Amid a sell-off, oil market may have to stop believing its PR

Did record oil prices just get talked to death -- or at least into a short-term coma?

Crude oil futures slumped 3.4% today, the biggest decline in two months, after weeks of headlines suggesting that energy prices were in an unstoppable upward spiral.

"We do know that oil has been the most talked about thing recently, and that things often top or bottom when their moves have attracted a lot of attention," said Brent Luce, a portfolio manager at investment firm CapitalWorks in Cleveland.

Even by their own wacky standards, commodity markets in general had a wild session -- and the end result had to give consumers a reason to be hopeful, and bullish speculators a reason to fear. Gold, silver, copper, wheat and other commodities followed oil sharply lower.

Oil futures in New York shot as high $133.12 a barrel early in the session, then quickly sank to $126.11 before finishing the day at $126.62, down $4.41 from Wednesday. It was the biggest one-day drop for crude since March 19.

Traders said the market initially reacted bullishly to the government’s weekly data on oil inventories, which showed a decline in supplies. But William O’Neill, a veteran commodities analyst at Logic Advisors in Upper Saddle River, N.J., said the supply shortfall was quickly explained away by delays in Gulf Coast tanker off-loadings because of fog. So supplies there are expected to rebound soon, he said.

Meanwhile, the government said U.S. gasoline demand averaged 9.3 million barrels a day in the four weeks ended May 23, down 0.4% from the same period last year -- another sign that record prices are crimping consumption (surprise!).

"It’s gotten to the point where people aren’t driving," said Phil Gotthelf, a commodities expert and head of Equidex Brokerage Group in Closter, N.J.

A rally in the dollar against other currencies also undercut commodities today, because a stronger dollar would be anti-inflationary, giving speculators less reason to buy commodities as inflation hedges.

Finally, there was a political element to the sell-off in oil: Amid rising ire in Washington about the role investors and speculators are playing in helping to drive crude to record heights, the Commodity Futures Trading Commission disclosed that it has been investigating that aspect of the market since December -- raising the possibility of regulatory action to curb trading activity. (See story here.)

Whatever you may think of the global long-term supply and demand situation for oil, in the short run the market just looks to have gotten way too excited about itself, O’Neill and Gotthelf said.

"I’ve advised people to cull their long positions or get entirely out of the market," O’Neill said.

Gotthelf, who said he has been shorting some commodities recently, said veteran market players know all too well what can happen when bull markets reach wretched excess.

Historically, "The most spectacular trends in commodities are the price implosions," he said.

Photo: Oil rigs near L.A. Paul Buck/EPA

Comments

[Sara]

Finally! Let this show that the hype surrounding any certain commodity, in this case, OIL, can result in wild spikes in price with little to no basis of fact on supply, usage and the like. I hope crude oil futures crash and burn, taking all the money of the speculative investors that sought hedge refuge with it. Don't believe them when they say it's market conditions- it's hype!!!

[David Elliott]

Finally the US government may do something that the Futures Exchange should have done months ago - stopped organisations (hedge funds) manipulating prices. Perhaps this action will spread to all comodities and stocks

[Michael Snyder]

It's the over-leveraged condition of the commodities, financial & stock markets that keeps building these bubbles. No one can afford to "sit" on their money for even a few days or the wolves will catch up. I'm sorry but eerily consistent 100+ point per day swings in the DOW indicate a system in danger of collapse. Rumors/"expert" opinions have moved billions in oil with a sound bite. Fundamentals my a**! What ever happened to common sense? I've a little bad news for today's traders, America was built, not leveraged into the country it was before they got a hold of it. What they're doing is leveraging us right into a depression. Yes, I said depression. This recession's been on for almost a year. The only people who haven't got the word are the White House & Wall St.

[Brian]

Aha, I told people that tons of people are carpooling and conserving on gasoline. Just by the number of people who sign up at RideSearch.com to carpool we can see that lowering the demand for gas will lower the price. Speculators can see that, it is common sense.

[Bud Verde]

Buy! It is still cheap at $130/bbl. Burn it, then buy some more and burn that, too. You are merely doing your human part to change the world when you buy and burn oil. Finally when petroleum becomes uncommon, our descendents will value it properly for all its wonderful properties, and marvel that this stuff was once pretty common on a rich earth.

[Jeffery Q Nunn]

Well actually, if you had looked up the definition of a recession before you acted and spoke as if you did, you would know that WE ARE NOT IN A RECESSION. Growth has slowed, but we still have POSITIVE GDP growth.

So by your definition, it is a depression when an economy hits .6% growth?

Idiot.

[Earl Hartley]

Funny how that works,even funnier that most people don't see it. Lots of people blame it on "those damn towelheads" or the oil companies themselves. Sure the oil companies are making record profits but why. Is it because they said ,"Hey today I think we'll make the price of crude,a,a,a let's see,a,I know let's try $126.00 today,ha,ha,how do you like those apples",I should think not. We the people can fight back,regulation,how do your regulate free enterprize? We the people can and must develope alternative means to our current transportation needs. Oil companies need to rethink things,oil is going to run out but,energy never will. A whole new way of thinking must come about. A unified grassroots effort is the only way to demand change and get it. Only one oil company has actually started calling themselves what I have said for years needs to happen. Chevron has been calling themselves an energy company in many of their ads,which I think, is the only way to bring about change. Different thinking brings about different ideas,different ideas bring about change.We need to leave the Middle-East,let them keep their oil,and allow the collective mind of the American people fight the war on our terms and without bloodshed. People,it's up to us,not Wall St.,not Washington,us.....we must change. P.S. I am not a tree-hugger. I actually work in the transportation industry.

[peter poliandro]

well they work to push up the prices before the holiday,now that it has passed ,now we will wait till we get a little cold weather in  the east so they can start again to raise prices

[Jet]

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/29/ccoil229.xml
historical oil cost as % of world GDP 2008 looks exactly like 1980 just before oil prices crashed

http://themessthatgreenspanmade.blogspot.com/2008/05/home-prices-how-low-can-you-go.html
here we have house price curves over past 8 years climbing smoothly up to 2006 then curving over and heading down. Now after about 2 years those curves are not pulling up. They are still heading for zero. Thats right if those house prices continue for 2 more years they will undershoot to zero.

So maybe one day we will look back and say May 28 was peak oil (price) in this bubble cycle.

The bubbles are all caused by Retirement fund money. The world needs to understand the theory of saving for retirement can't work. Money can not perform that function. Retirement funds are where all the hedge fund money comes from. It is $10's Trillions --- You can not transfer that amount of wealth and power over that amount of time.

[builder7]

Since consumption has went down an estimated 19% since the first of the year, why do oil prices continue to rise? It couldn't be that somebody is bidding it up and taking profits months after demand went down would it? Who has this type of power? Another thing that these oil companies who say that they are just making a normal profit no different than any other company. That can't be true for two reasons. The first reason is that no other company makes $40 billion in profits in one quarter or as much as all the oil companies are making. Also, something that they seem to have forgotten (conveniently) is the security of the US, who depends on them to facilitate our economy. Maybe they are making a couple hundred billion every quarter, combined, but they are costing this country a lot more than that and should be accountable for it. These companies also should not be getting government handouts in the form of subsidies and low taxes and kickbacks. They need to end the socialist handouts to them and let them uncap the wells here in this country and get on with producing oil, instead of sitting on it until the price goes way up. They also need to take all of those profits and explore for oil, instead of asking the government for even more subsidies, like the gift of ANWR that they want. That is the easy money which is a quick fix for the energy problems that we have. We should keep that field anyway, just in case we need it in case of war or some other national emergency in the future. Hopefully, in the future, oil exploration will be less intrusive. They need to quit whining about how they can't drill for oil in all the lucrative spots and go out and get the oil that exists in Texas, Oklahoma, Colorado, Wyoming, and other states and places around the world. For these companies to sit there and say that they want to drill in other areas when they don't develop areas that they already have control and permission to drill in is a national security threat. Can you imagine what would happen if we had to depend on them to provide oil for the nation in time of war, but they would sit there and say that they will only drill for oil in lucrative, politically unpopular areas. Well, the national emergency is here now and maybe they should start doing something or maybe they could move over to the mideast and they could protect them!

[clive dorman]

150% hike in oil from USD50 to USD125 in 18 months has little to do with flat supply/rising demand in relatively small (in global terms) emerging economies like India and China. Can anyone tell me: is there a regulatory firewall between big oil and the hedge funds/oil punters? Perhaps I'm ascribing too much evil genius to the likes of XOM, but my belief is the big producers and refiners are simply trying to find oil's true consumer pain barrier, where high price overrules necessity. In the past decade, for example, the supplied price of gasoline to the US market has more than doubled, yet demand has begun to fall only in the past two years. Clive Dorman

[Rev. C. Walking Turtle Mann (ULC)]

@ MIchael Snyder: "This recession's been on for almost a year. The only people who haven't got the word are the White House & Wall St." Only a minor technical difference of opinion with no distinct difference in the present effect, but I (for one) really do think the entire White House is quite manifestly nothing like so dips^!+-dumb as GWB likes to lay it on us when he's on a roll. Um, Google and READ the "The Grumbling Hive" text by old Bernard DeMandeville. Then Google "War is a Racket" by Major General Smedley Darlington Butler - and read it well. Then, Gentle Reader, *think* about it. Then, having thought well, DO feel free to vote with every dollar that you consciously and deliberately do *NOT* spend into that MIL-spec industrial-grade planet-wide meat-grinder's gaping radioactive maw. Fact: Them crooked cheatin' war-pah-tay knaves (NeoCons, Zio-cons and Politi-cons on both sides of the BushDawg Aisle, all alike samesame like Interstate Sixty) have bullied and conned, robbed and murdered their way into a uniquely hated position in the hearts and minds of Normal Decent People all around the world. (See what unlimited power'll get'cha, Bunky?) Now, that'd scare you or me, but these guys are apparently "seared in the conscience" and care only for mammon/money/pelf/possession, nothing more. Like gamers they care. Let them all be hunted down and frog-marched in chains to the International Criminal Court at the Hague, I say! Try them all, fair and square on ALL the evidence! If hangin's all they got Hague-side for correction, post-conviction, at this still-primitive point in human history's time, well, gee, I sure am sorry but nice try anyway; buh-bye Bonesmen and torture-lawyer John "Nutbuster" Yoo alike samesame. (Just don't wiggle and you won't break your nose on the trap-hole's edge at drop-point, OK?) None of 'em's about to turn honest in this lifetime. They all say nice-sounding things, sure, (except maybe for Mr. RIchard B. "Darth" Cheney, who reputedly merely snarls and makes gurgling noises when approached) - but they all do other things, 180 degrees different from than what they say, whenever it suits the moment's purpose. Um, the name for the football game where the goal-posts always get moved back at the Critical Instant is called, "Razzle-Dazzle". It's an old American carny grifter's con. It's how they get their dinner, y'see. Midway and Veep Suite alike, samesame. Duh-bya's just coasting along for the ride like a trust-fund baby; he can fly off to Argentina and enjoy his new Rancho Malario down there any time he wants. Lots of Congress-critters have gone that way, too - have ye noticed? They all just nicely lie so's to reduce We the People's moral-compassed interference with their own privatized, mercenary bloodbath to a minimum, of course. But one and all, clearly, by their actions in full publick view, *do* just dote on the uniquely piquant flavour of vintage Imperial /Chateau/ /Hubris/ and blood-cured brie, aged in cordite smoke for 100 years. Wotta' pah-tay. Them Tories'd have us think their blood's blue iffen we take their faithy-based NCLB-education's base premises any too seriously. Um, the War Pah-tay's everlasting lust for that elite cannibal thrill-of-consumption (HEY! WHOSE BLOOD *IS* THAT, ANYWAY???) is apparently just too obsessively overwhelming in their own lives to ever allow even the first one of those sufferin' criminal perps, who have unlawfully and maliciously arrayed themselves against all the Rest of Us, to ever just be decent human beings. They cannot just by themselves lay off from whompin' all their neighbors (and OUR WORLD, TOO!) right down the septic pit into the ground. Cunning savage beasts in Human Suits, they are. Not entirely unlike those greedy Wall Street tycoon-types - but with a cunning that beats even the Greedy Ones of the Financial Sector to the REAL money. And a propensity for torture that'd just warm Old King John's wizzley little black heart, pre-Magna Carta. Google the video, "Money as Debt" and follow the Goldsmith's Tale, is the safe way to "Get It". Ask Meyer Rothschild all about it, if you like - but be prepared to pay forever for your answer. But please, either way, educate y'se'f. GOOGLE!

[a nuffer]

It's a bubble!!! Stick your toe in it and it will burst!!! Can't wait to see the "greedy speculators" drown in it!

[dw]

Oil companies and producers have tons of cash. If you think they are not manipulating futures markets, you are naive. The CFTC should investigate the producers and not fall for the nonsense about pension and hedge funds. As soon as Democrats control the government, investigations and prosecutions will lower the price of oil.

[Mike Tyler]

Check out OPEC's "Monthly Oil Market Report" for May 2008. Page 26, Table 6 "World Oil Demand for 2008, mb/d"

According to this month's report world oil demand year over year (May 07 to May 08) is expected to increase by a mere 1.35%

Even more telling is that OPEC reduced its forecast of total world demand from their prior report.

Here's the link: http://www.opec.org/home/Monthly%20Oil%20Market%20Reports/2008/pdf/MR052008.pdf

The oil crash is coming... because the truth is that a 1% increase in demand is NOT enough to cause a doubling of this commodity's (nor any commodity's) pricing over a time span of several months. Demand for oil is dropping even further than what OPEC forecasts. So the over-inflated prices will have to fall hard and fast. If you’re heavily invested into oil, it's high time to pull out.

Consider: the State of California was recently subjected to price fixing and gouging by traders who blamed the soaring cost of electricity on Californians' "excessive demand." The whole USA was constantly subjected to news/media stories about how Californians were causing their own problems. The fact was that the demand had grown only slightly. Eventually the whole trading scheme fell apart because the economics just did not exist to support super inflated prices. When that realization sunk in at the trading level it further resulted in identifying the tip of the iceberg that toppled Enron and later led to a re-organization of how electrical power is traded in this country.

But as they say, some traders never learn, they just crash and burn! The most peculiar thing is that those folks who are so heavily immersed in the particular business (oil trading, electricity trading, house flipping, derivatives, etc.) never see it coming.

[Idrinkyourmilkshake]

It shouldnt be a big surprise to find WTI spot prices got a little ahead of themselves. The market is taking a breather. When we hit $135 it was on fears of supply disruptions that did not pan out to much. There is plenty of evidence that the fundamentals support oil @ $110-120 per barrel, even higher.

The price must rise until demand matches supply. Demand in oil is not something that responds to small price changes - "inelastic". So it takes large price increases to soften demand.

US demand falling a few 10ths of a percent is washed away by Chindian demand rising by 3 or 4%. Chinas consumption is more than half of US consumption. When 7Mbpd rises 4%, and 12Mbpd falls by 0.4% you can see that overall demand is still rising - Globally.

this has nothing to do with big oil finding out what we are willing to pay, theres something called competition. Even OPEC countries compete with other OPEC countries over quotas.

Stand back, look at the big picture, global supply reaching an undulating plateau (and the mix trending to unconventional, heavier crudes and gas to liquids). Then look at global demand continuing to rise even under this price pressure, thanks to the Asian Tiger. China and India are subsidizing their fuel prices to stimulate their growth. The price will rise until Chindian demand flattens out, Americans cannot car pool or regulate their way out of this mess now. All the flap about congressional reports is just that - populist flap in an election year. Some politicians think they can regulate their way through this, while the others think they can drill their way out.

When you find yourself trapped in a hole - stop digging.

[Michael Snyder]

Rev.
I don't like the bast**ds either; but dude, your heart! Try a little decaf.

[Rex Jones]

Wake up people the U.S. isn't the only game in town. Oil is a magical commodity that lets its possesors live like Kings. Guess what the whole world wants to live like Kings and they are willing to raise the bid for oil so they can get it. With 6.5 BILLION people in todays world wanting to possess it the price is increasing, especially since inspite of very high prices we aren't producing anymore of it than we were 4 years ago! Why.... well guess what the world is not made of oil it is a a precious and LIMITED commodity that doesn't grow on trees. With the world using 87 million barrels a day and us producing only 85 guess what we are using up our inventories and the higher price must force some people to quit using it. Thats how markets work...maybe thats why we all don't live in million dollar homes, and drive expensive cars. I know its not fun but get real. If your going to wail like a female dog then get educated about whats really happening. Your ignorance is truly pathetic

[newageblues]

If you don't like the price of energy, use less, vote on the price of energy with your $

[Michael Snyder]

Jeffery,
It's so nice to see such an articulate, educated man as yourself buying the Bush Administration's cooked books hook line and sinker. Our economy is existing in an over-leveraged bubble driven by no-load investors. From your response I gather you must be one of them. It's hard when you realize all of that equity you've leveraged into you've livelihood is just so much hot air. But then it seems to fit your dialogue.

[bill]

Oil Exporters Are Unable to Keep Up With Demand
Wall Street Journal May 29, 2008; Page A8
http://www.theoildrum.com/node/4066
The world’s top oil producers are proving unable to put more barrels on thirsty world markets despite sky-high prices, a shift that defies traditional market logic and looks set to continue.
Fresh data from the U.S. Department of Energy show the amount of petroleum products shipped by the world’s top oil exporters fell 2.5% last year, despite a 57% increase in prices, a trend that appears to be holding true this year as well.
There are several reasons behind the net-export decline. Soaring profits from high-price crude have fueled a boom in oil demand in Saudi Arabia and across the Middle East, leaving less oil for export. At the same time, aging fields and sluggish investments have caused exports to drop significantly in Mexico, Norway and, most recently, Russia.
In all, according to the Energy Department figures, net exports by the world’s top 15 suppliers, which account for 45% of all production, fell by nearly a million barrels to 38.7 million barrels a day last year. The drop would have been steeper if not for heightened output in less-developed countries such as Angola and Libya, whose economies have yet to become big energy consumers.
For all the attention paid to China’s increasing energy thirst, rising energy demand in the Middle East may pose the greater challenge. Last year, the region’s six largest petroleum exporters — Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar — curbed their output by 544,000 barrels a day. At the same time, their domestic demand increased by 318,000 barrels a day, leading to a loss in net exports of 862,000 barrels a day, according to the U.S. Energy Information Administration.
Demand in the Middle East is a major factor right now, said Adam Robinson, an oil analyst at Lehman Brothers in New York. Mr. Robinson predicts the region will constitute more than 40% of increased demand next year.
Saudi Arabia in particular has become a major energy consumer as the country pushes to put its oil riches to greater use. The kingdom is in the middle of a major investment campaign to become a world player in petrochemicals, aluminum and fertilizers, all of which will require huge amounts of oil and natural gas.
Since 2004, Saudi oil consumption has increased nearly 23%, to 2.3 million barrels a day last year. Jeffrey Brown, a Dallas-based petroleum geologist who studies net export numbers, said that at its current growth rate, Saudi Arabia could be consuming 4.6 million barrels a day by 2020.
That would cut significantly into Saudi exports even as the world looks to its largest oil supplier to help manage rising demand. Saudi Arabia has nearly a quarter of the world’s proven reserves and supplies around 12% of the 86 million barrels a day that the world now consumes.
One reason Middle Eastern nations are using more oil is a shortage of natural gas, said Bill Farren-Price, director of energy at Medley Global Advisors. This is particularly troublesome during the summer, when governments scramble to keep the lights on and air conditioners cranking.
Some producers, such as the U.A.E., are easing back at times on the crucial industry practice of injecting natural gas into crude oil fields, which is done to boost reservoir pressure and increase crude recovery rates. Halting the injections ends up undercutting oil production, further reducing exports.
As top exporters hit trouble, historically marginal players such as Brazil and Kazakhstan are likely to play a greater role. Three of the four non-OPEC players among the top 15 oil exporters — Russia, Norway and Mexico — are reporting declines in production this year. Kazakhstan is showing slight net export gains.
No big exporter is struggling more than Mexico, where net exports dropped 15% in 2007. Mexican officials announced Monday that output from the country’s once-mighty offshore Cantarell field had plunged by a third in less than a year.
Analysts said there are reasons for optimism. Russia’s government is scrambling to alter the tax rates that many say have put a lid on new oil development. Mr. Robinson said 65 new ultra-deepwater drilling rigs are expected to arrive over the next three years, following a five-year stretch in which the industry gained only 10 such rigs.
Those additional rigs will help companies tap some of the most promising, but now inaccessible, waters off Brazil, Australia, West Africa and in the Gulf of Mexico.
“The sense in the market is that peak oil is here and that things will only get worse,” says Mr. Robinson. “But the verdict is still out on that.”

[Robert Marston]

Um, guys, we do have a supply problem. Oil production is essentially flat since 2005. Net world exports are falling. Demand destruction may keep price in check and, perhaps, speculators have inflated the market a bit. But we are still in a pretty tough situation.

The best thing we could do right now is increase efficiency and move away from oil wherever we can. Hopefully, we'll see a lot of new electric and hybrid electric vehicles coming online in the near future.

As for price declines -- don't trust oil to drop or stay low for extended periods. We have severe world supply trouble at the moment. The future doesn't look too hot either.

[Spectator Sport]

Earl,
you may want to refrain from using racial slurs to refer to those of MIddle Eastern lineage and other derogatory comments about environmentalists and the like; such remarks only make you appear arrogant and completely detract from your comment. Also, you may wish to utilize the spell check feature of your computer to avoid embarrassing errors such as "enterprize" (correct spelling is enterprise).

[Woody McKay]

I'm getting tired of all the talking and crying about hight oil prices. What is our country doing about uncapping our domestic oil wells that were stopped up because of cheap Arab and South American oil. How about our goverment giving incentives to the auto makers to build cheaper electric cars in this country to put more people to work and bring down the demand for oil? Does anyone remember back in the seventies when gas was rationed because of a supposed lack of oil? It's time that the goverment started to address these issues and lets start to rebuild our economy and start putting more wind mills and solar farms online.