Tuesday, July 7, 2009

The Oil Glut

Nathalie went to bed one night and told me "I want to invest in oil". Oil was at $32, I believe this was 4-5 mo ago?. I went online to research just how one invests in oil. I read about Contango, ETFs and owning oil tankers. I realized a big part of the cost is the ongoing cost of storage. It seemed complicated and not terribly interesting. I told Nathalie I had no appetite for risk. Today Oil stands at $65.

Via naked capitalism, an article on supply and demand. Basically the short term supply is going to be huge. So downward pressure should increase. The article forecasts oil at $20. Mind you, before the bubble in commodities, I had read an article stating that oil would go from $70 to $50. It was basically right, even understated, considering that oil went to $30 but after having visited $150.

Such volatility in market pricing is mostly the result of the futures market. Any time someone tries to compute spot from futures, there is a lot of guess work going on. Also the futures are susceptible to speculation. A barrel of oil changes hands 27 times before it reaches the consummer. This makes for volatile prices. If one were to look at oil markets would they find the reflection of supply and demand or a swarm of speculators?

An orderly transition of our economies to something else than oil will take a century and at least 3 generations, assuming we make oil last that long. Grand-pa, tell us about the old cars again? What happened to the reserves of oil? Did the markets handle it well or did it degenerate in war? I hope our economies are more resilient and clever than that.

4 comments:

Marcf said...

Timely:

http://finance.yahoo.com/news/US-agency-may-impose-limits-apf-130757015.html?x=0&sec=topStories&pos=7&asset=&ccode=

Don Marti said...

What about MacroShares -- http://www.macroshares.com/ -- keyed to the price of oil, but trades like a stock?

Jean-Luc Vanhulst said...

Latest Fortune Global 500: 7 out of the first 10 are oil companies.

http://money.cnn.com/magazines/fortune/global500/2009/index.html

Anonymous said...

Marc,

You might consider buying DIG ETF [when you think oil has hit bottom].

btw: we met at JavaOne in 2004 - at the cocktail party, I'm the one that bet Sun would go bust - $1 bet I still owe you.