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Yeah, it shocked me too, but I also thought the speculators were behind it all. I mean, if you have a commodity that is getting scarcer and harder to come by because the emerging markets are clamouring for it, why does the price yo-yo? Does the demand yo-yo? (it shouldn't, if we are to believe the "demand" excuse)
In any case, here it is:
$65 oil is coming (maybe)
A top analyst expects crude prices to start plummeting. If you don't believe it, you're not the only one, and a few stocks look good if you're in the skeptics' camp.
By Jon Markman
August 15, 2008
If you're frustrated over the high cost of gasoline at the pump, don't trade in your Hummer for a Vespa just yet: A leading energy analyst is telling clients these days to prepare for crude oil to retreat back below $65 per barrel over the next three years.
How could it happen? He says conservation, new drilling, efficient new vehicles, alternative energy sources, a rising U.S. dollar and a global recession will combine to blast prices back to the Stone Age -- or at least to last year's levels.
"The match has struck, the fuse has been lit, and four or five years from now OPEC producers are going to be drinking their own oil and choking on it," says Tony Kolton, the founder and president of Logical Information Machines, a provider of research to most of the world's major energy-trading companies for two decades.
Plenty of smart analysts disagree with this point of view, figuring that emerging-market demand will pump up fossil-fuel prices and that North Americans will blithely forget all about conservation if gasoline prices trend lower. But since Kolton's view is deeply out of consensus and at least minimally plausible, it does deserve our attention.
Speculators unmasked
Kolton, a specialist in the history, composition and psychology of the energy market, believes that speculators were without question behind the run-up of prices to $147 per barrel in July and that government threats to expose and punish their behaviour spooked them out of their positions in a hurry.
He says his data on open interest of non-commercial positions in crude trading, as well as conversations with professional traders at big oil companies, clearly show that speculators, and not rising demand from Asia, pushed the market to extremes.
In contrast to people who say the oil market is too big to be pushed around by hedge funds, Kolton counters that in fact it is much smaller than the bond, currency or equity markets. The oil market "can be easily manipulated," he says.
The reason for the misconception is that while the market is large in dollar terms, most of the oil companies' hedging positions are pointed the same direction and set for months at a time. So marginal new positions that point the opposite way can have an outsize impact, much like a 5-foot rudder can change the direction of a 500-foot ship.
"I would ask all the fundamental guys why oil was $147 a month ago and $114 today," Kolton says. "Their opinion that crude moves purely on real demand is BS. When the fast money comes out, there's a giant sucking sound."
The swift exit of the fast-money crowd has pushed oil back down to its March level, around $110. Kolton's research on seasonality and demand suggests oil prices will rebound back to the $125 area and then resume their crash. The $100 level will be hard to crack, but he expects energy bears to prevail over bulls within six months and launch crude on a journey below $65.
"You had a perfect storm of pre-Olympics demand in China, a plunging (U.S.) dollar, speculation, cold weather and fear of supply disruptions in Nigeria and Iran pushing it up, and now they've all swung around on a dime," Kolton says, observing that U.S. recession and conservation are gutting demand, Iran is at the negotiating table, the U.S. dollar is soaring against the euro in reaction to the worsening European economy, and the summer has proved milder than normal, sapping the use of air conditioning thoughout North America.
"People who don't trade the futures markets don't realize that this is typical for commodities, which always trade on emotion. Look at silver in the late 1970s, which went from $4 to $50 and back to $4 in two years," Kolton says.
Diminished demand
What about all that talk of how supply is running out? Well, it's funny: The spike to $147 seems to have really got people thinking about scarcity, and they've started making plans that could be very long-lasting.
It's sort of like the day a person realizes it's time to stop smoking -- a light-bulb moment of alertness to a long-simmering crisis. Oil bears now think the $147 level was a slap in the face that made major corporate users consider changing their behaviour in persistent and fundamental ways.
Auto companies became focused on creating smaller hybrid cars; individuals are discovering the joys of public transportation, car pools and bicycles; churches are lecturing on the need to turn out the lights in vacant rooms; and American presidential candidates are debating the merits of inflating tires. And perhaps most importantly, going green appears to have emerged from fad to lifestyle as the cool dads now drive Mini Coopers instead of gas-guzzling Suburbans to their kids' soccer practices.
Big private-equity and venture-capital funds, and industrial titans such as General Electric (GE.N), are throwing billions of dollars into creating better batteries, advanced materials and vehicles that run on plug-in electric power and plentiful U.S. natural gas.
Meanwhile, oil giants from Brazil to Beijing are exploring for new oil and finding it offshore a lot more easily than expected, with payoffs to come a lot sooner than most skeptics now believe possible.
All of this is coming at a time when a credit drought has seriously impaired economic growth and blunted employment levels in developed nations in Europe and the Americas, and threatens to spread to Australia and much of Asia. When people are commuting and consuming less, and when companies are making less, they collectively use less energy.
The U.S. Energy Information Administration reported Tuesday that oil demand during the first half of 2008 fell by an average 800,000 barrels per day compared with the same period a year ago -- the biggest volume decline in 26 years.
In any case, here it is:
$65 oil is coming (maybe)
A top analyst expects crude prices to start plummeting. If you don't believe it, you're not the only one, and a few stocks look good if you're in the skeptics' camp.
By Jon Markman
August 15, 2008
If you're frustrated over the high cost of gasoline at the pump, don't trade in your Hummer for a Vespa just yet: A leading energy analyst is telling clients these days to prepare for crude oil to retreat back below $65 per barrel over the next three years.
How could it happen? He says conservation, new drilling, efficient new vehicles, alternative energy sources, a rising U.S. dollar and a global recession will combine to blast prices back to the Stone Age -- or at least to last year's levels.
"The match has struck, the fuse has been lit, and four or five years from now OPEC producers are going to be drinking their own oil and choking on it," says Tony Kolton, the founder and president of Logical Information Machines, a provider of research to most of the world's major energy-trading companies for two decades.
Plenty of smart analysts disagree with this point of view, figuring that emerging-market demand will pump up fossil-fuel prices and that North Americans will blithely forget all about conservation if gasoline prices trend lower. But since Kolton's view is deeply out of consensus and at least minimally plausible, it does deserve our attention.
Speculators unmasked
Kolton, a specialist in the history, composition and psychology of the energy market, believes that speculators were without question behind the run-up of prices to $147 per barrel in July and that government threats to expose and punish their behaviour spooked them out of their positions in a hurry.
He says his data on open interest of non-commercial positions in crude trading, as well as conversations with professional traders at big oil companies, clearly show that speculators, and not rising demand from Asia, pushed the market to extremes.
In contrast to people who say the oil market is too big to be pushed around by hedge funds, Kolton counters that in fact it is much smaller than the bond, currency or equity markets. The oil market "can be easily manipulated," he says.
The reason for the misconception is that while the market is large in dollar terms, most of the oil companies' hedging positions are pointed the same direction and set for months at a time. So marginal new positions that point the opposite way can have an outsize impact, much like a 5-foot rudder can change the direction of a 500-foot ship.
"I would ask all the fundamental guys why oil was $147 a month ago and $114 today," Kolton says. "Their opinion that crude moves purely on real demand is BS. When the fast money comes out, there's a giant sucking sound."
The swift exit of the fast-money crowd has pushed oil back down to its March level, around $110. Kolton's research on seasonality and demand suggests oil prices will rebound back to the $125 area and then resume their crash. The $100 level will be hard to crack, but he expects energy bears to prevail over bulls within six months and launch crude on a journey below $65.
"You had a perfect storm of pre-Olympics demand in China, a plunging (U.S.) dollar, speculation, cold weather and fear of supply disruptions in Nigeria and Iran pushing it up, and now they've all swung around on a dime," Kolton says, observing that U.S. recession and conservation are gutting demand, Iran is at the negotiating table, the U.S. dollar is soaring against the euro in reaction to the worsening European economy, and the summer has proved milder than normal, sapping the use of air conditioning thoughout North America.
"People who don't trade the futures markets don't realize that this is typical for commodities, which always trade on emotion. Look at silver in the late 1970s, which went from $4 to $50 and back to $4 in two years," Kolton says.
Diminished demand
What about all that talk of how supply is running out? Well, it's funny: The spike to $147 seems to have really got people thinking about scarcity, and they've started making plans that could be very long-lasting.
It's sort of like the day a person realizes it's time to stop smoking -- a light-bulb moment of alertness to a long-simmering crisis. Oil bears now think the $147 level was a slap in the face that made major corporate users consider changing their behaviour in persistent and fundamental ways.
Auto companies became focused on creating smaller hybrid cars; individuals are discovering the joys of public transportation, car pools and bicycles; churches are lecturing on the need to turn out the lights in vacant rooms; and American presidential candidates are debating the merits of inflating tires. And perhaps most importantly, going green appears to have emerged from fad to lifestyle as the cool dads now drive Mini Coopers instead of gas-guzzling Suburbans to their kids' soccer practices.
Big private-equity and venture-capital funds, and industrial titans such as General Electric (GE.N), are throwing billions of dollars into creating better batteries, advanced materials and vehicles that run on plug-in electric power and plentiful U.S. natural gas.
Meanwhile, oil giants from Brazil to Beijing are exploring for new oil and finding it offshore a lot more easily than expected, with payoffs to come a lot sooner than most skeptics now believe possible.
All of this is coming at a time when a credit drought has seriously impaired economic growth and blunted employment levels in developed nations in Europe and the Americas, and threatens to spread to Australia and much of Asia. When people are commuting and consuming less, and when companies are making less, they collectively use less energy.
The U.S. Energy Information Administration reported Tuesday that oil demand during the first half of 2008 fell by an average 800,000 barrels per day compared with the same period a year ago -- the biggest volume decline in 26 years.
