Ready for the Oil Bubble?

Ready for the Oil Bubble? Source: http://www.star-telegram.com/104/story/651928.html

One law is causing prices to go through the roof By Ed Wallace Special to the Star-Telegram

"There’s a few hedge fund managers out there who are masters at knowing how to exploit the peak [oil] theories and hot buttons of supply and demand and by making bold predictions of shocking price advancements to come, they only add more fuel to the bullish fire in a sort of self fulfilling prophecy." — National Gas Week, Sept. 5, 2005 as reprinted in the US Senate Permanent Subcommittee on Investigations’ report, "The Role of Market Speculation in Rising Oil and Gas Prices," June 27, 2006

There it is in plain sight for everyone to see, exactly what I’ve been reporting for the past few years: Many individuals who are investing in oil and natural gas futures are going out in the media and trying to convince the American public that either we are out of oil or there is a serious supply shortage of crude against worldwide demand. The question is: Does it surprise you to discover that the US Senate investigated the rigging of the oil market by speculators in the summer of 2006 – and concluded that there was no supply and demand problem with oil? Did you know that their conclusion was that speculators were responsible for a 70 percent overcharge in the price of oil in the months leading up to the summer of 2006?

This from page 1 of the Executive Summary of that Senate investigation, there is this one troubling line: "Today, U.S. oil inventories are at an eight-year high, and OECD (Organization for Economic Co-operation and Development) oil inventories are at a 20-year high."

That’s odd because, in 2006, just like today, the media reporting covered the serious international shortage of oil and justified oil’s high price. Even more troubling is that the House of Representatives held a hearing this past December, ominously titled "Energy Speculation and Price Manipulation." How did it pass under the radar that both the Senate and the House studied the issue of price manipulation in our energy markets and both concluded that it was unregulated, massive trading in one futures market that was really driving up the price of oil and natural gas? And given that conclusion, why has Congress done nothing about it?

A week ago Goldman Sachs issued a new investor note, suggesting that somewhere between six months to two years, the price of oil could go into a "super spike" and prices jump as high as $200 per barrel. It became the major story of the night. Ignored in the reporting frenzy was that many legitimate and well-respected oil analysts dismissed Goldman Sachs’ prediction as groundless.

Get ready for the next shock to your system. In the past month we have added 11.9 million barrels of oil into our stock reserves, giving us 32.3 million more barrels of oil than we had on hand January 1. On May 5, we found out that for the second time in as many years, Iran was storing its excess crude oil on tankers in the Persian Gulf, because it had run out of storage space in the desert and was awaiting buyers for its heavy crude. That same day Saudi Arabia cut the discount price for its Arabian Heavy crude to $7.45, hoping to entice more buyers for immediate delivery. We didn’t hear that news, either.

While researching my third article for BusinessWeek online about the world’s oil situation in 2008, I asked for the most current report from Oil Movements. Because the oil industry is not transparent, Oil Movements tracks every tanker at sea, from both OPEC and non-OPEC oil countries, along with their cargoes’ final destinations. Anne O’Shea responded immediately to my request with their report dated May 8, 2008. Just so you will know, oil shipments are up from a year ago in almost every class, including Middle East oil in transit and Non-OPEC in Transit. The only class of oil shipment that has declined is covered on page 3 of that report. That chart is labeled, "4-Week Changes in Westbound Oil at Sea."

That’s right, shipments of oil headed west have shown serious declines during the month of April, down 800,000 barrels per day in the week before the publication of the report. Now, let me give you the first line from under the Westbound Oil shipments chart: "In the west, a big share of any [oil] stock building done this year has happened offshore, out of sight."

Could this be true? Oil Movements, the unimpeachable source for finding the real world situation on oil transits, is saying that oil is being hidden offshore, not declared in inventories? Yes, that is exactly what they are saying.

That same week our refineries cut their production runs back to 85 percent, down from 89 percent a year ago, to trim more gasoline out of our stock reserves, to increase their profits per gallon.

It’s amazing how quickly we forget our recent history. Congressional hearings in 2001, blasting certain Wall Street executives for using the media to sell the public on stocks in order to bid up the price – so their firm could divest of its shares without taking a beating. Meanwhile, other trusted advisors pushed stocks that were fundamentally worthless, because their affiliated banks had large loan agreements with those companies.

The year before Enron had been caught manipulating the California energy market, even forcing rolling blackouts across the northern part of their state apparently just for effect – to support their claim that there just wasn’t enough electricity to go around. Again, we now know that claim was untrue. It was Enron shutting down certain power generation plants, while placing bets on their unregulated energy futures market. The net cost to California consumers was almost $8 billion.

It didn’t end there. Amaranth Advisors, a hedge fund, literally was cornering the market on natural gas futures, to make it appear that there was a shortage of natural gas, when the Commodities Futures Trading Commission told Amaranth to liquidate its position on the NYMEX because its bidding had already moved natural gas prices far beyond the reasonable limits of supply and demand. Now, remember this name: ICE, short for Intercontinental Exchange – the "dark futures lookalike market."

Once the CFTC told it to back off its natural gas futures contracts, Amaranth simply shifted gears, got out of the NYMEX, placed its massive bets outside of government regulation in ICE and managed to drive natural gas futures to $8.50 per MBtu.

As the Senate investigation into the manipulation of the energy markets showed, "Amaranth – the day before they failed, natural gas was about $8.50; the day after it failed, it went to $4.46 MBtu." That’s right, one major hedge fund managed to double the price of natural gas simply by loading up on futures contracts; when the government told them their bets were unwarranted, they simply moved their monies to a futures exchange that was unregulated. Only when Amaranth failed did natural gas prices fall back to what was considered normal for supply and demand.

Sadly, like oil today, when this was happening we were being told that natural gas supplies were tight worldwide. That statement simply wasn’t true.

Likewise, British Petroleum was busted for manipulating the propane market in the winter of 2004 and fined $373 million. Of course, in Texas, under deregulation of our public utilities, our electric rates can be set using the futures market for natural gas, so the manipulation of the natural gas market spelled trouble for us. Consider this, by 2006, according to www.powertochoose.org, electricity rates for us had climbed to 15 cents a kilowatt-hour due to the high cost of natural gas. But, that was the exact same time period that Amaranth was proven to be manipulating the market and sending natural gas futures through the roof. Two months later the hedge fund collapsed and natural gas prices fell. Therefore, most Texans paid higher electric bills for Amaranth’s manipulation of the natural gas market.

Professor Michael Greenberger of the University of Maryland, a former board member of the Commodities Futures Trading Commission, testified in front of the House Committee on Energy and Commerce on December 14 of last year. Under discussion that day was the manipulation of the energy markets and prices, but Professor Greenberger added these comments: "Three, four months from now, you’re going to have a hearing on the subprime meltdown, and you’re going to find that the very same legislation [deregulating energy] deregulated something called collateralized debt obligations, CDOs." That legislation, friends, directly ties the mortgage meltdown to the high price of energy today.

It was called H.R. 5660, the Commodities Futures Modernization Act of 2000. At first this bill went nowhere in the House, not even up for debate. Then, a few months later, late one night a 242-page bill written by Wall Street lawyers, with the exact same name as the former House bill, was quietly added to an 11,000-page appropriations bill, and the Enron loophole was created. The power behind that bill was one Texas Senator, one Texas Congressman and their wives.

Next week: How the unregulated futures market pushes the price of oil, natural gas and gasoline far beyond those commodities’ market value, thanks to the creation of the Intercontinental Exchange. Worse, Congress knows this, but does nothing.

A lot of people are in denial about anything they don’t want to hear. I was on the receiving end of quite a bit of vitriol on a thread yesterday for daring to suggest that we won’t be able to rely on oil much longer and we should stop fighting the inevitable.

The rules need to be changed so Banks can’t use Deposits to speculate.

The rules need to be changed so that only investors that have facilities to take delivery of the commodity can bid.

If this is really true, the speculators need to be thrown UNDER the jail and their families put into debtors’ prison.

These speculators include fund managers for large unions and government agencies. Basically the derivative investors that lost their shirts during the Sub Prime crash. We are talking about the complete failure of the National US financial system and our National government. The House of Cards is very shaky right now. We all knew The People would end up bailing these 'investors out'. We just perhaps did not know how.

This profiteering is not just fattening their wallets using our money — which is bad enough and worthy of harsh punishment. It’s emboldening and enriching the people that would kill us. And that my friends is treason.

The demand is dropping as people stop driving and companies fold. Their profits may not even be an issue here, but I am just speculating. Perhaps this is how we get cooperation to neutralize the Iranian threat ? Who knows.

It’s difficult to compare Housing/real estate and other commodities with the World energy market.

The biggest driving force is fact that China, India and many formerly third-world countries have greatly industrialized. The World demand for oil has nearly doubled in just a short while.

There is not much of a bubble here at all. Maybe a few dollars as the market fluctuates, but in the long run, it will double again in the near future.

From our own standpoint, we have to import refined distillates because we do not have the capacity to meet our own demand. Now that the rest of the World is starting to pass us economically, we will see even more demand that will sustain the current prices and even drive them higher.

Costs of trading with those countries will also go up because the energy costs went up for those foreign traders.

Believe me, there is no bubble, only foam on the water.

I’ve given up on waiting for the increase to supply or the decrease in demand to bring down the price.
We cannot afford (as a family) to do nothing.
We traded in our Fords for Toyotas already.
We’ve cut down on driving - but even that isn’t helping us now.
I’m doing grocery shopping at Aldi’s and Sam’s (buying bulk).

I am not a green thumb, but we recently bought a book on square foot gardening and will give that a try this summer.

Our next step is to figure out the best alternative to our oil fuled furnace - which is only 7 yrs. old.

We’d like to figure out a way to keep the furnace, but power it with a different source.

We also live on top of a very windy hill with enough land for wind power - but in NY the cost of implementing wind energy is out of our reach.

~~~~~Hopefully, they will run out of places to put the oil.~~~~~

According to some people, Iran has a plan to flood the market with cheap oil...The purpose being to destroy the U.S. economy...And some say that’s the real reason we are at the doorstep of war with Iran...

This guy has some interesting information...

http://www.youtube.com/watch?v=NbakN7SLdbk&feature=related

Pinging you for your take on this. I’m as surprised as anyone about the fact that Iran is storing its supply in tankers offshore due to being out of land-based storage.

I was aware we, the US, had decreased our consumption (116 B brls per day?) than in the past, but was unaware of the ‘over-supply’ inferred in this article.

“At least we have a robust supply albeit at an outrageous price.
About 6 months of President O’Bammy and a filibuster proof congress and we’ll be back to 55 mph and gas lines.”

I wrote about what I believe the ‘rats will do to “bring down prices” yesterday in this post:
http://www.freerepublic.com/focus/news/2019195/posts?page=117#117

- John

Since when has cheap oil ever been the downfall of our economy?

It looks pretty certain that 4 dollar oil is doing a pretty good job of it though.

It will,one way or the other. Either:

A. Alternative fuels will take off, or
B. The oil bubble will burst, creating a surplus.

The people here who put these gloom and doom market personalities that say we'll be stuck with high prices in X permanently up on a pedestal as though they were flawless and obviously more capable than the rest of us at predicting the future absolutely crack me up.

Only about 23% of all oil investments are from private speculators. That has very little impact on the market as a whole. The culprit is huge industrial expansion going in China and India, which together host a third of the World’s population.

And the idea of alternative energy ever effecting the price, that is still decades away, if at all.

Money speculators? There’s a ton of them. Look up a list of people who invest in, and then ruined, the Russian ecnomy after the fall of the USSR. Soros and his cronies. They make money off devaluing the currency of nations.

“This is not anything new and it will not help ease oil prices,” said Ehsan ul-Haq, head of research at JBC Energy in Vienna, Austria. “The oil futures market is very strong, but the physical markets are not so strong.”

http://www.freerepublic.com/focus/f-news/2005158/posts

Note the key sentence: “The oil futures market is very strong, but the physical markets are not so strong.”

I’m not sure I follow you. Are you saying that China and India are taking part in the oil futures market? Or the fact that they’re growing so much right now is leading to greater demand, thus raising the price? If the latter is the case this would be in direct conflict with what the article is saying about Saudi Arabia and Iran have vast surpluses of stored oil. I’m confused.

Some interesting facts on oil supply and demand.

World oil production was up 2.5 percent in the first quarter of 2008 over the same period in 2007 while world oil consumption rose by just 2 percent.
Although U.S. crude oil inventories have fallen, gasoline inventories are at their highest since March, 1993
The U.S. consumed 4 percent less petroleum in January 2008 than it did the year before.
China's thirst for oil is abating somewhat. Its demand for oil, which once rose at 10 percent per year, has now dropped to 6 percent per year.
World surplus oil production capacity has gone from a very tight 1.5 million barrels per day a couple of years ago to more than 3 million barrels today
Since September 2003, the total number of open crude oil futures and options contracts rose by 364 percent. Meanwhile the global demand for petroleum rose by just 8.2 percent.

Source: ReasonOnline

It would appear that speculation may be a bigger contributing factor than you acknowledge.

If you’re correct, to me it’s almost like they’re indirectly declaring war on our country. If their goal is a profit with the added consequece of destroying our economy, they should be treated as foreign invaders and dealt with accordingly. :-)

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