Oil Shortage fears push oil futures near $140

This is a very good article from the financial times... :borat:

May 21 2008 00:52
Fears of a shortage within five years propelled long-term oil futures prices to almost $140 a barrel on Tuesday, further stoking inflationary pressures in the global economy.

Quote:

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Investors rushed to buy oil futures contracts as far forward as December 2016, pushing their prices as high as $139.50 a barrel, up more than $9.50 on the day. The spot price hit a record $129.60 a barrel.

Veteran traders said they had never seen such a jump and said investors were increasingly betting that oil production would soon peak because of geopolitical and geological constraints.

Neil McMahon, of Sanford Bernstein, said: “Peak oil views – regardless of whether right or wrong – are seeping into the market and supporting high prices.”

Anne-Louise Hittle, of Wood Mackenzie, added that investors were shifting their focus from the short-term to the medium-term, where supply fears played a bigger role. Since January, long-term futures oil contracts, such as those for delivery in 2016, have jumped almost 60 per cent, while near-term prices have gone up 35 per cent.

That trend was exacerbated by T. Boone Pickens, the influential investor who believes world oil production is about to peak as aging fields run dry. He warned that oil prices would hit $150 a barrel by the end of the year.

“Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87m,” Mr Pickens told CNBC. “It’s just that simple.”

Mr Pickens’s view is still in the minority in the oil industry. But concerns over future oil supplies are fast moving into the mainstream and influencing investors.

Politicians have expressed concern that speculators are forcing prices higher and Joseph Lieberman, the influential senator, said he was considering legislation to limit big institutional investors in commodities markets.

Some energy executives have warned that geopolitical supply constraints will mean production will not be able to match demand as early as 2012 to 2015.

This comes as demand, especially from China, is set to continue to grow, while that of the US slows. Adam Sieminski, chief energy economist at Deutsche Bank, said: “The price is going to go up until governments that subsidise oil consumption in Asia and the Middle East can no longer afford it.”

So far China is doing the opposite, having recently retrenched subsidies. Analysts say Chinese demand could surge further as the country faces shortages of coal and hydropower.

Nervousness about Chinese energy demand was exacerbated on Tuesday when officials said 32 power plants had been forced to close because of coal shortages.

PetroChina and Sinopec, the two biggest domestic oil groups, also have diverted fuel supplies to the quake-hit Sichuan region.

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I read this article last night. I think it is a bit misleading and kinda fear mongering. I think a lot of people who read it probably assumed that oil spiked $10 last night, when it's not true. There are futures contracts for whatever amount, including below $100/bbl. Those just aren't being bought right now. I do agree with it, however, with regards to how the "Peak Oil" theory has seeped into the futures market and hijacked it. This horde of $140/bbl futures contracts is based on "supply fears". The key word here is "fear". Nobody knows what will happen in the future and, of course, the press does a lousy job of looking into the facts and going along with this fear mongering.

A few things to note. T. Boone Pickens is an oil investor and has made billions through the oil industry. He will say things to try and influence the market in a specific way to benefit his holdings. Because he's a wealthy investor, his words have a lot of sway, for better or worse. But when he says the world can only produce 85M bbl a day and not a drop more, that's not true and he's either lying or doesn't know the statistics. He's a smart guy, so I think he's being dishonest to benefits his investments.

First of all, there demand for about 87M bbl a day, but that is being adequately supplied at the moment. The first quarter of this year, there was 87M bbl a day produced. So right there, Pickens is talking out of his ass to scare people and drive up the price. Furthermore, the IEA has downgraded their forecast for demand for the whole year.

http://omrpublic.iea.org/omrarchive/11apr08full.pdf

This IEA report is very interesting in itself. Apparently, demand in China isn't increasing as much as expected (imports actually declined in April) and they've even started rationing gas in some parts.

http://uk.reuters.com/article/oilRpt/id ... 0120080513

The FT is also right that developing countries are subsidizing oil purchases. China has a lot of cash right now and they're basically suppressing the price of fuel back home with that money. Venezuela and the Middle Eastern countries do the same thing. How long they can do this for is the question, but they can't do if forever if prices skyrocket the way they are now.

Another interesting factor is that investment banks like Goldman Sachs and Morgan Stanley are actually buying physical oil fields. They've been doing this for the last few years.

http://business.timesonline.co.uk/tol/b ... 481363.ece

http://www.commoditytrader.com/2005/03/ ... ergy_i.php

Not sure about you, but I don't really feel comfortable with investment banks and bankers, like T. Boone Pickens and Matt Simmons, hording oil supply and perhaps deliberately suppressing it to affect the price.

Mr. Pickens also placed the largest order in history for wind turbines this week when he sealed a deal with GE for $2 billion worth of the things, and plans to build the world's largest wind farm in the Texas panhandle.

This might seem a little off topic, but how much was gas per barrel in the 1970s during the embargo? We might be in a similar situation, although its not as obvious.

Plus, why doesn't the us government step in to help gas prices. No, I'm not talking about giving us tax breaks... those wont work. Why doesn't the government start buying gas from the producers at a huge rate. After they have accumulated millions of barrels of oil, they can resell it to the general public and flood the market completely. This would in turn push the gas prices way down for at least a short period where gas is extremely expensive like the summer. After the summer is over and the surplus has been depleted, the gas prices will naturally go back down because of the lack of demand, and we can start the whole process again.

Obviously the gov would be loosing quite alot of money, but I'm willing to bet the people who's jobs were lost wouldn't mind paying higher taxes in order to acquire and retain their jobs.