Oil Drops Again

It looks like the oil bubble may have burst.

NEW YORK (al-AP) -- Oil prices kept falling Tuesday, sinking as low as $118 a barrel on growing concerns that a U.S. economic slowdown and high energy costs are curbing consumer demand for gasoline and other petroleum products.

Crude's decline is giving Americans more relief at the pump. A gallon of regular gasoline on average fell another penny overnight to $3.871, according to auto club AAA, the Oil Price Information Service and Wright Express. Gas prices have fallen four straight weeks for the first time in December; prices are off 5.9 percent from their July high as U.S. motorists cut back on their driving to save money.

A day after plunging as much as $5 a barrel in a dramatic sell-off, crude continued its downward trend Tuesday as traders sold oil contracts on the belief that prices are still too high in relation to demand and have further room to fall.

Light, sweet crude for September delivery lost $1.86 to trade at $119.55 a barrel on the New York Mercantile Exchange, after earlier falling to $118, the lowest level since May 5.

Crude has now fallen more than $25 since reaching a trading high of $147.27 on July 11.

"The market psychology has finally shifted," said Stephen Schork, an analyst and trader in Villanova, Pa., adding that "$4-a-gallon gasoline has clearly killed demand."

No kidding on that last line. Still waiting for the corresponding drop at the pump. Even while oil prices were falling, the price at the pump in Racine and Kenosha jumped 10-15 cents a gallon over the past two days.

Re: Pop goes the bubble!

Who Let the Bears Out!

Or at least that is what I hope to be singing.

Is the run on oil coming to an end? Hard to say, back in June oil made a similar move from the mid to upper 130s back to the low 120s, but it immediately proceeded to zoom right back up to new record prices. Recent moves are more significant than those June moves but such moves do happen.

A number of factors are reported to be in play. First off repeated news hinting at economic slowdown here, reports came out that oil inventories were up when traders expected them to be down, and the same for gasoline inventories which are reported at the upper end of average levels for the current time. Another factor, increased pressure to extract more energy resources from the USA. I do not think it coincidence CL took a hit the day Preisdent Bush came out and forcefully called for more domestic oil production.

However, there is still concern about the fragile nature of the main oil producers. Reports on an oil pipeline bombing in Nigeria suspended the drop (however today oil futures are up a bit to sideways). In addition, there are concerns about demand outstripping supply, even if there is enough oil in the ground for many years it is not getting easier to extract it.

A lot of blame is going around. Speculators are right now the favorite scapegoat but why should that be? Speculators do not care about the direction of the price, they only care about guessing the direction. If a trader expects the market to fall they change trading strategies and they still earn money from their trades.

Here are a couple of sites to keep your finger on the oil market:
INO
The New York Mercantile Exchange
Gas Buddy (local gas prices)
and for analysis & insight: Seeking Alpha's energy sector section.

I find gasoline does peg closely to oil and it does go down as quickly as it goes up! Right now in the Valley the Gas Buddy site is showing gasoline selling in a range of $3.92/gallon-->$4.07/gallon with all reports currently under $4.00/gallon. This morning this was not the case. Gasoline pricing does lag oil pricing but it does follow in both directions.

Interestingly Enough

Iran is stockpiling oil in tankers off of its coast. Why? Because it is waiting for higher prices. No, not prices bigger than $130.00 a barrel but perhaps $100.00 a barrel. Iran's oil is a heavy crude and not worth the same as the light crude. That sort of crude produces more heating oil of which there is supposedly and abundance of. See This Economist article for the whole story. In fact, the article I refer to states the discount rate on Iran's crude is growing larger! Check out this Belmont Club article & discussion that gives the news above an even more interesting twist.

Anyway, I do not think anyone is disputing the importance of developing alternative energies, but it will take more than clicking the heels together and chanting "I wish for alternative energy!" Solar and wind play a part but wind is viable only on large commercial scale and solar is *VERY* promising on the small scale (I seriously considered it for our home, had I calculated properly the first time our new house may have had PV material the south facing roof and I looked into geothermal heating but they play shell games with you on that), but is not going to be able to fit the bill on a large scale for some time (if ever). Nuclear is going to have to come back onto the table and if the choice is massive starvation (that'll solve our obesity crisis), nuclear energy, or pumping more oil out of the ground it is an easy choice the later two.

Re: Re: Bakken Oil Analysis

Lance says:

Looking back on those stories, I see a lot of “estimates,” but no real sourcing for those estimates. So it looks like I got sucked into speculation that was too good to be true.

The fellow I refer to in my post LC Price set it all off:

Then the stuff of legends came, along with one geochemist by the name of L. C. Price. Mr. Price, working for the US Geological Survey [USGS] performed extensive chemical analysis of abandoned oil wells, primarily in North Dakota and came away with an astonishing conclusion—The Bakken trend contains up to 200 billion to 500 billion, yes that is with a “B”, of original oil in place.

Source: The Bakken Trend: Lost Dutchmen Mine of the Oil Patch? – Seeking Alpha How did LC come up with his estimate? I have not seen his paper nor would I probably be able to really understand it (not having studied much geology).

Geologists and oil companies have known of this reserve for a long time, it is just costs more to coax the oil out of the ground there and only now with $110 per barrel oil is it feasible to extract that oil.

Bakken Oil Analysis Out

The USGS released its Bakken Oil analysis today.

Back in 2000 a guy by the name of LC Price put together a paper on the Bakken oil reserve and estimated the the reserve to hold between 200 and 500 Billion bbl.s of oil. I have seen some estimates go as high as 900 Billion barrels of oil. For comparison Saudi Arabia is thought to be sitting on 260 billion barrels of oil. However, the USGS did not release Price's report (Price has since died) and did further analysis of the reserves. The USGS released the much anticipated report today and the result is...

Nowhere near the numbers tossed around above. The USGS estimates the Bakken Reserve to hold about 3.65 billion barrels of recoverable oil. This increases our nation's known reserves from 14% to 19%. Not quite the spectacular as the hype (how typical). However a few things.

As our technology and expertise increase we will most likely bring more of the oil in the reserve into production. Secondly I recall reading (sorry can't get the source) that oil production in Alaska is outperforming early reserve estimates.

However, remember what I was saying yesterday, this is not cheap oil. Even if the amount was according to the hype the oil is hard to recover and most likely is more problematic to refine.

In addition the the petroleum there is natural gas to be found there.

The Bakken Oil Reserves

Here is a poorly written, but informative, paper on the Bakken Oil Reserve. This deposit has been known since the mid-70s (Wiki says it was described in 1951, but I don't know if that was the geological formation or the fact it may contain a lot of petroleum) and it appears the oil (according to the Wiki entry on the Bakken Oil Rserver) is more difficult to extract than what oil producers like.

The impression I get is this oil reserve is only going to put an end to the rise in the real price of oil and is only going to be able to drive the price of oil down as we learn how to more productively extract it. That is, even if this oil source lives up to the hype and we get good production online in a fast manner it probably will not do much to lower the price of oil. It will do much to weaken OPEC's hand, which is not a bad thing (however remember OPEC's hand also consists of the fact a lot more people want oil now than before).

The paper I cite above notes numerous times the ability to extract oil depends to a large extent on the price of oil. If all of a sudden oil goes back to under $50/barrel then the Bakken oil is probably not going to be worth going after. However, I am skeptical we will see current oil production become dirt cheap again (or at least not without a very serious shock to the world economy) at prices like they were at the end of the '90s and early '00s (even with the recovery of the dollar).

There is a lot of variability in the estimates of the total amount of oil as well as how much of the oil is recoverable.

I was talking with a guy at the pump in Kaukauna a weekend or two ago and warned about how this area is probably home to the ultra-endangered hairy-nosed prairie dog (a tongue in cheek invention) and he laughed and said if the estimates are confirmed to be as good as the early papers indicate then no hairy-nosed prairie dog is going to stop the extraction of that oil.