Friday 18 July 2008

"Crude Oil Breaks Below Major Support as Forecast"

From The Market Oracle, see also the FT.

Now we will find out whether oil prices were indeed driven by fundamentals or speculation. Or, the more sophisticated view, by hoarding, i.e. just leaving the stuff underground (there being no evidence for actual hoarding in tanks above ground).

This was explained in an FT article recently - if oil rich countries expect oil prices to rise faster than interest rates, the NPV of oil in the ground is higher than the NPV of oil that they can extract and sell today, so there is no point in pumping any at all.

5 comments:

Anonymous said...

My guess is that oil will fall no further than $110-$120 which will be hailed as salvation for the world economy, and until another big banks go tits up, will support the current bear rally. Which is strange really because two years ago we were assured that oil over $100 would precipitate a world recession.

Mark Wadsworth said...

That's the point of the FT article.

If you were King of Saudi, then you would pump the stuff now and sell it for $130 rather than wait a year and sell it for $110. So more pumping now speeds up the fall.

And you will keep pumping as long as you expect prices to fall in short to medium term.

When the next bubble starts, the reverse applies. If you can sell it now for $50, but you expect prices to rise to $60 in a year's time, if you sell it now and put the money in the bank on, after a year you have $52 with interest.

If you pump and sell it in a year's time, you have $60 in the bank. So you slow production down again.

All this rather turns the supply-demand curve on its head, but hey.

Anonymous said...

If you pump too fast, you bugger the field (in the sense of reducing the total amount you'll eventually get out).

Simon Fawthrop said...

But if all the producers start pumping is there enough refining capacity? These people don't thiks os

http://www.peak-oil-news.info/oil-refinery-capacity-bottleneck/

And if that is the case then there is still a scarcity problem downstream.

Mark Wadsworth said...

D, GS, that may be true. I know little about the practicalities, I do know about the economics, the key to this being a teeny tiny disruption of 1% in supply leads to an enormous increase in price. If the Saudis pumped a tiny little bit more, they'd build the refining capacity in two shakes of a monkey's tail.