Peak Oil News: Peak Oil Passnotes: Why Is Oil at $60?

Saturday, September 23, 2006

Peak Oil Passnotes: Why Is Oil at $60?

Resource Investor

By Edward Tapamor

When a commodity or a stock moves fast we tend to get very excited. We hope to discover whether or not it has made some kind of quantum leap or is just part of a long term trend. So what the heck is happening to crude oil? Is this a slip? A correction? Or gigantic profit taking? Or none of the above?

Since we last wrote this column oil has continued its most excellent nosedive, actually breaching the $60 at $59.80 intraday this week. Just six weeks ago it was busting out at $78 and everyone – this commentator included – thought it was only a matter of time before $80 oil arrived.

We did also think that before it hit $80 there could well be a pull back, $64 maybe, $62 possibly. But the recent declines have been savage. There are many factors that have precluded this fall in price but one that most people have forgotten – amidst Iran, the UN and Hugo Chavez – is the end of the effect from Katrina.

The effects of Katrina lasted a long time. In the first three months of this year they were still heavily in evidence. Damaged refineries sat along the Gulf of Mexico coast, it exacerbated the flood of cash that came back into the market following the Christmas bonus season.

The tightness in the supply of gasoline to the U.S. was compounded through the year to June. It hung around until summer picking up other items like Iran, Lebanon and so on. But sitting high in people’s mind was that the effect of Katrina, plus the cost of the repairs, could be thrown away by another hurricane season like the one in 2005.

Almost a year from the formation of Katrina, tensions in the oil market reached their highest. Oil was busting its gut on August 8th and 9th. Many people had almost assumed that hurricanes were going to come crashing through on top of all the problems that existed. But they did not.

So it is this commentator’s view that oil has had a temporary correction. One that may still be ongoing. But this is not some kind of major sidestep, we are not heading back to $40. Instead we are seeing the collapse of multiple worries all at once. Although too late for the 1200 dead there is a UN force in southern Lebanon. For now Iran seems fairly safe from attack, at least until next spring.

But most of all the expected return of hurricanes to the Gulf of Mexico has not happened. The possible effect of another Katrina, destroying hundreds of millions of pounds of repairs - so shortly after the repairs had been undertaken - was a massive problem at the back of the mind of the market.

One by one the problems underpinning the rise in the price of crude melted away and we saw the first set of falls to sub $70 around the turn of the month. The absence of hurricanes and the effective sanctity of the value of the repairs from Katrina were now safe in the bank.

This culminated in the return of our herd mentality and the profit taking surge. Remember we said the market would sit around $61 at Christmas time? Well it just happened three months early. As we write West Texas Intermediate sits at $61.

So where will it go now. After all we got our timing wrong so why not just get the whole shooting match wrong. Will oil be at $40 by Christmas? It does not look like it.

Short of the publicised start of some kind of new recession we are now looking at a base price of around $57/$57.50. At that price, crude has to be a buy. The market has seen a combination of events that had both instant effect – relative peace in Lebanon, possible talks in Iran, a slowdown of disruption in Nigeria – and the resolution of long standing others, namely the prospect of Katrina 2. It has also seen that despite all the problems around the world, no one has yet run out of oil to any great extent.

But upper boundaries are tempting. The profits they give are monumental. We will almost certainly see the same volatile surge, but this time upwards, once the down point has been touched. The problems in the world will not go away; we could still have a harsh winter like we had a hot summer.

What we have now is a moment of super volatility. Where ranges are broad sweeps, like the volume of cash in the market, like the money that can be made. Will be made.


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