Oil Consumption Forecast Lowered

[Fredledingue]

It's clear that off these $260 Bln invested currently in oil futures, some billions will have to be cashed in and placed into something else. It starts looking like a card castle.
The article says that it came from $15 Bln in 2003 to $260 Bln today partly because of higher oil prices, partly because of larger investments. So at equal initial investments, if counting only the rise in oil prices, it should make $70 Bln.
The part of higher prices is $55 Bln, the part of higer investments (understand "speculation") is $190 Bln.
If this is not a bubble...

The oil frenzy is based on concurent factors. And we can say that we are served with the total explosive cocktail here, but I don't believe that it will last forever.

-A weak dollar
Unfortunately the dollar will remain weak. But if oil prices starts to go down for one of thet reasons below being infirmed, commodities (oil) won't be that good a hedge against a falling dollar anymore.

-Rising demand
Another article today pointed to lower industrial output in China. Already! Yet, on another article published the same day, it's stated that gas demand is still booming in China and in the rest of Asia.
That doesn't hold water: If there is an economical slowdown, and a lower industrial output certainly is, there will be lower demand for gas from individual car owners.
That will come like a shock because everybody but me expects gas consumption to keep growing in 2008. The problem is that we don't have numbers as up to date for Asia than for the US.
The so famous BRIC regions, responsible for almost all of the global oil demand increase, have seen their economy booming under a policy of low gas prices for all. This policy is now under question for obvious reason.
Near $150 a barrel, it's certain that such policy is unsustainable. (see above for more details)

-oil production
Oil production has been unchanged globaly, even reduced in the US, Venezuela and Nigeria. Normal that oil prices keep climbing Mount Everest.
But what happens when oil offer finaly rises? It may take a bit longer to drill and a bit more money to pump oil deeper, but it doesn't cost $150 to do it. (see above for more details)

-Iran
That's the most dangerous factor. But it's not like no oil will pass the Straight of Ormuz if Israel (or the US) attacks.
There could be disruption, and clearly then $150 or even $250 could be justified if that happens, but it will be short term.
Iran is in no position to block the sea routes, they won't dare attack arab states and they won't disrupt their own exports.
"If israel attacks Iran" can also be "if Israel doesn't attack Iran". IMO, the latter is more plausible. Israel will attack only under extreme necessity.

[Airelon]

Dude, just remember - this isn't about automobiles. That's such a small part of it. This is about petroleum. Which is in everything you see.

We've had speculation in it's current form for the last 60 years. Something, fundamentally - has changed. Heck, I've been doing it for 12 years. The trend started as soon as countries totaling 2 billion people got involved in purchasing the markets.

Remember - that if we started repealing the laws that are on the books and drilling for oil today - in various places such as the Atlantic coast, the Arctic, and elsewhere? It'd take about 10 years for the infrastructure to be setup to be able to meet demand. That's being conservative. Some people say 25 years.

[Fredledingue]

Ok, demand is rising and output barely follows. But...

$260 billions invested in oil futures is not normal.
$100 billions in gasoline subsidies globaly is not normal.
Stabil or decreasing oil production is not normal.
Only 200 vehicles in the world driving on hydrogen in 2008 is not normal.

If Saudis are saying that they don't plan to increase output, it's because there is no buyers (at these prices). Not that there is no demand but big buyers are waiting for lower prices before buying.
Oil prices stands at $145, not because India has bought tankerfulls of oil at this price but because commodity speculators have bought it on-paper and this oil is now waiting to be sent, God knows where.
I wouldn't be surprised that most of Forex traded oil is never shipped anywhere and that the new big oil consumer nations like China are buying their oil much cheaper.
Opec members are not crazy: they are not increasing production unless there are buyers at current prices. They found out that it's more profitable to pump oil prices than oil itself.
But make no mistake, Saudi will be ready for an additional 1.2 millions barrels a day by next year if needed.

Why I think emerging economies are buying oil much cheaper than electronicaly traded futures, is that they would be ruined with their current gas subsidies policy.
There is only two solutions: Either oil prices stays at these prices because they are real but gas subsidies stops and so does gas consumption growth or oil prices drop to were they are physicaly exchanged in the real world.
Here is an excellent article about these subsidies:

Originally Posted by The Christian Science Monitor

In China, the government caps gas prices. Drivers there pay about half of what Americans pay. In many countries, oil prices are held artificially low, either by fiat or subsidy. The result? Consumption keeps rising, boosting global prices. The rest of the world – the part now racing to conserve – ends up paying more than it should.

Unfair?

Yes, say global actors such as the International Monetary Fund (IMF), which is calling on governments to let consumers face market prices in order to kick-start conservation and reduce official spending.

About half of humanity, from India to Chile, now benefits from cut-rate petroleum prices. In 2008, these countries will account for all the growth in world oil demand, or an additional one million barrels a day, according to Deutsche Bank. Their consumption will be the highest in eight years.
And these subsidies will cost as much as $100 billion in 2008, or twice as much as last year, estimates the International Energy Agency. That would be money better spent on reducing oil use – what's called "demand erosion" – than encouraging it. And sadly, it is the rich who benefit the most. The IMF says the top one-fifth of households in income receive 42 percent of fuel subsidies because they are the heaviest users.

full article - click here

Now one note on "oil is in everything you touch or see". Yes but...
During during the refining process, oil is divided in separate distilates. White spirit and other solvants are the lightest of these distilates, followed by gasoline, diesel, etc the heaviest being asphalt. So the more you drive the more you force rafineries to produce all the petroleum subproducts.
So far it's not plastic consumption or road expansion that are driving the oil prices but cars and heating fuels.

[Novice Investing]

Bloomberg.com: Worldwide

Price of gasoline in China is now $ 3.42/gallon ($ 143.64 per barrel). Assuming gasoline price is $ 10 higher than crude, Chinese government is now subsidizing at around $ 10 per barrels of its gasoline demand. That is 'only' $ 60 Million per day, $ 21.9 Billion per year, which is peanut for the government. Trade surplus is running at > $ 100 Billion annually. Anyway, regarding the Chinese apettite for fuel oil, I don't think they have that much of a disposable income.

Lookie here. $ 3.42/ gallon is what the US was paying for gasoline just last year. And I don't think the salary in China is increasing that much. What is their current income per capita? I am guessing at around USD 5000/year. The US income per capita is around USD 44,000 per year. Now, I know that living cost is lower in China than in the US. But is it 10 times lower? In big cities where the demand of car is, I don't think so. Further, for cars, the Chinese are paying around perhaps 15% less, not much more since steel plastic part etc is a widely traded commodity. How about housing? I think labor cost is much cheaper than in the US, and I am guessing that houses construction is about half as cheap in China. Land in China is more affordable. but then again, in big cities, does land cost 10 times less than in the US? I don't think so. I am guessing 5-6 times but not much more. Food, yes, the Chinese eats less food than in the US. Looking at income distribution, I don't think the Chinese will have more disposable income than us. Thus, if $ 4.00 per gallon of gasoline has started to reduce demand in the US, it will do so too in China, even with current subsidized price of $ 3.42 per gallon. In short, the growth of 6MBPD demand of oil from China will not come from gasoline consumption. Gasoline consumption may in fact decrease from here.

How about industrial demand? Industrial demand from factories etc etc very much dependant on the US demand. If US motorists start to cut back, eventually, they will cut back on their consumptions on goods made in China.

Biggest energy usage after transportation and industry is electricity. Demand is projected to increase 15% to 2.859 trillion kwh. In dollar term, assuming $ 0.05/kwh of cost, that is equal to $ 143 Billion of expense per year.

China Electricity - consumption - Economy

Assuming 80% of this is from crude oil and average oil price of $ 90 per barrels, demand is around 3.48 MBPD. If we assume still a 15% increase each year, that is equivalent to 522 KBPD.

Net net, for 2008-2009, China's energy consumption will rise less than the reduced demand of 800 KBPD in the US due to $ 4.00/gallon gasoline. Others like the European countries and Japan has witnessed similar trend, thus, while India, Russia, Brazil demand may pick up, overall, demand will be lower this year compared to last year.

Of course this calculation is a simplified one but I am guessing it is better than not having it.

[Fredledingue]

Chinese are paying at the pump 13 cents per gallon less than what gasoline is traded on the Nymex ($3.55/gallon vs $3.42/gallon - link, see at the bottom).
So either China gets oil cheaper or they are subsidizing by that much or both.
I don't know how many gallons chinese consume per year, but it certainly not peanuts.
The article I posted above shows a figure of $1.8 billion per year for chinese subsidies, that's not "a lot" for China but still.

But there isn't only China. The total for all gas subsidies globaly should be $100 billions per year. That much going straight from the wallet of third-world tax payers to arab and persian oil sheik coffers.

The same goes for electricity generated with petroleun fuels. They either pay for it or subsidize it, probably more than automobile fuels.

The point out of it is as you said, it's odd to imagine chinese and indians who earn 8 times less than americans, burning more gas at these levels while americans lower their consumption and see their economy in jeopardy.

[Ray The Money Man]

Originally Posted by Novice Investing

This is only the beginning

Ray The Money Man:

Would you mind giving some backup to your statement? I've heard similar statements in the past concerning dotcoms, housing. Do you think this time is different? I don't think so.

Well, I just don't look at energy as a "Sector" in our investment world. Like dotcoms, housing, etc. Everything is changing, the rest of the world[especially the 3rd world] is moving toward living as we do. Look what we have down to the rest of the world as far as driving prices up being the largest consumers of products and materials. Especially energy of all types. And we are a mere 300 million people. We are no longer the price makers, we are the price takers now. Billions of people in the world have the nerve to start eating two meals a day instead of one. How dare they! Energy, including oil will be the center piece to this Global Super Cycle. Don't be fooled by these temporary pull backs. Imagine the expansion we had when the GI's came home after World War II on a Global Basis.

[Novice Investing]

Hi, guys:

There has been this discussion at Businessweek with two writers of divergence point of view. This is the latest thread:

High Oil Prices: Hype's Impact

The writer echoed what I have said all along.
"But when the amount invested in oil futures rises from $9 billion eight years ago to possibly as much as $280 billion today, that is speculation far beyond what the reality of supply and demand warrants"

This figure is up to end 2007. (When oil is at $ 90-$100). However, if you look at the commentary section, there is one poster who believed that the amount is even higher since Feb 2008. It can be as much as $ 250 Billion in additional fund, for 2008 alone. <-- Of course, this is just speculation here since the data will only be available probably 6 months from now.

[Ray The Money Man]

Speculation works. Any effect the speculators have on the price going up they will also have on it going down. Will we blame them for that to. I am old enough to remember the Saudis blaming speculators for keeping oil at $10.00 per barrel. LOL

While I hate seeing my FXI down this year, where would oil prices be if China had grown more than 9% this year. Only 9%! This is just the start so you better get on board. NOV, SLB, RIG, PBR should get it done.