Oil's tipping point: Where is it?

Houston Chronicle ^ | April 22, 2008, 9:56PM | KRISTEN HAYS

[thackney]

With crude approaching $120, experts look for hints of decline

With oil less than a buck away from $120 a barrel, analysts are growing weary at trying to anticipate the tipping point that will bring prices down.

Some say a six-score price could prompt developed countries to pressure the Organization of the Petroleum Exporting Countries to increase production whether or not the cartel sees a need to do so.

Others say it's folly to predict a tipping point until the weak dollar stabilizes and strengthens.

Either way, analysts say, it's reaching the point where something's got to give.

"I'm hopeful that we are in the grand finale of this 2008 event," said Tom Kloza, chief oil analyst at the Oil Price Information Service in Wall, N.J.

The side effect of high crude prices most visible to consumers, the price at the gasoline pump, also is setting records — and for the first time this week it surpassed its all-time inflation-adjusted high.

Oil crossed that threshold several months ago. The federal government says the average U.S. price per gallon of gasoline hit $3.508 on Monday, nearly a dime higher than the March 1981 high of $3.41 in today's dollars ($1.42 before adjustment for inflation.)

That continued push also prompted analysts to speculate that oil's run-up is reaching its last rally.

Kloza said attempting to identify the tipping point is "pretty much an exercise in abstract thought."

Earlier this year, though, he compared $100 oil to the pre-dot-com bust Nasdaq stock exchange rally in 1999 and 2000, though he wasn't clear on whether $100 oil represented Nasdaq at 4,000 or 5,000.

"It is now clear that it represented the former, and not the latter, which represented the last throes of the bubble," Kloza said. "I hope $120 a barrel is the equivalent of the Nasdaq 5,000, which would put us in the last inning."

Crude for May delivery came within a dime of $120 a barrel Tuesday before closing at a record $119.37 a barrel on the New York Mercantile Exchange. The push came amid the dollar's fall to another low against the euro, which makes oil a cheaper buy for foreign investors.

Demand in China, India and the Middle East remains strong, while U.S. demand is flat or falling, awash in worries about a recession fueled by the credit and housing crisis and negative jobs data.

Geopolitical factors that raised concerns about supply in recent days include militant attacks on Royal Dutch Shell's oil operations in Nigeria that shut down 169,000 barrels a day of production; a pirate attack on an oil tanker near Yemen; and revelations that oil production in Russia fell in January and February.

Dollar called driving force However, Addison Armstrong, director of market research for TFS Energy in Stamford, Conn., said the weak-and-weaker dollar is driving the ramp-up.

The Federal Reserve has slashed U.S. interest rates to aid efforts to stave off a recession.

The European Central Bank hasn't cut interest rates and hinted this week that it may raise rates to address inflation — which could widen the gap between the euro and the dollar.

"Until the dollar really stabilizes and turns, it's foolish to try to call a top in this market," he said. "This crude rally is all about the dollar."

Cushion of subsidies Also, consumers in emerging economies like China and India where demand is strong haven't felt the pressure of high prices prevalent in the U.S. because their governments subsidize their gasoline costs, Armstrong noted.

"I think the tipping point really has to come when we see more significant demand destruction here in the U.S.," he said.

"The longer and deeper the recession in the U.S. is, there is a chance that begins to impact China's economy and India's economy and some others where we get a lot of imports. In a slowdown, we wouldn't be buying as much, and that could impact what is happening overseas."

For now, however, demand in emerging economies is more than offsetting slower demand in the U.S. and other developed countries, said Brian Hicks, co-manager of the U.S. Global Investors Resource Fund in San Antonio.

An OPEC increase? And Hicks said $120 a barrel could prompt developed countries to pressure OPEC to "at least think about or consider" increasing production.

Top policymakers in Saudi Arabia, the world's biggest oil producer, have said recently the kingdom sees no need to increase output anytime soon. But International Energy Agency Executive Director Nobuo Tanaka said in a speech Sunday that OPEC should help boost oil inventories because prices are too high.

Hicks noted that OPEC has less spare capacity than in the past — now less than 2 million barrels a day — but there's room to talk about upping output with oil hitting its current level.

"That's probably at the point where you start to see global leaders maybe get involved," Hicks said. "It's becoming more and more of a headwind to the economy."

Kloza said $120 oil doesn't change his prediction that the average U.S. price for gasoline will range from $3.50 to $3.75 a gallon with exceptions in some areas, such as California.

He has said $4 per gallon gasoline isn't reasonable given the sluggish economy and underlying fundamentals of supply and demand.

"Let's hope so," he said Tuesday.

[thackney]

Sorry, but understanding the industry is greatly different from being able to predict the pricing market.

I do believe Natural Gas has more possibilities in short term growth of supply, but I wouldn’t make any promises about which would rise faster.

[thackney]

Reserves 1/5 the size of the US (not counting places like ANWR and Florida Coasts) is not going to flood the market. It will help, but this a expected to be less than half the size ANWR.

[ConservativeDude]

Well, it also doesn’t help that OPEC has initiated much of this “falling dollar” scenario by deciding to ditch the dollar for the euro. “

Is that official OPEC policy? I did not know that, but that sure makes sense now.

[thackney]

No.

[Gvl_M3]

One thing I would like to see added to the futures market, is that you have to be able to take delivery of the oil you purchased.

With Rolf’s example, you can buy food, store it yourself, and sell it a year latter.

How can I buy 1000 barrels of oil and store it in my .25 acre back yard?

If this was a requirement, it would greatly slow down the speculation.

[wardaddy]

it will start when demand goes down due to intolerable price.

and that has started...give it time

just like the early 70s and 1980

problem now is when are we gonna decide that Enviro-Weenie gas prices are too damn high

[Sgt_Schultze]

At this point, it's not even a supply issue. US refinery utilization is running at only (about) 82% of capacity. There's still residual capacity but slowing delivery allows for a larger profit.

[ROLF of the HILL COUNTRY]

How?

[Sgt_Schultze]

how what?

[7mmMag@LeftCoast]

Not to burst your bubble, but the DOE document seems to indicate consumption will out pace prouction by 2030, except for only the most optimistic estimates - which rarely comes to pass.

As a matter of fact they indicate historical trends of consumption greater than production for 1990 through 2005, though it is harder to gauge due to the fact that DOE omits the 2004 and 2005 consumption data, but includes it for the prouction data, makes it harder to compare apples to apples.

Was that intentional?

[ksen]

So, when do the developed nations of the world tell OPEC no more food shipments until oil production goes up?

[trumandogz]

Thank God that the Chinese and Cubans are drilling off of the coast of Florida. The US certainly can’t.

I was not aware that the Chinese and Cubans were drilling off of Florida. Do you know if they are actually drilling in U.S. territorial waters?

[trumandogz]

Bush Would Use Power of Persuasion to Raise Oil Supply (2000)

WAYNE, Mich., June 27 — Gov. George W. Bush of Texas said today that if he was president, he would bring down gasoline prices through sheer force of personality, by creating enough political good will with oil-producing nations that they would increase their supply of crude.

http://www.nytimes.com/library/politics/camp/062800wh-bush.html

[7mmMag@LeftCoast]

Would not matter, you still need refining capacity to handle the increased production.

Despite the misleading % utilization number in a previous post pertaining to refining capacity, the utilization rate is due to the high maintenance needs and down time of 50 to 90 year old refinery equipment, not because someone wants to artificially stimulate profits.

These people need to learn something about maintenance and production equipment. Pumps, compressor, motors, reformers, etc. do not magically run forever.

The older refineries will never increase production and utilization rates without a major investment that includes restructure and/or replacement of their current refining equipment/systems, which could potentially cause a refinery to shut down for 2 or 3 years - then the libs would really scream.

We need to build MORE REFINERIES, but the lib goofballs won't let us do that either. Then again if my premise that the oil may run out in about 80 years is correct, then none of it matters that much in the long term. We need to build more nuclear power plants, a lot more and soon.

[thackney]

If this was a requirement, it would greatly slow down the speculation push all futures trading to overseas markets.

[thackney]

it will start when demand goes down due to intolerable price.

and that has started...

Not yet, Global demand for oil continues to rise, although at a slower rate.

[Eva]

Reducing oil consumption in the US will do nothing to lower the price. The slack will be picked up by China and other countries. If the demand does eventually decrease, the producers will cut output.

[thackney]

As a matter of fact they indicate historical trends of consumption greater than production for 1990 through 2005, though it is harder to gauge due to the fact that DOE omits the 2004 and 2005 consumption data, but includes it for the prouction data, makes it harder to compare apples to apples.

Was that intentional?

The sources for each are from different EIA documents.

I tried looking at a common source like their International Energy Outlook, but it is nearly a year old, to be updated in May. And some of those historical dates are based upon 2004 data.

http://www.eia.doe.gov/oiaf/ieo/oil.html

It is almost impossible for any organization to accurately predict out to 2030. As an example, look at what their price projects were from just last year.

In spite of their wide band, we were outside it rather quickly.

Higher prices than predicted "should" decrease demand and increase supply. On the other hand, the fact we are already outside their band of anticipated pricing means conditions are already beyond what they considered.

[tatown]

“Are you putting your own money on that claim in the futures market? If US gasoline consumption fell by 20%, that is only a 2% decline in the world oil consumption.”

If US consumption represents 25% of global consumption, how does reducing the US consumption by 20% only reduce global consumption by 2%?

You might want to check your math but:

20% of 25% = 5% (not 2%)

[thackney]

US consumption consist of a lot more than gasoline. Gasoline is less than half our petroleum consumption.

The US consumes about 9 MMBPD of gasoline. The World consumes about 85 MMBPD of crude oil.

20% of 9 = 1.8

1.8 = 2.11% of 85