase in the supply of fiat money.
  • Eric Sean Tite Webber on January 21 2012 said:
    But if PEAK OIL is a hoax, which it is according to REAL scientists @ both NATIONAL ACADEMY of SCIENCES and SWEDISH ROYAL INSTITUTE, among others, aren't all these speculators, mentioned in your most excellent article, merely playing an ~150 year old fools game, according to the rules of the 'Greater Fool Theory' http://goo.gl/0UiA8 , compartmentalized from the "real action" of the even higher insider games they only think they are a part of, i.e. we can know ONLY what we are aware of?

    So our contention is that these speculators are indeed playing a fools game 150+ years in the making, and that indeed crude oil is the perfect renewable energy as it has NOTHING to do with fossils, as it is ubiquitous and constantly produced abiotically via a natural geologic process between earths crust & mantle, and that $ATANIC $ABBATEAN MA$ONIC http://goo.gl/4yFz3 influences at the highest levels, including collusion between rogue Sauds and rogue Brits, as evidenced by the physical manifestation of their relationship in the Saudi-BinLadin-Built *BIG-BEN replica in Mecca* complex, never to be confused with the GoodElite who are trying to expose this ruse of all times, who can only use good information, never bad action, to keep our good name & free will free, just as Gd is.

    This angle is explored in greater detail here: http://goo.gl/5GDIB

    Furthermore that faux-environmentalism, never to be confused with real environmentalism, is merely part of the same *BigPigOil* ruse, as counter-intuitive as that sounds, it does increase the "scarcity" of the truly ubiquitous resource as well as provide opportunity for this despicably over-the-top and ultimately clumsy evil-hand-revealing ad http://goo.gl/Bian5 and its nexus to state sponsored "terrorism".

    Yes, it really does all fit together like this, these are the most hell bent crew on earth, we should know as our ancestors, the TITE family, of the Good Elite, passed along tremendously important information, showing that these fiends are completely disconnected from reality as they have become so drunk on millenia of easy spoils, yet the truth is still the truth, and their redemption will be the greatest of all accomplishments as we head gracefully into the "TITE INVERSION" of Concerns described here: http://goo.gl/BJzpM as Gd's plan to unfold as perfectly as ever.

    =====================

    Finally

    WE-R© ’THE’ system, that can
    ONLY be 'gamed' , to EVERYONE's
    Advantage !!! ...by design...

    LET the GAMES BEGIN, shall we ?
    UPDATED: http://goo.gl/BJzpM
  • Tech1 on January 21 2012 said:
    I enjoyed the article quite a bit although I look at markets in a simple fashion. Since 1971 oil has backed our Petrodollar and since it is the reserve currency(for now thanks to our troops) stocks tend to trade along with oil's direction. I think it could be quite possible oil could fall back at some point-(short term) but if anything I have read about cost of production this wouldn't last long. First thing I do is stick up the oil chart when I'm trading-it's the key in our global economy. Whatever happens if it drops I will be short stocks and commodities then load up for bear when it levels off. The one thing I do look at is cost of production. With offshore drillers going over 30,000 feet down and rigs costing 500 million a pop, the Saudis pumping water into their fields and most major fields in decline? I've read how the Saudis needed $82 a barrel last May then over $90 recently and even Canada's oil sands require one barrel equivilent to produce six so any drop would have to be short term unless demand was cut drastically and many companies were forced out of business. Doesn't matter to me really but the oil bankers that really run this world like their position and they seem to be doing everything possible to keep the price in a fairly narrow trading range since 2009. I would love it to drop to $50! I make a ton of money buying commodites and at the bottom like back on March 2009 because it wouldn't stay there long! One other thing is vehicles are the main user of oil and GM and Ford etc. are doing quite well lately. Also I see Iran surrounded with our military and us pulling our people out of Syria so I say they are cooked but I don't have a timeline. there boys seek total control of the global economy and the oil and they control the Saudis and our "government". The only thing I see that might indicate a short term drop is the level in the stock market which is seeking it's toppping level. They always drop it via an event of some kind via derivatives, media stories, whatever or investors pulling out of overbought markets. Buying opportunity of a lifetime again if they do. Only thing I could see dropping oil longer than just short term would be a pandemic etc. taking out several billion people or the solar storms knocking out the electrical grids globally. Anything is possible but some things are more likely.
  • Bud Goltry on January 21 2012 said:
    Question for Chris Cook:

    Where does all this leave the royalty owner?
  • Johnny on January 22 2012 said:
    My clairvoyant stock analyst tells me that $98 is the Jan 20 low for oil in 2012, with price rising to $105 by Feb and $110 in April.
    He states an oil shortage exists and is getting worse as world populations increase and third world becomes industrialized.
    The world has too many people. It's that simple.
    There is definitely enough oil for a world population of 2 billion (1940 era).
    He predicts $2500 gold by Sept 2012. (another story)
  • Jason Emery on January 23 2012 said:
    Another factor is the oil to natural gas ratio. A 42 gallon barrel of W. Texas crude (wtic) has 7 times more btu's than a 1000 cubic feet of natural gas. Theoretically, wtic should trade about 7 times higher than the price of ng.

    For the 20 year period ending in the year 2000, I believe this ratio was 9:1, meaning that oil sold for a modest premium over those two decades.

    At the early 2009 low, when deflation fears were rampant, the ratio plunged all the way to par, 7:1. Now, with the fed and ECB (european central bank)on the verge of the biggest bank and sovereign debt bailout of all time, the oil to ng ratio has expanded to 42:1. (see stockcharts.com symbol $wtic:$natgas).

    The oil:natgas ratio is a pretty good proxy for inflation or deflation fears. Not perfect, by any means, but pretty good. Right now, the market senses that we are gonna have the mother of all hyper inflations, probably rivaling the 1923 German one. Whether there is good balance between crude oil buyers and sellers, or a shortage or a glut is secondary. The world's central bankers are going to have to print (or the electronic equivalent) literally tens of trillions of dollars, yen and euros. It is the end of the line. Every one is levered 40 to 100 times, and the can has been kicked as far as it will go. It is time for Bernanke to write one big check to paper over the whole thing.

    We will see $200/bbl this year or early 2013, maybe even $300 or $400. Who knows. Do they even have any gold backing the dollar. Many believe is was sold, swapped, or leased long ago. Maybe $1000/bbl. If the fed and their supposed gold is ever audited, one could make a reasonable guess. Not now.
  • Wayne MacNeil on January 24 2012 said:
    For Dr. Banks if he is still reading this post, or to others with good information. Is there really an oil supply deficit bubble working its way through the worldwide system? What I have read, is that this started to impact prices at end of 2011 and will continue thru 2012, potentially causing a large price spike. How real is this?
  • Baron Von Hamburger on January 27 2012 said:
    There is no such thing as peak oil. It is a myth, like fairies and unicorns. I have been saying this for years and have made tons of money shorting oil. I will continue to short oil until the price comes back where it was, and that was $20.

    http://www.businessweek.com/magazine/everything-you-know-about-peak-oil-is-wrong-01262012_page_2.html

    Plug your ears because the above Businessweek article is right. There is no such thing as peak oil and we have tons of resources.
  • CR8054 on February 15 2012 said:
    Well, if anyone is still reading this. On Feb 14 oil was over $100 a barrel and gasoline predicted to rise to over $4 a gallon, perhaps $5 a by summer. So much for a collapse in oil prices.
  • Peter on April 22 2012 said:
    Oil price still up....

    How can the price of anything that is becoming less and less available ever crash? As supply decreases the price will go ever higher until oil is no longer feasible and alternatives are found.
  • SueG on May 06 2012 said:
    May 6, 2012 Oil is headed down.

    Sarkozy loses, Greece votes out 'austerity' parties.

    Oil drops 4%. What will tomorrow and next week bring?
  • told ya on June 21 2012 said:
    Middle of June. Price of oil just dropped under $80. Maybe this guy is a genius. We will see.
  • Manny on December 30 2012 said:
    it say everything about the prices but not how much money do you need to invest and who you need to contact..

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