Unprecedented Responses in Last Hour to Floyd Norris's Blog on Oil

Oops, since 2:00 pm; Still pretty incredible.
June 26, 2008, 2:00 pm

Floyd Norris
The Beginning of the End for High Oil Prices
Oil prices are up sharply (again) today. But stocks in oil companies are not.
For most of the run-up in oil prices, the stocks of the oil companies have moved right along. But lately, that has not been the case.
The divergence came after June 4, a day when oil prices fell to $122.30, and the Amex Oil Index (a group of oil stocks) also fell sharply. As I write this, the oil price is up to $137.90, a rise of nearly 13 percent. Oil stocks are up less than 1 percent.
Today, the oil price is up more than 2 percent, and oil stocks are down almost 1 percent.
It may be that the stock market is growing worried that high oil prices contain the seeds of their own destruction.
“At some point, it is likely to dawn on people who own oil shares that rising oil prices are raising global recession risks, and that a global recession would be really bad for oil companies,” said Robert Barbera, the chief economist of ITG.
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38 comments so far...
1.
June 26th,20082:23 pm
The traders have used every excuse in the book to “justify” why the price of oil should be in $140 range, in the absence of any supply shortages….
As I pointed out in my previous posting on “blame the speculators”, there are parallels between this fiasco and the energy trading of a few years ago, that caused bogus rolling blackouts and soaring electricity prices…. At the end there were no shortages and in fact the industry had 20-30 percent excess capacity, and as we all know, following the collapse of Enron, many other power producers also went bankrupt (Calpine, Mirant, etc.) or came close to filing for bankruptcy (Dynegy), and spent years selling off assets, raising capital and fixing up their balance sheets….
Floyd, your observation is right on the money, the “financial players/traders” who have jacked up the oil prices beyond any logic, are getting out of the oil company shares first (being ahead of the curve), and soon will be unloading their futures contracts…..
Stay tuned!!!
— Posted by Hassan Azarm
2.
June 26th,20082:45 pm
Who is putting money in oil? I mean is it all institutional and if there is a crash who is going to suffer?
— Posted by Doug
3.
June 26th,20083:37 pm
Hey Hassan,
Enron was primarily an energy trading and transporting company, not a primary energy producer. But your analysis is very pertinent.
Also, maybe governments will start excess profit and windfall taxing of oil companies. Gasp!! Taxing the rich, radical idea.
Bill P
— Posted by Bill P
4.
June 26th,20083:38 pm
Wishful thinking. The price is up to stay. Demand is escalating and supplies are tapering downward. This is not going to stop.
How can the chief financial correspondent of The New York Times and The International Herald Tribune get this basic economic principle so wrong?
— Posted by Beerzie Boy
5.
June 26th,20083:54 pm
I agree that the behaviour of oil stock not following the oil price is a direct sign of a possible tide change, I am still impressed by the overall economy state, where I see the result of a real state”gold rush” that lead nowhere, a consistent fiscal deficit as a war byproduct, a growing global inflation and unrest the result of seemingly the change of usage of grains into fuel, and the real possibility of recession, what’s next?
— Posted by Angel Palacios
6.
June 26th,20084:01 pm
Some of us would like others to believe that speculation is a bad word. As if the common man is suffering because of ‘greedy’ speculators. The reality is that it is not. In fact, it is just the opposite. Speculation keeps the market going. And, there is nothing morally wrong in speculating. Speculators may win or lose (again Enron serves as a point). Instead of raising a rhetoric against speculators, politicians will be well-served if they create conditions that change the underlying sentiment of the speculators. If the government signals its intent to prospect oil in US or if it says that it will sell a quarter of its oil reserves (say) at the current price to book profits, that acts as a strong negative for speculators’ expectations. After all, what good is a strategic reserve if we cannot use it in times of requirement? Those who say that it will take 10 years to prospect for oil and, hence, it will not help, have no idea how modern markets work. Markets account for the future based on expectations. For example, the markets dropped instantaneously as they heard of the 9/11 attacks - even though it would take months for the economy to be affected. If the current runup for oil price is indeed a bubble created by speculation it should not be too difficult to burst that bubble.
— Posted by Deb
7.
June 26th,20084:10 pm
the reason why oil stocks are down could be because of selling to raise capital for margin calls on other stocks
— Posted by browne
8.
June 26th,20084:14 pm
This is simplistic, and wrong.
What if you were selling a valuable product, whose price kept rising, but you didn’t have much more to sell? Public Oil corporations control a small % of reserves. National oil co’s hold by far the most.
Why buy into a company, or hold their stock, if their access to product to sell is drying up?
— Posted by Jonathan
9.
June 26th,20084:17 pm
Ah yes, this is looking and smelling like Enron all over again, except much bigger in every aspect. Just like Enron, the key players are Wall Street, Washington and the Industry. Particular scrutiny should be paid to ICE - Inter Continental Exchange, which accounts for a significant portion of key trades in price setting points of the oil market. ICE is designed to operate beyond the scrutiny of regulatory mechanisms and is opaque to outsiders. No surprise there. Ken Lay is laughing, wherever he is.
— Posted by Dave
10.
June 26th,20084:23 pm
At the end of the quarter, when the oil companies report their profits, the stocks are going to fly.
— Posted by Jonathan
11.
June 26th,20084:24 pm
Doug posted:
“Who is putting money in oil? I mean is it all institutional and if there is a crash who is going to suffer?
That’s the problem, everyone suffers if there is a financial collapse. And it is possible. When it becomes impossible to pay, people don’t pay, and no more is delivered. As the real wages of American workers slip month to month and the real prices of what they have to buy rise month to month, at some point, it becomes impossible to keep paying. So we don’t buy as much gas, or crap from China, and a downward spiral can begin. A genuine collapse will prove devilish difficult to get out of.
— Posted by Fred Bauder
12.
June 26th,20084:27 pm
It isn’t that hard to see why the oil futures traders are betting on a higher price of oil. If you made a chart of the oil prices over the last two weeks, and you listed, in one column, oil price deflators - for instance, China’s selective release of some sectors from price controls, or the promise by the Sauds to pump more oil, what would you put in the column of oil price inflators? Easy. Israel minister says that Israel may have to bomb Iran before the end of the year. Bush goes to Europe, succeeds in tightening sanctions on Iran. Israel plans war game mimicking the bombing of Iran.
For years, I thought the lefty hysteria about Bush attacking Iran was hokum. I couldn’t see how he could afford that action.
However, lately I believe the atmosphere of tension which Bush has created is slipping out of his control.
There was a Financial Times item, yesterday, about the effect of the sanctions on the second largest producer of oil in the world - Iran - and guess what? Sanctions are visibly slowing down production and exploration in some of Iran’s most productive fields. This is happening at the same time that we are asking, like dummies, about the supply and demand situation.
The atmosphere that Bush has created between Iran and Israel looks eerily like the atmosphere in the summer of 2006, when Israel invaded Lebanon. So, if you were a futures trader, what would you see regarding the geopolitics of the Middle East?
1. A U.S. policy of hostility to Iran that is adrift;2. No effort on the part of the U.S. to negotiate a demand that they can’t enforce - Iran’s surrender of its nuclear power program;3. The encouragement of extremists in the Israel government to ratchet up the threat level vis a vis Iran4. No discussion, none, nada, in the U.S. press about the cost of the present course of U.S. foreign policy. I’d say that the cost of the hostility towards Iran is now at about 50 cents to 1 dollar extra at the pump.
Drift and hostility are a good combination for disaster. If Israel does bomb Iran, that will not only probably cause Iran to turn off its spigot, but Iraq too, while creating vast popular outrage across the Middle East that the major producers would resist at their peril.
Yet, one has yet to read one single article in the business section of the NYT about the security premium on oil in the market. When articles are published about what possibly possibly could be driving up the price of oil, the recent atmosphere of tension isn’t even mentioned. This is my definition of frivolity among the establishment - the wise men who have a lock on our foreign policy and their press minions can’t even discuss the costs of that policy. This is an unhealthy sign. Oil will keep going higher.
— Posted by roger
13.
June 26th,20084:29 pm
China will pick up the demand. Chinese are just now buying their first cars.
— Posted by Tom
14.
June 26th,20084:30 pm
@ some point recently, I heard that “The best cure for high oil prices are high oil prices.”
— Posted by David Butler
15.
June 26th,20084:36 pm
The Oil prices are high because the US dollar has lost half of its value compared to the Euro with which it was at par on December 2002. It will continue to go up as long as the US dollar goes down. When they decide to raise rates and also allow oil exploration in Alaska and in east/west coast offshores, the prices will stabilize and move down. Meanwhile, the stock market is extremely oversold; watch for a bottom to go fishing! (not anytime soon though).
— Posted by Pal Anand
16.
June 26th,20084:36 pm
It’s also the beginning of an economic boom for an oil free industrial age. So far, we’ve enabled the age of micro-electronics and its ever so evolving age of telecommunications. Most ills of society are founded in oil (carcinogens) and no price is too high to alleviate the symptoms of suffocating from its pollution. Now is as good a time as any to re-invent the wheel and with it less friction to make this transition to become a truly fuel friendly economy.
— Posted by Mark
17.
June 26th,20084:38 pm
I think Floyd’s and Mr. Barbera’s explanation are dead wrong. Most large oil companies are vertically integrated. Exploration, Refining, Distribution and Marketing which includes Retailing.
Does anyone care to guess why Exxon/Mobil is ridding itself of its retail gas business? Margins are too thin or non-existent. It might surprise some that most refiners are operating at a loss on these high crude prices.
If you think gas prices are high now you ain’t seen nothing yet. Just wait the large integrated oils start shedding their refining operations - they’ll have to if crude remains at current levels.
Also, did you know there has not be a new refinery built in the U.S. in the last 30 years?
— Posted by Rev. Dave
18.
June 26th,20084:39 pm
On the other side of every oil future trade or oil index trade is a buyer and a seller. How is it that speculators are causing this exactly? Speculators are both losing and winning as the price goes up. I they were just holding they would never make any money and there would be no more buyers to drive the price up.
— Posted by Niko
19.
June 26th,20084:40 pm
If convinced there’s an oil bubble inflated by speculators and it’s about to pop, you may consider selling naked calls, it may make you rich.
— Posted by Jason Walker
20.
June 26th,20084:50 pm
ENRON, ENRON, ENRON + bush!
— Posted by Barry
21.
June 26th,20084:53 pm
The Fed could have put a stop to this oil bubble foolishness by increasing the Fed Funds Rate to 2.25% instead of leaving it at 2%. Rather than being injected into the economy where it is needed, all this cheap Fed money is going straight into commodities speculation. I suppose the Fed will have to bail out Goldman and their ilk when they lose their fannies in an oil price collapse.
— Posted by Geoerg C
22.
June 26th,20084:54 pm
I don’t know if I’m missing something here, but the Oil market is not the same as the power market. Power is a perishable product while oil is not.
When power is generated, it is either used or is lost, so it’s easy for the Enron traders to control supply and manipulate the market by taking down plants for “maintenance”. However, this situation was limited to the US as the scope of the “power crisis” did not extend beyond our borders.
The oil market is global and it is more difficult to size-up. If the speculators decide to close their positions, we would expect the price to go down. But the oil-producing countries can counter this by announcing a reduction in production or stir up enough political uncertainty to prop up the market price. Whether they actually do reduce production, “cheat” and produce more than they say, or sell less oil due to the reduced demand, in the end, these countries and their governments will end up with more money even though the true demand may be down.
Hopefully, I’d like to see some sanity after the “peak driving season”, but with all these players beyond the reach of the US market regulators, I don’t think I’ll ever see prices falling below $100/bbl again in my lifetime.
These oil-producing countries have obviously learned their lessons well from their experiences from our EHMs. By being so indebted to the rest of the world now, we may well be on our way to becoming a global economic colony.
— Posted by doppleclutch
23.
June 26th,20085:06 pm
Oil company stockholders do not want their profits to continue rising, due to continued increases in the price of crude, partly because they are afraid of Congress slapping them with some kind of new tax.
— Posted by Lester
24.
June 26th,20085:19 pm
I feel after the property slump speculators took out their investments just before the downturn and they along with BANKS, and most other financial institutions poored their resources into oil by buying up most availble stocks to force the price up.This has got nothing to do with oil stocks going down but that of those who feel a very large fast buck is fair game even if it puts some economies into turmoil.I wish they would realise all the heartache and pain millions of families arfound this globe,soem of whom will break up marraige or even commit suicide.Loose their homes which they may have spent years scraping and saving to make wht is is today.This false way of accounting has got to stop and real factors brought to fall in line with what goes on in every street.We the people own as much of the plant as all those greedy groups that just exploit by creating wealth from misery.They will die just the same as we do except lets hope their death may be much slower and much more painfull than ours.The oil prices will come down and when they do let us hope the governments aropund the world stop all this profit crazed cooperations from using our natural resources to rip the heart out of the global economy.Even China and India will get hit eventually and then prepare to duck.
— Posted by Terry Bayliffe
25.
June 26th,20085:20 pm
I’m sure that these high oil and gas prices are very good for the American economy and industry in the long run and are very bad for oil-producing companies and countries.
— Posted by mike
26.
June 26th,20085:22 pm
Another sure sign of a downturn in oil prices: I was at my dentist today and he was telling me about all the money he was making in oil futures….
— Posted by Ken
27.
June 26th,20085:23 pm
These prices will continue until the elections. Prior to that the oil companies and traders will keep prices up and once it is clear that a more consumer frendly administration is going to take over the prices will drop this goes the same for the Euro.
— Posted by Sr Tocino
28.
June 26th,20085:28 pm
I think we need to differentiate between integrated oils and oil services. Integrated oils could well be off because they must replace their inventories at higher prices, and the market is seeing that their margins will be squeezed if the higher retail pricing results in dampened sales.
Also, those who claim that speculation is resulting in a bull market in oil have it backwards! The bull market in oil is rewarding those who are speculating long on oil, while punishing speculative bears. People speculate on both sides of the trade — and the market is rewarding the bulls. We had shorts speculating and making lots of money as oil dropped to $10 but no one was blaming speculators for the weak oil market ten years ago. There is absolutely no Enron at work here. This isn’t the California electricity market, it’s far bigger with far more players all over the world involved.
Higher oil prices may indeed be their own undoing. Despite the relatively inelastic demand for the stuff, eventually we will find ways to avoid buying it. That’s a good thing and it’s exactly the way markets are supposed to work. Our drive-through way of life is falling apart and I say, good riddance. Let’s replace it with sustainable communities and an energy policy that consists of more than just dropping bombs.
— Posted by Flarben
29.
June 26th,20085:29 pm
No one really knows what’s driving this runup, but one thing is for sure, until the current administration releases the reins, there won’t be any relief until it is politically expedient (advantageous) for them. The oil companies are getting theirs while they can. That’s what a monopoly is for!
— Posted by steve
30.
June 26th,20085:40 pm
I find it interesting that the crude oil surplus increases and so does the price of oil. Libya suggests it will lower production because the market is well-supplied, the price of oil goes up. Much of the oil that we use in the U.S. comes from the U.S., but oil prices are internationally set. The price of crude has increased 100% in a years time, even though demand has only increased maybe 2% in the same time. I sincerely believe that supply and demand are not the basis for this run-up. Instead, I believe speculation and market manipulation are too blame. Notice that when a couple of investment bank’s analysts make predictions of what might happen to other companies those companies shares plummet, even in the face of evidence to suggest that the predictions are wrong? How about investment house analysts who are making predictions on each other’s profit and loss? I think much of what we are seeing is market manipulation reminiscent of many similar markets dating as far back as London in the 1700s. Read Robb’s book on the history of white-collar crime in England for a better understanding of this statement and idea.
— Posted by Larry
31.
June 26th,20085:42 pm
For us simple minded folk out here.How come nobody dare say the word nuclear?So many other countries are and have beensupplyingthe power at an affordable price per kilowatt.If they had any problem, we would pay too from thefallout.And it has been 40 years of more advancedtech information to more than make me safe withmultiple backup computer systems to avoidfailures.I would not protest them in my neighborhood whenthe risk is already here on the planet.Electric cars would be a given.Clean water and clean air? What a concept!Jodie
— Posted by Jodie
32.
June 26th,20085:42 pm
If you have investments in oil get out now. The market has to fall and fall hard. There is a surplus of oil in the market, not a shortage as some would have you believe. This could be the biggest fall in prices ever. The real price should be somewhere near 40 not 140.
How do I know this? I am directly involved in wholesale fuel oil, there is an abundant supply.
— Posted by oil man
33.
June 26th,20085:47 pm
Not a chance this view is correct. Total global oil supplies are decreasing every day. The cost of recovering the amount that remains is very high and increasing by the day. This modern world can not possibly function without huge energy use. World stock markets have little to nothing to do with Chinese or Indian main street. Sheer population numbers means energy consumption and demand for basic survival goods will continue to sky rocket.
The real story here is that Wall Street for the most part is built on hot air. It knows little about which it pontificates. The real action is that stocks are being dumped while the money pours into oil or safer places.
RobertWashington, DC
— Posted by Robert
34.
June 26th,20085:57 pm
Oil shares are quietly pricing in the pandering next congress hell bent on a “windfall profits tax” which will show their constituents that they are “doing something” even if it is totally counterproductive. No matter that the national oil companies of countries we have worked hard to alienate will be gaining power and market share.
— Posted by Kirk Cornwell
35.
June 26th,20085:57 pm
Bill P Posting 3
Enron owned or operated 38 power plants in the US and internationally. The US capacity was about 2500 MW and did not register as a big part of their business.
All those who are sold on the idea of supply-demand and efficient markets, should revisit other hypes, electricity trading, .com, housing, Wheat, etc.
Oil Man posting #32 is on target….
— Posted by Hassan Azarm
36.
June 26th,20086:02 pm
Contrary to what US Energy Secretary Samuel Bodman says I don’t think supply and demand are really causing the problem. There are to many other factors at play here. Too many middle men skimming profits. Too much manipulation of supplies and inventories. The price of oil nearly doubled and gas went up a third in just one year and yet figures are coming out that indicate we are using less gas, not more, probably because people are cutting back on gas. That clearly means supply and demand have nothing to do with these prices. Speculation is driving prices !!! Lawmakers blame loopholes in commodities trading like the Swaps loophole or Enron Loophole. Whatever you want to call it, It’s a get rich quick scheme and not much less obvious than a pyramid scheme. There is no way supply is causing this gas crisis. I put the full blame on speculators and commodities traders and I am sick of the smoke and mirrors. The meeting in Saudi Arabia hasn’t achieved any substantial results from what I can see. The price of oil is still going up. There must be something else that’s driving prices up and I think I know what it is. Although il appears to be a good hedge against inflation, a lower dollar and a low oil supply, in reality nothing could be farther from the truth. The main thing driving inflation is oil prices and as inflation goes higher investors buy more oil driving inflation higher again. Some experts predict this will trigger the worldwide recession. This will result in lower gas consumption and it will free up more gas supplies.. I am no expert but even I can see the writing on the wall. Investors are going to loose their shirts on oil. We may be looking at another ENRON. Hedge funds will topple leaving old age pensioners with nothing. The government won’t be able to bail them out this time because the cost would be far to great. The CFTC and ICE will be too slow to react to the cracks forming in commodities trading so the govenment will finally step in. By that time it will probably be too late. www.nbtv.ca
— Posted by Ted
37.
June 26th,20086:29 pm
In other words-It’s a BUBBLE!
— Posted by Paula
38.
June 26th,20086:46 pm
With nothing to show for my trouble except being left alone to enjoy dead silence, I have told my Republican representative, the Department of Justice, and anyone in this corrupt government that would listen to me since 2002 that Internet based commodity auction (energy trading) markets are entirely corruptible and given the money involved almost certainly so. The issue is that the Internet was never built to run auctions — so they have an unintended Achilles heal. The problem is that computers used by bidders to these online auction markets set their time by making unencrypted port 13 calls to time servers in order to set their time, and since these calls use frames of unencrypted plain text these frames can be nefariously intercepted and manipulated in transit between the bidding computer and the time server. The net effect is that it is possible to manipulate the clock settings on either the computer running the auction or on the computers of the bidders. A nefarious 100 mille second time shift (one tenth of a second) on a 4 meg connection is enough to push a thousand bids by one market participant in or out of an auction time window, but insufficient to not be attributed to excess traffic on the Internet slowing things down and resulting in a slightly off clock setting. Consider the genius of this scam — without ever touching the communication between a bidder and the auction system (which might be monitored) you can affect the outcome of the bidding process by affecting an entirely different communication which isn’t monitored between the bidder and a time server. You pick your winners and losers and thus affect prices over time by altering their time windows to make them individually either bigger winners or bigger losers. This is a crime which cannot be detected or punished, but it will leave consumers punished at the pump — so at least someone gets punished . Bravo !
— Posted by Ivan