About the price of oil

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Dimitris Hatzopoulos

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Message 337120 - Posted: 14 Jun 2006, 23:08:22 UTC
Last modified: 14 Jun 2006, 23:32:32 UTC

Physical market is awash in oil, yet price at record highs of $70/bar.

If you're interested to know what is behind $70+/barrel crude oil, when OPEC claim all along that "the market is very well supplied" and recently (Apr-06) OPEC producers can't even find buyers for all their oil, and so e.g. Saudis had to reduce production from 9.5Mbpd (where it stood for the past 2yr) to 9.1Mbpd as reported in Wall Street Journal a few days ago:

In an interview after a meeting here of the Organization of Petroleum Exporting Countries, Ali Naimi said other cartel members are having trouble finding buyers for all the crude they are producing, at a time when global stores are near full and many refiners have closed facilities for routine maintenance. One Saudi official said an estimated three million barrels a day of refining capacity is out of action and unable to process crude, at a time when the world is using some 84 million barrels a day of oil products like gasoline and jet fuel.

"It's not just heavy oil. Even light oil is having problems" finding buyers, Mr. Naimi said, referring to premium grades of crude known as light crude that are highly prized by refiners because they have high gasoline yields.


you can read more in:

http://dhatz.blogspot.com/2006/06/oil-to-38657-per-barrel.html

and also a series of posts in Rosetta@home's forum:

http://boinc.bakerlab.org/rosetta/forum_thread.php?id=1707

even back in Oct-05 (after Katrina "crisis") there were no buyers for real "wet barrels":

OPEC Offers an Extra 2M Barrels of Oil
2005-09-21 11:18:40 AP
Ministers of the OPEC agreed here on Tuesday to provide an extra two million barrels of crude oil a day in a bid to calm down the world oil market.

VIENNA, Austria-OPEC offered world markets an extra 2 million barrels of oil a day � its entire spare capacity � on Tuesday in an attempt to show that supply fears were unfounded even with traders eyeing another hurricane approaching the Gulf of Mexico.

The cartel, which has come under international pressure over the near-record prices that followed Hurricane Katrina, said its output ceiling would remain at 28 million barrels a day and stressed that the main obstacle is refining capability, not a shortage of crude.

"If you have a buyer, bring him, we'll give him the 2 million. We have the availability to provide it," said OPEC President Sheik Ahmed Fahd Al Ahmed Al Sabah, who is also Kuwait's oil minister.


OPEC has been stating this since year 2000:

Friday, 22 September, 2000, 09:13 GMT 10:13 UK
Oil: New rules of the trading game
Market speculators using sophisticated financial instruments are having an increasing influence on oil prices.

The secretary general of the Organisation of Petroleum Exporting Countries (Opec), Rilwanu Lukman, says the world oil market is held captive by the derivatives markets. The old rules of supply and demand have been distorted, he says, by the creation of what he calls "paper barrels" of oil.

Opec president Ali Rodriguez says that at least $8 of the oil price is due to speculation.

They are both articulating the anxiety at the loss of control felt by the Opec oil producers. They can no longer manipulate the market mechanisms that have made them lots of money recently, but which no longer respond to the old fashioned rules they prefer.

Thus, says Mr Lukman - and he should know - the time has long gone when the complex trading systems that are responsible for moving oil around the world from producer to consumer were only governed by the rules of supply and demand.

Mr Lukman was for many years Nigeria's oil minister and representative at Opec, and as one of the organisation's oldest hands, has watched the oil market closely for almost three decades.

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Message 337468 - Posted: 15 Jun 2006, 6:27:07 UTC

Money grabbing, plain old fashioned greed.

They know the world is so desperate for oil they can keep raising the price and we (the consumers) will pay, because collectivley we prize this black sticky carbon based liquid more highly than almost any other world resource.
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Message 339654 - Posted: 16 Jun 2006, 21:29:23 UTC

One more week ended with oil at $70/bar (it has "stabilised" at 70-75 for the past 2 months). I'm copying some comments from mainstream media, on the issue of speculation in oil. He makes a good point, that very often people discuss the irrelevant "fixes", not the problem.

Although, as I explained many times, the real problem isn't speculation (which is a useful transfer-of-risk service), but the FAULTY pricing system for oil which is being taken advantage of. So we have a situation where oil price goes up and up and at the same time oil producers can't find buyers for their oil (even light sweet crudes, just in case one wonders).

Recently (Apr-06) Saudi Arabia reduced production by -400,000 barrels/day (from 9.5Mbpd to 9.1Mbpd) because it could find no buyers for it.


The Danger of Speculation
Commentary by Mike Norman for FOX Fan Central

Mike Norman
It’s time to speak the truth. No more disingenuous questioning and wondering. No more exasperated resignation. We know the reason why oil prices are high, and it’s time to admit it and do something about it.

Oil prices are high because of speculation, pure and simple. That’s not an assertion, that’s a fact. Yet rather than attack the speculation and rid ourselves of the problem, we flail away at the symptoms. High gasoline prices? Oh, let’s use hybrid cars, or drill in the Rockies or off the California coast. How about doubling the use of ethanol, even though it costs more to produce than the energy you get out of it? Then again, we can go to Alaska, or build more refineries, or triple the number of nuclear power plants. Sound good?

What if we just stopped the speculation?

No, you can’t do that! That would be interfering with the “free” market.

Hey, the “free” market is starting to get awfully expensive.

Tell me, how is it free when speculators rule the roost? It’s one thing when they do what they do with pieces of paper called stocks, but it’s another when they do it with a vital commodity like oil. We saw the devastation their behavior wrought in the 1990s, and we’re witnessing it again right now.

rest of article: http://www.foxnews.com/story/0,2933,166038,00.html
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Message 339799 - Posted: 16 Jun 2006, 23:49:15 UTC - in response to Message 339654.  
Last modified: 17 Jun 2006, 0:10:58 UTC

One more week ended with oil at $70/bar (it has "stabilised" at 70-75 for the past 2 months). I'm copying some comments from mainstream media, on the issue of speculation in oil. He makes a good point, that very often people discuss the irrelevant "fixes", not the problem.

Although, as I explained many times, the real problem isn't speculation (which is a useful transfer-of-risk service), but the FAULTY pricing system for oil which is being taken advantage of. So we have a situation where oil price goes up and up and at the same time oil producers can't find buyers for their oil (even light sweet crudes, just in case one wonders).

Recently (Apr-06) Saudi Arabia reduced production by -400,000 barrels/day (from 9.5Mbpd to 9.1Mbpd) because it could find no buyers for it.


The Danger of Speculation
Commentary by Mike Norman for FOX Fan Central

Mike Norman
It’s time to speak the truth. No more disingenuous questioning and wondering. No more exasperated resignation. We know the reason why oil prices are high, and it’s time to admit it and do something about it.

Oil prices are high because of speculation, pure and simple. That’s not an assertion, that’s a fact. Yet rather than attack the speculation and rid ourselves of the problem, we flail away at the symptoms. High gasoline prices? Oh, let’s use hybrid cars, or drill in the Rockies or off the California coast. How about doubling the use of ethanol, even though it costs more to produce than the energy you get out of it? Then again, we can go to Alaska, or build more refineries, or triple the number of nuclear power plants. Sound good?

What if we just stopped the speculation?

No, you can’t do that! That would be interfering with the “free” market.

Hey, the “free” market is starting to get awfully expensive.

Tell me, how is it free when speculators rule the roost? It’s one thing when they do what they do with pieces of paper called stocks, but it’s another when they do it with a vital commodity like oil. We saw the devastation their behavior wrought in the 1990s, and we’re witnessing it again right now.

rest of article: http://www.foxnews.com/story/0,2933,166038,00.html


They are trying to make this all too complicated.

The problem is these countries already have enough money so they would rather slow production than drop the price to get it sold. They can find buyers if they would just drop the price. It isn't speculation! These people are making the wrong assumptions of what controls the price.
They control the price buy not selling at a lower price.

The buyers have enough oil so they are not buying at the inflated price.

What drives the supply and demand theory is the need for a profit and the need to consume which creats a liquid or flowing market.

Here the need for profit is missing so they drop production.
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Message 339897 - Posted: 17 Jun 2006, 2:30:30 UTC

The problem is these countries already have enough money so they would rather slow production than drop the price to get it sold. They can find buyers if they would just drop the price.


The issue is that e.g. Saudi Arabia doesn't sell "spot" like a gas-station, i.e. you'd go over there with a supertanker and tell them "fill'er up".

They sell now oil for delivery after a few months and it's priced off the futures markets, at "prevailing prices".

And price discovery mechanism is broken (or "rigged" if you prefer) for the reasons explained in the URL I provided earlier.
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Message 339900 - Posted: 17 Jun 2006, 2:35:31 UTC - in response to Message 339897.  
Last modified: 17 Jun 2006, 3:06:57 UTC

The problem is these countries already have enough money so they would rather slow production than drop the price to get it sold. They can find buyers if they would just drop the price.


The issue is that e.g. Saudi Arabia doesn't sell "spot" like a gas-station, i.e. you'd go over there with a supertanker and tell them "fill'er up".

They sell now oil for delivery after a few months and it's priced off the futures markets, at "prevailing prices".

And price discovery mechanism is broken (or "rigged" if you prefer) for the reasons explained in the URL I provided earlier.

They don't have to use those prices they can sell below! If they did the price would start dropping fast because the futures would start to drop!

The shippers would buy all the oil they could take if it was below market.

Then they would need to unload it which means they would need to drop the price. The reason the cartel worked was the Saudis could regulate the price by controlling their production by unloading their oil.

They like the current price so they cut back. Kiss principle.

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Message 342387 - Posted: 19 Jun 2006, 16:43:25 UTC - in response to Message 339900.  
Last modified: 19 Jun 2006, 17:02:52 UTC

They don't have to use those prices they can sell below! If they did the price would start dropping fast because the futures would start to drop!

The shippers would buy all the oil they could take if it was below market.

Then they would need to unload it which means they would need to drop the price. The reason the cartel worked was the Saudis could regulate the price by controlling their production by unloading their oil.

They like the current price so they cut back. Kiss principle.


To do as you suggest, they'll have to abolish the current pricing system which is in place for the past 20yr and start selling oil with nation-to-nation contracts.

Also, why should the oil producers initiate this change? They're not the ones getting hurt by these absurd oil prices, are they?

The problem is the BROKEN pricing system for oil which is being taken advantage of. So we have a situation where oil price goes up and up and at the same time oil producers can't find buyers for their oil (even light sweet crudes, just in case one wonders). Recently (Apr-06) Saudi Arabia reduced production by -400,000 barrels/day (from 9.5Mbpd to 9.1Mbpd) because it could find no buyers for it.

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Message 342445 - Posted: 19 Jun 2006, 17:44:32 UTC
Last modified: 19 Jun 2006, 18:16:00 UTC

I'll just make my three points briefly here today, because my previously longer explanations were deleted, and I don't want to go to the trouble of looking up all those references again.

Correction:I thought those two posts were gone forever, but as Ageless points out, they're there now and perhaps always have been.

1. The longterm structural problem is at the refinery level. That's where the bottleneck is. American refiners have bypassed the expense of making new refineries by simply raising the prices to make their profits. It's like DeBeers and diamonds: managed scarcity.

2. The price/futures disconnect that you referred to in your interesting article Dimitris (on futures and arbitrage) is a typical market bubble. It won't last forever and when it bursts, the speculators will go bust never to rise again, mainly because most of them are leveraged 10:1. It could happen on any day prior to any of the contract expiries, especially on a triple-witching day. It's just a game of musical chairs, and when the music stops, they'll go bust. It's a temporary aberration.

3. I'd be glad to see OPEC oil cartel fall apart. We've been under their thumb for far too long now. If Barry Goldwater had been elected back in the '60s we would never have had to go through it in the first place. Arab appeasement has cost us dearly.


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Message 342452 - Posted: 19 Jun 2006, 17:59:39 UTC - in response to Message 342445.  

I'll just make my three points briefly here today, because my previously longer explanations were deleted

No, they are just in the other thread: post 1 and post 2.

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Message 342460 - Posted: 19 Jun 2006, 18:12:45 UTC - in response to Message 342452.  

I'll just make my three points briefly here today, because my previously longer explanations were deleted

No, they are just in the other thread: post 1 and post 2.

You're welcome.

OOOH! Thank you, Ageless!!!!



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Message 342463 - Posted: 19 Jun 2006, 18:18:48 UTC

Much as one would like to blame the OPEC cartel, we can't ignore the fact that the markets that create this broken pricing system are in NY (NYMEX) and London. Just what else can the Arabs do, other than say "the market is oversupplied and over-priced" as they've been saying since 2005, or "find me a buyer and I'll give him 2 million barrels/day" ?

If the consuming nations want to break this vicious circle, there are several options, country-to-country contracts being one of them.

As for being a market bubble, I agree it is the case. But the issue here is that unlike a stock bubble, which one can simply ignore, we're all forced to be "long energy" and pay the price dictated by this broken pricing system! It's been THREE (3) YEARS of it already.
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Message 342470 - Posted: 19 Jun 2006, 18:35:44 UTC

To repeat the issue with broken arbitrage in oil:

If arbitrage in oil would work as in almost every other market, then I could e.g. buy those extra 400,000 barrels/day from Saudis (which recently cut, citing lack of buyers) at prevailing price $70 and immediately sell short 400 contracts at $70.

If I held my shorts to delivery (of physical), then the "investors" in oil would have to build storage tanks to accumulate the extra 400Kbpd, i.e. 12 million barrels per month. If I kept doing it for a few months, investors would have to keep building tanks to accept new oil or at some point choke on the supply of new oil and stop initiating new longs (buying new paper barrels of oil). Yet I would still be buying 400Kbpd from Saudis and selling short 400 contracts per day, which -in absence of "investor" buyers- would pressure the price down.

And when that happens, the "oil investors" would incur a big loss, because they'd have accumulated their hundreds of millions barrels inventory held in their tanks, at higher prices.

The abovementioned scenario ofcourse assumes REAL "wet barrel" oil demand is stable (e.g. China's oil imports were down -2.2% in 2005).

But, apparently it works differently for oil, because unless those 400Kbpd from Saudis are the exact type specified in the futures contract (as e.g. Brent is 0.4% of world's oil production, but is used to price 60% of world's oil), I can't do this kind of arbitrage at a scale that it would PROMPTLY affect price.

That's probably why oil price is going up while producers claim they can't find buyers for their real "wet barrels" of oil.

This "feeding of barrels" is happening and "investors" are hoarding it, which is why you see inventories rise, but it's an extremely slow process and meanwhile gullible consumer victims are forced to pay these obscene prices.
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Message 342805 - Posted: 20 Jun 2006, 0:07:11 UTC - in response to Message 342470.  
Last modified: 20 Jun 2006, 0:19:01 UTC

To repeat the issue with broken arbitrage in oil:

If arbitrage in oil would work as in almost every other market, then I could e.g. buy those extra 400,000 barrels/day from Saudis (which recently cut, citing lack of buyers) at prevailing price $70 and immediately sell short 400 contracts at $70.

If I held my shorts to delivery (of physical), then the "investors" in oil would have to build storage tanks to accumulate the extra 400Kbpd, i.e. 12 million barrels per month. If I kept doing it for a few months, investors would have to keep building tanks to accept new oil or at some point choke on the supply of new oil and stop initiating new longs (buying new paper barrels of oil). Yet I would still be buying 400Kbpd from Saudis and selling short 400 contracts per day, which -in absence of "investor" buyers- would pressure the price down.

And when that happens, the "oil investors" would incur a big loss, because they'd have accumulated their hundreds of millions barrels inventory held in their tanks, at higher prices.

The abovementioned scenario ofcourse assumes REAL "wet barrel" oil demand is stable (e.g. China's oil imports were down -2.2% in 2005).

But, apparently it works differently for oil, because unless those 400Kbpd from Saudis are the exact type specified in the futures contract (as e.g. Brent is 0.4% of world's oil production, but is used to price 60% of world's oil), I can't do this kind of arbitrage at a scale that it would PROMPTLY affect price.

That's probably why oil price is going up while producers claim they can't find buyers for their real "wet barrels" of oil.

This "feeding of barrels" is happening and "investors" are hoarding it, which is why you see inventories rise, but it's an extremely slow process and meanwhile gullible consumer victims are forced to pay these obscene prices.


It doesn't work that way. They would sell their oil contracts at a loss because they don't want to take delivery of the oil.

Also you would never do such a trade because the net before costs is zero.

You would want to buy oil contracts at $65 and sell the other contracts at $70.
But because the Saudis will not sell their extra oil at $65 the price will not come down.
They keep the price high by not selling.

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Message 342814 - Posted: 20 Jun 2006, 0:23:27 UTC - in response to Message 342805.  
Last modified: 20 Jun 2006, 0:27:53 UTC

It doesn't work that way. They would sell their oil contracts at a loss because they don't want to take delivery of the oil.


And you know this from ...? Btw I happen to be a participant in these markets.

Anyway, things don't work exactly as you read in the books, i.e. that speculators never take delivery of the physical commodity etc. E.g. you can read one of the links in my original article, it's a bit "journalistic" but shows how investment banks are active in the physical, taking delivery and storing it in tanks:


The Sunday Times September 12, 2004

SPECIAL REPORT

Speculators hijack oil market
Prices have been forced up unnecessarily as investment banks and hedge funds join the ‘black gold rush’. Robert Winnett reports
A LARGE WAREHOUSE in Amsterdam may seem an unusual place to attract the City’s top traders and hedge funds. But, in the past few months, Morgan Stanley has been accumulating warehouse space in the Netherlands to store its hottest new property — oil.

This and the tankers that have been hired by the investment bank illustrate just how important oil is now becoming in the City of London and Wall Street.
[...]

Rest of article at http://business.timesonline.co.uk/article/0,,9072-1257188,00.html

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Message 342819 - Posted: 20 Jun 2006, 0:41:30 UTC - in response to Message 342805.  

Also you would never do such a trade because the net before costs is zero.

You would want to buy oil contracts at $65 and sell the other contracts at $70.


I was trying to simplify the example by ignoring transaction costs. In reality it would allow one to lock in a small profit. But as I wrote in oil can't be done at a scale that would seriously affect prices.

Anyway, this is how arbitrage works, in any "orderly" market, from physical commodities to stock index futures.

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Message 342821 - Posted: 20 Jun 2006, 0:43:29 UTC - in response to Message 342463.  
Last modified: 20 Jun 2006, 0:57:07 UTC

Much as one would like to blame the OPEC cartel, we can't ignore the fact that the markets that create this broken pricing system are in NY (NYMEX) and London. Just what else can the Arabs do, other than say "the market is oversupplied and over-priced" as they've been saying since 2005, or "find me a buyer and I'll give him 2 million barrels/day" ?

If the consuming nations want to break this vicious circle, there are several options, country-to-country contracts being one of them.

As for being a market bubble, I agree it is the case. But the issue here is that unlike a stock bubble, which one can simply ignore, we're all forced to be "long energy" and pay the price dictated by this broken pricing system! It's been THREE (3) YEARS of it already.

It's always interesting to guess when a bubble is close to bursting.

The Tulip Bulb bubble of 1634 lasted 3 years.

http://www.investopedia.com/features/crashes/crashes2.asp

The recent stock market bubble lasted, what, 5 years (counting it from 1995)?

I'd say that it's likely a parabolic curve upwards on a chart. As more and more people become envious of the profit made, word spreads until finally the most ignorant invest. Shortly after even the paperboy and his family are in it, the market collapses. On a chart, the parabola starts to look close to going straight up, I would guess.

I'm wondering if you've charted the acceleration in oil prices?

You'd think, wouldn't you, that with all the media exposure and internet communications world wide, a bubble nowadays shouldn't last longer than 5 years? I mean that people hear about and pile into things sooner.


Btw, That's another excellent article you've added there, Dmitri. Thanks.





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Message 346755 - Posted: 23 Jun 2006, 19:25:41 UTC



One more week gone by, with oil closing above the $70/bar price (it's been 2 months already). Doesn't make headlines anymore and people seem to be "accepting" it.

Beethoven, I've no idea when the bubble will burst, mainly because I see incredible complacency by those being victimised (i.e. consumers) and that, unlike stockmarket bubbles which deflate from their own weight (nobody is obligated to buy a stock), the KEY difference with a unup in vital commodities like energy is that there is almost inelastic, price-inensitive buying by the victims who need it.

Btw, it's not just oil which has been the target of speculative inflows, it's just that it's the one which most affects our everyday life.
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Message 346772 - Posted: 23 Jun 2006, 19:38:47 UTC

Btw the runup in price of commodities is not limited to oil. Just for comparison, I'll send monthly charts of various commodities. You'll notice that those which enjoy almost inelastic, price-insensitive demand by consumer-victims held up their price quite well.

Oil:


Copper:


Platinum:


Gold/Silver



Orange Juice:


Sugar:

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Message 346788 - Posted: 23 Jun 2006, 19:47:55 UTC

OOOH! Great Charts!

Thanks Dmitri. I've got to run to the market, a custom order is waiting for me. But I'll have a close look at these when I get back.

At just the briefest of glimpses, that Copper Chart looks like it's ready for a serious correction.

Thanks for posting these. I'll read everything you've posted carefully when I get back.
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Message 347010 - Posted: 23 Jun 2006, 23:29:39 UTC
Last modified: 23 Jun 2006, 23:40:15 UTC

Hi Dmitri:

Well, I've looked at the charts and I've made a couple of observations. Assuming that those volume bars are all on the same time frame (monthly?) and relative scale, it seems to me that the "easy" money was made on the less "necessary" commodities, like OJ and sugar. These had less volatility as they rose. The metals had a clear rise, with silver paralling gold (but more prone to volatility, as I believe is usual between those two metals). There have always been weaker hands in silver than those diehard Goldbugs. lol

Now what's interesting to me in the light crude charts is the volatility. You have a more "jagged" rise, with many red bars mixed in with the green. That suggests to me that you have either more day-traders in it or otherwise more short-term speculators than with the other commodities. What I mean is that I don't see signs that there are "Oil bugs" in the same way that you have "Gold bugs" ie a large core group of committed investors. If it continues rises, I would expect even stronger volatility swings as the "strong" hands try to shakeout the "weaker" hands.

It also seems to me that it is nowhere near the burst of the bubble, the chart hasn't moved almost straight up, like the OJ and sugar have. It looks to me more like an "orderly" (price-wise, not market-wise) progression upwards. I mean, it doesn't look to have "blown off" to a verticle rise. So there's room in it yet, even after a sharp fall.

I do understand what you say about the worrisome nature to the economy of this being a "utility-style" commodity (ie a necessary product). I also understand your observation that consumers seem to be allowing the rise by not cutting back on consumption. But remember that in the United States, gasoline prices have never been as high as in Europe. That suggests to me that this passivity is only there because a true "pain" threshold has not yet been reached. But it's out there somewhere, just as it was with Europe. So one would have to research the history of hight prices in Europe, I think. At what percentage of annual wages did the price of gasoline and heating fuel suddenly stop its sharp rise there? That might give an indication of where approximately the "pain" threshold might be here. With this caveat: I think Americans are car crazy. They will suffer more pain before cutting back than the Europeans did.

The light oil chart is at an interesting point right now, with that narrowing price-range "flag". That's usually a sign, isn't it, that there will be a significant breakout in either one direction or the other. What I see is that the rise stopped at around $75. If it now breaks to the upside it will go beyond $75, I think, and quite probably to $80, but nonetheless $75 is a definite resistance point. I wouldn't call $100 as a forseeable price just yet, but $90 doesn't look off-the-horizon to me.

Very interesting charts, as I said. I'll have another look at them and see if I find something more.

Cheers!
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Message boards : Cafe SETI : About the price of oil


 
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