Where do so you see oil heading next?

The strange part is that with so much speculation in both directions, figuring out a real price is challenging. The rise in oil from $20 to $150 and then fall back to $40 all within 6 years makes the fundamentals hard to see.

All the way up, most experts were predicting it would stabilize a bit below wherever it was. At $45, they said it would setlle back to $35; at $70 they said it would stabilize at $60; at $90, they said $80; and at $150, they said it would come back to $120.

Now on the way down, most predictions are a bit higher than whereve it is. Your prediction of $45-60 is the range most are talking now.

There are a lot of similaries between the oil and tech bubbles. It is quite clear now that somewhere between 50-90% of the rise in oil from 2003-8 was pure speculation. This is similar to the tech bubble in the late 90’s, which we can now see was mostly speculation. Both started with a reason that seemed valid (unlimited potential of tech and China). In both cases. the rise was eerily consistent so that the volatility of the sector was low during the rise. And in both cases, the believers in the bubble clung to their beliefs for a year or 2 after the collapse and kept predicting it was a temporary decline.

From all the forecasts I’ve read lately, it seems like there will not be a real supply/demand issue for at least 3-5 years and possibly 10 years or more. There are enough people believing in oil that we could easiily have another bubble and collapse, but Peak Oil and real shortages appear far off. In the mean time, we may see hybrids and other fuels reduce demand.

It is better if oil does stay higher, though. At $45, many of the new projects will be shelved and the drive for alternates will be less. We will still eventually hit Peak Oil, so a higher price now will help us later.

We are still much more confident in stocks, however. The are understandable and companies can always find ways to adapt to any situation and still eventually make money. There is tremendous pessimism about stocks, especially US stocks, so probably all the bad news and more is already built into current prices.

Meanwhile, the price of oil is heavily inflenenced by both speculation and politics. I could give you a solid argument that the price of oil in 10 years could be $25 and another solid argument for $300. The fundamentals of oil are that most of the “demand” from China was mainly than speculation on futures contracts. The demand form China will be reduced for a few years. Warren Buffett’s purchase could be nothing more than diversification and planning for Peak Oil far in the future.

Betting on oil is a gamble. We are much more confident in the stock market over the long run, even US stocks in the next several years. This is especially true when the market is very cheap and pessimism is massive.

Ed

In retrospect, the timing of this article was quite fortunate.

Ed

Good call Ed

Looks like the time to take a profit was weeks ago… even 1 week ago would have been much better than now.

I was surprised that OPEC said that they wouldn’t cut production – but they quickly reversed that position.

Good points. It makes it look like entirely speculation, doesn’t it? Supply and demand do not seem to be the main drivers of oil prices.

Part of it can be explained though. Gasoline inventory declines now is seasonal. They stock up before the summer driving season and then let it decline near the end.

Ed

I just noticed your post. So, there are more of us? I’m still looking for a good Kitchener farmer’s sausage. I still import from Winkler. I checked the geneology – tons of Rempels not related to me.

One possible reason that oil is not in a slow steady rise is that it is possible that speculators are giving us advance warning about the Peak by bidding up the price prematurely.

It looks like this article was quite timely. Oil has been plunging, so it appears the bubble is popping.

Ed

BTW – same last name as me! Yo Cuz – Kitchener farmer’s sausage all the way…

I’m not in the industry but just someone who keeps up with this topic.
To clarify, I take Peak Oil seriously and it is very possible that we are in the beginning stages. Why the expansion in the oil patch?
Don’t know enough to say, so I’ll take a guess — technical correction.

FYI, one guy at theoildrum opined that a peak oil trajectory would be slow and steady, not the sudden jump we got.

Will

Interesting comments. The score, as best I can figure out is 9-5 for oil bubble. This is somewhat suprising, since based on the news for the last year, I was expecting Peak Oil to be the popular winner.

Also interesting is the plunge in oil prices since this article was published. Is the recent colllapse of oil prices the start of the popping of the bubble or a technical correction?

Ed

It could just be a money grab by oil producers, maybe they’re using to offset the costs of generating this extra 2.5%? Maybe demand is actually down as a result of the cost?

Supply, demand and price are always chasing each other, so the snapshot mentality is not really accurate. Graphs are definitely required here.

This is definitely the weak argument out of an otherwise compelling explanation for an Oil Bubble. I think it’s really relevant to note that current oil / gas prices are at “crisis levels”. By this, I mean that they’re causing lifestyle changes. US transit ridership is basically up everywhere, car-pooling is now easier than ever to organize. And everyone is talking about less general travel.

The truth could honestly be that both are true. We may well have reached “Peak Oil” but be on the verge of an “Oil Bubble”. Oil could be “over-prospected”, but this may be a self-fulfilling cycle. It could be that “over-priced” oil will keep itself that way until reality catches up.

Think of it this way. Consistently high-priced oil will force industry and consumers to react. They’re already doing this, but I don’t think the change has really “happened”. If gas prices went from $4/gallon to $3/gallon next month, then life here in the US would simply return to normal and demand would quickly outstrip supply. However, if gas prices went nowhere, then these consumer and industry changes would continue to happen.

If gas prices went from $4/gallon to $3/gallon in August 2009 (one year), they simply won’t have the same effect, people would already be driving less or using more public transit and the sudden drop in prices would be unlikely to undo the usage habits.

I believe that it’s a really complex machine, and I don’t know that even in these great articles we really have enough information to make a decision one way or the other. I honestly think that there are simply too many variables to make this call one way or the other.

It’s evident that current prices are causing significant changes, and this really breaks the supply / demand curve.

The abiogenic theory theory is an interesting one. I definitely need to look into it.