The commodities reversal is beginning to punish some large investors. Ospraie Management, one of the largest players in commodities, said it is shutting down its biggest fund following significant losses. The fund declined 27% in August alone on bets on oil, natural gas and structured products. Formerly high-flying commodities-related stocks have also taken a beating in recent sessions, hurting stock investors who had hoped to ride the commodities wave.
Like Grandma always said, the wheel goes round and round, and sooner or later the fly on top gets to be the fly on the bottom.
Will the same people who demanded a "windfall profits tax" now demand a "huge losses subsidy" if the price of oil continues to go back down?
Looks like the bubble has burst. Any fund that was betting for oil to hit $200 a barrel is taking risk to new heights. A fool's bet.
And yet, there's still a remarkable lack of willingness to discuss this topic in plain, blunt language. What we have just witnessed was a commodities bubble, exemplified by (but not limited to) the dramatic and sudden rise in the price of crude. Like most bubbles, its origins lay in the regular operation of the market - rising demand and limited supply led to rising prices. But what distinguishes a bubble is that prices become unmoored from market fundamentals by the irrational expectation that short-term trends will be extended indefinitely. That's precisely what happened. (In this case, that was compounded by the long-term shift of assets into commodities, and the short-term flight of inflation-fearful capitol into those markets.)
I listened last week to television and radio commentators explaining that crude surged a dollar or two on fears of Gustav, and then a few days later, that it had fallen seven dollars as those fears receded. It would have been more accurate to say that fears of Gustav temporarily stalled the established declining trend, and that it made up for lost time once Gustav diminished as a threat to supply. Sometimes, covering the prices on a daily basis blinds reporters to the obvious (like: if the fear only drove it up by $2, how can the absence of that fear lead it to fall by $7?)
Of course, the initial rise in price was solidly grounded, and we won't see a return to cheap oil anytime soon. But we've seen an awful lot of bloviating about irresponsible consumers who bought into the real estate bubble. It's worth bearing in mind that the most sophisticated investors in the country just got their clocks cleaned by a bubble of their own (making).
Cynic, I don't usually do this, but man... you win the thread.
Democrats don't want to talk about this because it makes the strategy of going after speculators seem pointless (now that their clocks have been cleaned as you say). Republicans don't want to talk about it because it makes "drill here, drill now!" seem pointless.
It all depends on what you mean by "circle" and "reversal." You've provided no absolute numbers or criteria, so I'm not sure what to make of your analysis or comment.
I looked at the issue of commodities and in particular oil production versus consumption around eight years ago, looked at EROI issues with respect to alternatives, and decided to move big time into oil at $35 and $55. Sure, there are ups and downs, but the essential analysis, considering the past prices and future needs, is that cheap oil ($20 or even $50/barrel) is in the past. These gyrations up and down are what one would expect in a tightening global market. Get used to it.
Speculators are always going to jump into something like commodities, but let's not forget the big picture.
Long oil. Long commodities.
Oil slides back towards $100 a barrel despite strong economic growth in the US.
What strong economic growth? Real growth or growth plus inflation? What would have happened with out those stimulus checks? What will Q3 look like?
Republicans don't want to talk about it because it makes "drill here, drill now!" seem pointless.
If you agree with Cynic and others that "we won't see a return to cheap oil anytime soon", why is "drill here, drill now!" rendered pointless? If oil supplies are tight, then that's a good solid argument for extracting more, isn't it?
I wouldn't say the bubble has burst until oil is safely well below $100. At least near $80.
And SG is exactly right. Keeping oil in the ground is a fool's game. The current model is that current price is the best predictor of future price. That means equal up and downside risk. Keeping oil in the groud doesn't reduce risk and prevents the compounding growth produced by the income and wealth generated.
In the short-run profits could be made by not fully utilizing capacity to drive up price and pressure countries allow more production capacity be built, but beyond that it's insane. Don't be the last on turn on the taps.
"compounding growth produced by the income and wealth generated."
Yeah, of growth all those useful SUVs and manufacturing lines producing them.
Brilliant analysis, just brilliant.
As Jim Rogers has noted, since the current secular bull market in oil began in 1999, oil prices have corrected by 40% or more three times. The key question is this: is the current correction another cyclical correction, or is it the end of the secular bull market in oil? My bet is that it is a cyclical correction, and oil will make new highs over the next few years. Those who now think the world is drowning in oil are putting a lot of oil E&Ps on sale.
aaron,
FWIW, I don't think it's necessarily a bad idea to keep it in the ground. The economy has shown it can sustain itself at $100/barrel oil. As long as we don't have a viable replacement for oil, I view ANWAR and the like as an unintended strategic petroleum reserve.
If oil does become too scarce ("too" being a subjective term) then it makes sense to tap it. Or if we can see a real light at the end of the tunnel, then start tapping it to deprive OPEC of some revenue. But until then, I'd suggest leaving it where it is.
Another benefit of increasing domestic energy production is that it will create a lot more high-paying blue collar jobs for Americans. Todd Palin is an example of an American who has benefited from high-paying work in the energy industry. Click on my name if you want to read a post I wrote about this, but, according to an Anchorage Daily News story Megan's colleague Jeffrey Goldberg linked to recently, Todd Palin was making $100k-$120k per year working for BP on the North Slope.
SG,
Since it can take years to get significant production from new fields, even if you didn't want us to consume more domestic oil and wanted it kept as a strategic reserve instead, wouldn't it make sense to drill for it now and store it where it would be readily accessible in an emergency?
Since it can take years to get significant production from new fields, even if you didn't want us to consume more domestic oil and wanted it kept as a strategic reserve instead, wouldn't it make sense to drill for it now and store it where it would be readily accessible in an emergency?
Yes, if (big if) I believed that would happen. But I don't. Any oil that is extracted will be immediately sold on the market. I view the political process that keeps us from drilling reflecting the public's view of scarcity. When oil got expensive, drilling became popular. It's not a well-defined process, but it's got a feedback loop.
Sure it will take time to bring new sources on-line, but my understanding is (at least for off-shore drilling) the delay is in getting the equipment. So even starting now doesn't start now. When oil gets really scarce, presumably there will be more equipment, or at least some of the current equipment will be idle (or underutilized), so the equipment delay should go down with time.
I don't claim that what we're (not) currently doing is optimal by any means. Just that it's not completely stupid, even if only by accident.
Sigh. Enough Nobel prizes have been won by economists asking, for it to acquire a name: The American Question. The Question is:
If you're so damned smart, why ain't you rich?
Which is silly. If you could act based on knowledge of the future behavior of a market, the market would compensate to negate the advantage. It's feedback, folks.
Speculators who drove the tech bubble got their profits out and used them to drive the energy (Enron) bubble and got their profits out and used them to drive the mortgage bubble and got their profits out and used them to drive the oil bubble.
For at least the last ten years the values of the indexes, DOW, NASDAQ and S&P, have seemed to me to reflect more of the size of each speculative bubble than any underlying corporate asset value. Investment bubbles are legal pyramid schemes, with the small investor who go in late and get out late paying off speculators who time their exits better. But I think our bubbles have burst and it's time the stock market economy comes back down to the living economy.
Nice points SG.
Roger, financial speculators generally stabilize prices, provide liquidity etc. Bubbles are usually a result of excess money supply and lack of easily identifiable opportunities. The financial speculators generally make it harder for people to run up the price and for bubbles to happen. And for a speculative bubble to pop, we will need speculators to put downward pressure the price.
SG,
ANWR is federal land. There's nothing stopping Congress from allowing drilling in a little section of it and at the same time legislating that 100% of the oil produced be bought by the federal government and placed in an expanded strategic petroleum reserve.
Regarding offshore drilling, during the time it would take to build new rigs, E&Ps would be doing the necessary mapping and seismography, which would take a couple of years anyway. But even once a new field is discovered, and the rig is on site, it can often take years to generate economic levels of oil from it. These are big, complex engineering projects (see, for example, the work involved with Brazil's Tupi discovery). That's no reason to put them off though. In addition to creating a lot of high-paying jobs in this country, every barrel of foreign oil that we can replace with a barrel of domestic oil will reduce our trade and fiscal deficits as well.
No, we won't be able to produce all of our oil needs domestically, but we'd still be better off if we produced more domestic energy.
DaveinHackensack:
I'd have no problems with your proposal either. I'm only stating that our national gridlock on drilling, while not a considered act, isn't entirely a bad thing.
Speculators provide price stability over time. I'd like to thank them for serving their function. It makes all our lives easier.
Hey, let's put the "fun" back into "fungible"!