May 05, 2011
More on oil markets
Posted by James Hamilton at May 5, 2011 02:21 PMdigg this | reddit
New jobless claims at 474,000; oil prices plunge. Oh, if only one could unequivocally claim cause and effect!
Nice articles, by the way.
Posted by: Steven Kopits at May 5, 2011 02:51 PM
Interesting readiing Prof. Hamilton, however, I did not see any comments on the "rebound effect".
Posted by: s@ndy at May 5, 2011 04:39 PM
Thanks for these posts, Professor.
If we are watching the unwinding of a silver bubble, and commodities speculators are having to cash out winning positions elsewhere (e.g., Oil) to meet margin calls, then the sputtering economic data - which seem right in line with an Oil price shock to me - will quickly reverse again.
Stall, not downturn. Thanks again.
Posted by: New Deal democrat at May 5, 2011 04:59 PM
I am confused as to why the oil sold off almost 10% today. I thought supply and demand was what was driving it higher, and most of the demand was coming from China and other developing nations? If speculators weren't driving the price of gas up, what oh what would cause it to drop 8% in a day?
Posted by: river at May 5, 2011 06:05 PM
Interesting work. i spent time examining oil prices, and I think what you miss is the extent to which the rise in oil price continues.
Oil is a volatile commodity, subject to significant swings. What I think virtually every analysis is missing is any real figures on the true marginal cost of oil. Given today's events, I would suggest that the piece that appeared here last weak suggesting that speculation was not the reason behind the recent rise in oil prices was clearly in error. It is obvious that even such things as margin calls have produced nearly a 10% swing in oil in one day.
I would love to hear an explanation of how that is about anything other than speculation.
This may sound overly harsh - and not solely directed to you - but until I see hard figures on the marginal cost of oil I will regard most of the analysis of oil as speculation which misses the fundamental driver in the price of any commodity.
In fact, the work tends to prove the opposite of what you argued last work.
Posted by: fladem at May 5, 2011 08:06 PM
Oil will be back to 140 USD ( Brent) in July, perhaps as an answer to QE3, perhaps more supply disruptions, perhaps both.
This old feb 6th graph, predicted 2 peaks and 2 dips, including the current one to Brent 110. That is a just a temporary dip, caused by silver bubble burst and its effect on commodity speculators.
Posted by: Ivars at May 6, 2011 12:05 AM
Good article. It would seem that the price of oil can be viewed as a leading indicator of economic growth and that near-term growth expectations have declined sharply.
fladem: You are new. All those have issues have been covered here.
The current cost of a marginal barrel is an interesting question. I'd say it was close to US$75/bbl and the rest of the price reflects security of supply concerns.
Posted by: westslope at May 6, 2011 04:52 AM
I think it's funny that so few Americans understand speculation. It's not evil, or illegal, or detrimental. Speculation can temporarily increase prices and it can temporarily decrease prices. I'm sure there are some oil producers somewhere upset that speculators have driven the price down over the past few days.
So you have a major, significant trend toward an imbalance between demand and supply. The only ways to resolve the resulting near-future crunch are for demand to fall or supply to increase. What will encourage more supply and less demand? Higher prices. What's the mechanism in the free market to signal the problem? Traders driving up prices.
What happens when the major consumer looks like they may be headed for less demand? (As in, the preliminary jobless claims rise significantly.) Well, if there will be less demand, prices should fall. That's not rocket science. Why do so many Americans have such a hard time understanding that?
Posted by: kjmclark at May 6, 2011 04:53 AM
The second myth that deserves a decent burial is that commodity prices are driven almost exclusively by fundamental forces of supply and demand and are unaffected by the build up and liquidation of speculative positions.
This argument has never seemed very plausible. But its adherents have clung on with surprising tenacity. It remains the official line for much of the research establishment as well as regulators, who continue to argue price movements can be largely or entirely explained by fundamental factors and that there is "no evidence" that speculation or investment flows have an impact.
It would be hard to find ANY fundamental factor that could explain how Brent crude prices could be worth $120 at the start of Thursday but less than $110 under twelve hours later.
Rising risk aversion or other fundamental economic factors certainly cannot explain the move. The Dow Jones Industrial Average has fallen less than 1.5 percent. Only developments internal to the commodity markets can explain the sell off.
Once it is accepted the accumulation and liquidation of positions can affect prices to such an enormous extent over short periods owing to uncertainty about fundamentals, limitations on liquidity, and shifts in sentiment, it is logical to accept that speculation can and probably does have some impact over longer time scales.
Posted by: river at May 6, 2011 08:28 AM
Watch it on "jobless claims". They are being impacted by the Southern storm sprew. It was very unusual and indeed, forced a artifical rise in jobless claims.
You could see that for 2 weeks now.
Oil did have some "froth" in it and traders are liquidating positions to take some profits.
Posted by: The at May 6, 2011 12:24 PM
I have improved a bit oil price prediction chart after the previous version ( Feb 6th) correctly timed/priced current dip.
Current oil dip will end already in May,at around Brent 100.
Posted by: Ivars at May 6, 2011 01:25 PM
IMO, average annual crude oil prices give us a far better idea of fundamental supply & demand factors. And there have clearly been some supply issues since 2005:
Global Crude Oil Production Versus US Oil Annual Spot Crude Prices
(EIA, crude + condensate, rounded off to nearest one mbpd)
2002: 67 mbpd & $26
2003: 69 mbpd & $31
2004: 72 mbpd & $42
2005: 74 mbpd & $57
2006: 73 mbpd & $66
2007: 73 mbpd & $72
2008: 74 mbpd & $100
2009: 72 mbpd & $62
2010: 74 mbpd & $79
There was a clear price signal from 2002 to 2005, as oil prices rose from $26 to $57. In response, global crude oil production increased by about 7 mbpd, a 3%/year rate of increase. If global C+C production had continued increasing at this rate, global production in 2010 would have averaged 86 mbpd, but lets look at what actually happened.
Annual oil prices from 2006 to 2010 inclusive have all exceeded the $57 level, and four of the five years have shown year over year increases in annual oil prices. In response, global annual crude oil production has so far not materially exceeded the 2005 level, and in fact we have seen a large cumulative shortfall between what we would have produced at the 2005 rate and what was actually produced.
But net oil exports are far more important to the oil importing countries, and we have seen a measurable decline in both Global Net Exports (GNE) and Available Net Exports (ANE). I define ANE as GNE less Chindia's combined net oil imports. ANE fell from about 41 mbpd in 2005 to 38 mbpd in 2008 and then down to 36 mbpd in 2009 (total petroleum liquids).
We don't have the 2010 data yet, but a plausible estimate is that ANE will be down to 27 to 30 mbpd by 2015.
Given the above numbers, what is truly bizarre is the widespread belief that generally rising oil prices are not related in any way to supply issues.
Posted by: Jeffrey J. Brown at May 7, 2011 06:53 AM
It is also truly bizarre that Americans perceive no conflict between various foreign policy goals such as supporting the flow of Jewish settlers to the West Bank of the former Palestinian mandate, and securing stable supplies of Mid-East oil. US-supported territorial gains made in the 1967 war of colonial acquisition have contributed to pitting the USA against 3 light oil reserve-rich nation states: Iraq, Iran and Libya. War, embargoes or various degrees of diplomatic isolation have contributed to keeping millions of barrels of light oil away from the markets.
In the meantime, behind the din of Arab civil conflicts, Israel has resumed the flow of settlers to the West Bank. Throwing Eqyptian President Mubarak under the bus virtually guarantees a more open border with the Gaza, where, if you recall, Israel was militarily pushed out a few years ago (and the settlements abandoned). The PLO and Hamas are talking. Turkey and Egypt both appear poised to adopt new, more creative, constructive ways of engaging Israel and expressing displeasure with the on-going colonization of the occupied Palestinian Territories. The Arab Spring has set in motion broad lofty expectations that virtually more future social conflict.
The sources and catalysts of potential conflicts in or near oil-reserve countries going forward are numerous. Hard not to agree with JDH's forecast of future supply shocks.
So how many years or decades will it take for the US to significantly increase fuel excise taxes or carbon taxes that should accomplish the same goals of decreasing consumption for given demand, and spurring further innovation? This is the one tax that can make Americans unequivocally richer.
Posted by: westslope at May 7, 2011 11:29 AM
It it were up to me, I would abolish the highly regressive Payroll Tax and fund Social Security/Medicare with tax on energy consumption.
Posted by: Jeffrey J. Brown at May 7, 2011 06:37 PM