Monday, June 23, 2008

Oil And The 'Big Rollover'

We picked up an interesting tid bit at today:

"SAN FRANCISCO (MarketWatch) -- TrimTabs Investment Research, which tracks asset flows into exchange-traded and other funds, said Thursday oil speculation risked tipping the world economy into financial ruin. TrimTabs backed up its hand-wringing by noting the potential impact of these funds in the futures markets: this year, commodity trading advisors and commodity ETF's have received $2 billion a month.

If just half those monthly assets bought oil futures, these would present long positions in 100,000 contracts a month, or about 3% of the open interest in oil futures. "The U.S. is going broke, and the rest of the world is sure to follow," said TrimTabs CEO Charles Biderman. To bring down oil prices, he recommended more disclosure of large oil futures holders. And he suggested oil users and the U.S. government short oil".

That is pretty strong language and fairly kooky suggestions. Short Oil? That would be a brave move but I guess if you want to reduce the price that is one way of going about it...suicidal...but one way. Can you imagine the scenario shoud a sovereign state intervene and try and force the markets to short? It would be like shooting ducks in a barrel as oil traders the world over piled in knowing that, at some stage, government bodies could not longer hold back the tide of millions of speculators. Couldn't happen? Remember Sterling and the ERM and Soros wandering into the sunset with billions of pounds in his pocket? Happy days..

It is far more likley, in our opinion, that some sort of regulatory situation will make speculating more difficult or uneconomical but would that be fair?

You could argue that oil is so important to the world's economy that speculation should not be allowed but how, therfore, would it be priced? You risk the possibility of the price of oil being set by governments and vested interests.. would that be a better situation? I am not so sure about that. We already have OPEC who, at the stroke of a pen could stick a few more million barrels of oil a month into the system and have speculators running for their own short positions in droves.

The real question is; What should be the price of oil? It is a finite commodity so as it become more scarce the price should naturally go up, but are we are that point yet?

I came across an interesting article written in 2000 where the author speculated that we were due for a 'big roll over'. Not actually a point where we would run out of oil, but where demand outsripped supply. Spookily the following chart has proved to be prophetic.

The chart is based around a paper and writings in 1999 by retired Professor of Geology at the University of Oregon, Dr. Walter Youngquist and Dr. R.C Duncan who set out to look at where oil production would be outstripped by demand their various statistics are most vividly presented in the charts above and below.

It is not only oil that is the target of these guys. If you would like to fry your brain have a look at their theory on food and the agri-business...

I wish these guys were on my prop desk.....


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