Oil price discussion and analysis

[Magdoran]

Re: OIL AGAIN!

Originally posted by Captain G
on the "Gold Price - Where is it heading?" thread

Hi Magdoran, just very curious, but why will oil be poised to potentially run up to test $90 within 3 months ??
Cheers, Capt.

This is in response to a question made about oil on the "Gold Price - Where is it heading?" thread.

I was projecting possible extensions to the bullish drive in Crude and Brent oil, and have attached 3 rough working charts to illustrate the potential levels oil may move to if the pattern in the current period gives a higher low, and moves bullishly out of the existing consolidation (see the charts). I am still working on this, so this is literally a work in progress.

Of course any bullish drive may fail around any of the extension divisions as shown in the chart, and would expect resistance at the 25%, 33%, 50% and 75% divisions.

The pattern looked initially to be accumulation to me, but it could be distribution for a pull back. I tend to favour the concept that this is accumulation for a drive up, but recognise that a marginal high may come in and halt the move – and it may just move sideways from here.

The 100% extension target over the next 3 moths or so (still working on time projections) as a potential target is based on the concept that consolidations can form 50% levels in price into the future (this concept is not my idea by the way).

HUSpotV (Unleaded futures) is problematic for the bullish projection though. I suspect that fuel is the primary driver in oil pricing above the ancillary products. The last bar could be a false break, but if it only yields a small pull back and makes a higher low, or is exceeded in 3 trading days, this would be bullish. If it pulls back, it could blunt a bullish drive in oil.

Ok, I’m going to be out of range for a few days, but will be interested to see what happens over the next couple of weeks.


Regards


Magdoran

 

[rederob]

Re: OIL AGAIN!

Magdoran
I think $90 is possible, but only if accompanied by geopolitical concerns that spill onto the world stage - Iran is the culprit to watch.
And then I thought about hurricanes: Put the two together and we have $100 as possible.
Otherwise I think POO over $85 this year will be a bit of a tall order.
I say this based on pragmatism, and not on natural demand, which I expect to be typically robust in the second half.
Pragmatism tells me that if POO soon hits $90 or $100 then we have a recipe for overheating the inflationary ingredients and cooking the US economy.
My suspicion is that even the speculators know this ( I know the oil companies do), and will need to be careful about killing the goose that lays the golden eggs.
My other suspicion is that peak oil is so close that if the global economy sees clear weather over the next few years we will definitely seee POO over $100 later on in 2007.
Curiously, the ratcheting of prices to accommodate higher oil costs over recent years shows us that we may be able to survive a little longer at these ridiculous levels.
Of the indicators I will be looking at to pre-emt a global market meltdown, oil will be my first gauge. Followed by a DOW chart.

Gold will run its own course, and may rise irrespective of oil prices, interest rates and bourse movements.

 

[michael_selway]

Re: OIL AGAIN!

Magdoran
I think $90 is possible, but only if accompanied by geopolitical concerns that spill onto the world stage - Iran is the culprit to watch.
And then I thought about hurricanes: Put the two together and we have $100 as possible.
Otherwise I think POO over $85 this year will be a bit of a tall order.
I say this based on pragmatism, and not on natural demand, which I expect to be typically robust in the second half.
Pragmatism tells me that if POO soon hits $90 or $100 then we have a recipe for overheating the inflationary ingredients and cooking the US economy.
My suspicion is that even the speculators know this ( I know the oil companies do), and will need to be careful about killing the goose that lays the golden eggs.
My other suspicion is that peak oil is so close that if the global economy sees clear weather over the next few years we will definitely seee POO over $100 later on in 2007.
Curiously, the ratcheting of prices to accommodate higher oil costs over recent years shows us that we may be able to survive a little longer at these ridiculous levels.
Of the indicators I will be looking at to pre-emt a global market meltdown, oil will be my first gauge. Followed by a DOW chart.

Gold will run its own course, and may rise irrespective of oil prices, interest rates and bourse movements.

Possible yes, but is it sustainable?

http://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=1DE6B75C-17A4-1130-F5CAF88306085114

thx

MS

Is There A Crude Oil Oversupply Or What?
FN Arena News - June 29 2006
By Greg Peel

"There has been a contradiction evident in the oil market throughout [the second quarter]. On the one hand, a mass of analyst and oil company executive comment has talked of chronic over-supply and price crashes. Some press comments have taken that view on board, and run with it repetitively as if it were set in stone. However, on the other hand, physical markets have not manifested the supposed over-supply, there have been three straight monthly averages for WTI above [US]$70, and, rather than crashing in a suitably humble fashion, the market is now gaining strength."

And therein lies the dilemma. This is the way Barclays Capital currently reads the crude oil market.

The current state of the oil market can best be unravelled by simplifying into four distinct factors. (1) Supply – is it or is it not in a position of surplus? (2) Demand – are higher prices having any effect in lowering demand? (2) Products – regardless of crude supply, supply of gasoline and other products will remain tight. (4) Geopolitical tension is the wildcard (and throw hurricanes in there as well).

Merrill Lynch has just raised its oil price assumptions. The analysts now value oil companies on the basis of a 2006 price of US$67.50/bbl (up 8.5%), 2007 of US$65.00/bbl (up 18%) and 2008 of US$50/bbl (up 8%). The longer term assumption remains at US$42/bbl.

US$42/bbl might seem like wishful thinking, but Merrills insists that "the full cycle cost of large-scale marginal sources of supply" dictates that this is a realistic price. In English, it means that if the oil price stays high enough for long enough then peripheral oil sources such as Canadian oil sands (extensive resources) or gas-to-liquid conversion begin to look economic and worth pursuing.

It is on the supply side that Merrills go on to formulate its view, despite having just upped forecast prices, that over the next 18 months the crude oil price will drift lower. Merrills believes global oil production is set to expand rapidly over coming quarters. Production is declining in the North Sea and Mexico (largest supplier to the US) but substantial production is anticipated from the Former Soviet Union (specifically Russia, Azerbaijan and Kazakhstan), Africa (Angola and Sudan) and Canada. Brazil is also expected to increase production.

Merrills expects non-OPEC production to grow by about 1.5 million barrels per day in 2007.

Then we have OPEC, which is also bringing further production on-line. Nigeria, Kuwait, Algeria, Iran, UEA, Libya and Saudi Arabia all plan to increase production. This increase could be 1.1 mb/d, says Merrills.

However, increased production is not going to solve the problems at the pump. Global refining capacity is still woefully inadequate. Moreover, a lot of the supposedly excess oil being produced at the moment is "heavy" crude. Refiners gave up on heavy crude years ago. Turning excess heavy crude into useable product would mean major refinery rejigging. "Sweet, light" crude is what everyone's set up for, and that is not in excess. One of the biggest sources is Nigeria, and its production has been slashed by terrorists.

If heavy crude producers end up creating even more of a bottleneck at the refiners they will have to consider actually cutting production. Otherwise the price of crude really will collapse. OPEC would not let this happen. Merrills suggests the next round of OPEC production meetings could be feisty.

If there's currently such an excess, or an excess to come, says Barclays, why then is the oil price going up? Oil prices will finish higher in the second quarter of 2006 than where they started. When Barclays crunches all the available numbers, and the dust settles, it appears the market in the second quarter will be significantly tighter than last year.

One possible answer to the conundrum is gasoline. As suggested, you can pump out as much black gold as you like but if you can't refine, it's not worth much. Thus a tight gasoline market, and subsequently high gasoline price, is what's dragging up the oil price.

Logic dictates that the higher prices go, the more demand will fall. So turning to the demand side, many economists base their predictions of, for example, a slowing US economy, on the fact that ongoing high oil prices will lead to demand falls that will curtail economic activity. Is there any evidence of this? Not much.

The demand effect comes down to price elasticity. In other words if the relationship between oil price and demand is elastic, each dollar of oil price will directly force a fall in demand. If inelastic, it won't. The Australian example is one that shows just how inelastic the relationship is.

An average Sydney family may use a car to drive to and from work, and another to drive the kids to and from school. Although higher oil prices have affected some increase in public transport use, and motor scooter and bicycle sales, most Sydneysiders have continued to buy the same amount of petrol but give up something else. New clothes perhaps, or dining out. As the price of petrol has climbed ever higher, it is not petrol sales that have suffered.

Merrills finds that the global price elasticity of oil is very low. The analysts estimate that, on average, a 10% increase in the price of petroleum products affects only a 0.5% fall in demand. In parts of the world it's even less. The greatest guzzlers of them all – Americans – have seen 40% higher gasoline prices this summer from last, but demand has fallen 1%.

While most economists expect the US economy to slow from here – not recede, just slow – global economic growth forecasts are hardly leaden. Merrills expects 4.4% global growth in 2007, which is still "above trend". This is not a figure that suggests a significant fall in oil demand. In fact, Merrills forecasts 2007 demand growth of 1.9 mb/d. (If you recall, aggregate supply increases were tipped to be 2.6 mb/d).

Merrills does not believe the refinery bottleneck problems will be solved before the second half of 2008. The analysts thus reason that demand for gasoline, diesel and jet fuel will simply have to slow to match available supplies. Maybe it will, but where does that leave the price? Merrills calculates that supply growth of light crudes (that which can be turned into fuel at present) will only be 1.4 mb/d.

On that assumption, Merrills suggests oil prices will drift lower over 18 months. If the fuel simply isn't available, then other arrangements will have to be made. Price spikes in products will also curtail demand and make consumers think again. Get set for hybrid car sales to rocket. Once everyone's reassessed their oil usage, then there's no reason to pay up so much. At least that's the theory.

But what of our old friend, geopolitical tension? Iraq, Iran, Nigeria, the nationalisation of South American sources – all are sufficient unknowns that can make a lot of hard core analysis worthless. FN Arena published the view of Credit Agricole's Jean-Charles Lacoste on Tuesday which is that we are in for the next great global oil shock, just like the seventies, due simply to the risk of some further devastating event. Oil at US$100/bbl, says Lacoste.

And as we speak, the waters in the Gulf of Mexico are getting warmer, and warmer…

 

[Magdoran]

Re: OIL AGAIN!

Hello rederob and Michael,


Markets are not rational. $90+ oil prices seem incredible, don’t they? If you’d even mentioned this level a few years ago, people would have thought you were potty, wouldn’t they? But speculators are focussed on the present to make money out of the market. I really don’t think they’re thinking about the longer term effects. In fact, a spike in oil prices and a resulting crash in the price will make some speculators who play the long side on the way up, and the short side on the way down rich. Very rich.

So, good point, rederob and Michael, what would $90+ oil do to the global economy, combined with rising interest rates, and soaring commodity prices? I fully agree with Michael and rederob, if we hit this level, it wouldn’t be sustainable. Look at the way commodities exhaust up into highs, then fall sharply from these heady heights – perhaps even look at the “dot com” boom, this is a good illustration of how markets perform in “blow off trends”.

My contention is that our whole current economic system is stacked like a house of cards. What we have is the perception of perennial demand based on the sustained growth in China. But are we are at the crossroads right now? Can the record levels of US debt be sustained without either an effective long term strategy in place where the US dollar loses value relatively against the Chinese currency, or that consumption rates are slowed considerably and debt levels are reduced? Add the oil scenario spiking to equivalent levels to the 70’s oil shocks, what would the effect be?

Think about this – much of the current prosperity has been driven around the western world in part by the surge in real estate values, which in part was fuelled by low interest rates which allowed significant leveraging of capital to borrow to acquire both for domestic and business pursuits. Add to this the equity in domestic households which sharply lifted the ability to purchase a range of household items, entertainment, luxury items etc. While all this is going on the Chinese have built major industrial cities in very short periods of time to supply to this demand, and millions of Chinese workers toil for a pittance to keep prices competitive.

Are we at a point where this kind of economic demand will fall due to inflationary flow on from key commodities like oil, metals, and the effect of contracting or sluggish house prices and rising interest rates? Are the internal domestic drivers in China sufficient for it to continue despite conditions in the US? Essentially to what extent is China “addicted” to the US, and vice versa? Where Australia’s economic future stands in my view is based on the commodity boom which has been the primary reason for the prosperity over the last 3 years.

A point lost on many people is that copper has increased price dramatically over the last year, almost quadrupling (see the attached chart). This has to have an effect on key costs world wide. Copper is often described as an economic barometer, just look at the attached chart, and tell me if this looks sustainable or exhaustive.

Are the recent corrections in the metals an overbalance in time and price with further correction to come, or is this the mid point for a major boom? Or is it the point where prices consolidate? I’m kind of leaning to the corrective viewpoint currently in the metals charts, but if the metals rally and test their highs, this has to be inflationary.

The question is, is anyone going to say “the Emperor had no clothes”, or is the whole system going to be sustained by “faith” by turning a blind eye (like the Japanese did in the past to their “Zombie” company structures and in western terms bankrupt banking system). Inflation rates are the key, and with key commodity prices soaring, this puts the question of how long inflation can be contained at the “desirable levels” before the base costs filter down and start having a marked impact?

I don’t think we’re at this point just yet, but consider a scenario where oil spikes up to that 90+ level, would this trigger a rather unpleasant set of economic events on a global scale? How this might pan out is beyond my capacity to measure, but what I can imagine is a significant contraction in demand and a potential major slide in forward estimates across the board for earnings – resulting potentially in a significant correction. But this is of course dependant on a range of variables playing out this way. Essentially it’s about perception and confidence above the fundamentals.

However I do think it is possible to maintain the current favourable economic conditions for years, especially if everyone maintains an optimistic outlook, and the structural strategies are addressed (particularly in the US) to reduce debt without sending the whole system into a recession or depression. Another danger is if there is a wholesale sell off of US currency and bonds and what the effect of this might be. Key holders are China and Japan. The Chinese are unlikely to want to unsettle the current arrangement, so for the present this is not a likely scenario, but it is something to consider.

Certainly in the longer term, if the Chinese demand and expansion despite some fluctuations remain in place, this signals longer term growth. The problem I think we have is in timing – when will corrections happen, how long and how deep will they go, and when and how far will a wider boom period last?

My controversial thinking at the moment is that the apparent lockstep of Gold with Crude oil prices may be about to diverge… But this is way too preliminary, all I can do is to interpret what I’m seeing in the charts currently, and this is a possibility. But what I see is oil looking bullish, and Gold in the short term looking like it should correct more. Of course I could be completely wrong here, and I will adjust my forecasts over the next few days/weeks as the price action gives more clues where these commodities might head.

There are several key variables to consider which we have charts on:

• Interest/Bond rates (particularly US – hence FED policy is a factor)
• Currency movements – particularly the US Dollar (since we’re looking at NYMEX Gold, it’s in US dollars),
• US indexes (DOW, NASDAQ, S&P 500)
• Oil/Fuel Prices (CL and HU, and LBCA)
• Metal Futures (Copper, Nickel, Aluminium, Zinc)

Of course this doesn’t cover the larger questions of the wider economic backdrop on issues like inflation, US debt levels (individual and national) and the relationship with China, and more broadly complex global economic cycles of supply and demand and the interrelationships between various countries and economic sectors.

In my undergraduate days I remember reading a book by Peter Gourevitch when it had just been released and was interested in the causes of depressions, and the responses by various governments to these situations. I think some of these notions are relevant in the current period considering the nature of the Chinese political system since much of the commodity boom is based on accelerating demand from China. That is that their system of government is not democratic, and policy can still be imposed. Second guessing the policy direction in China then is a key element on the way the global economy will behave into the future (an obvious point I know, but never the less often neglected).

Another perspective of interest was the notions put forward by Jim Rodgers in “Hot Commodities” on China. (Rodgers had travelled around China on a motorbike for around a year doing comprehensive economic research, and wrote the “Investment Biker” and “Adventure Capitalist” – prior to this he had been George Soros’ key partner when the Soros fund quadrupled in value - see “Soros on Soros”). Even Rodgers recognised that there will be periods of correction which can be marked by sharp pull backs. The key question for us as investors and traders is “when, and how much” – this is what I’m attempting to do.

Regards


Magdoran
P.S. I’ll look forward to returning to see how robust the debate becomes when I get back. Hope you all have a prosperous week! Mag

 

[wayneL]

Re: OIL AGAIN!

Oil hits record

http://www.marketwatch.com/News/Sto...BC1-43C8-B069-451AD2404D8C}&siteid=mktw&dist=

Crude marks a record close on political concerns
All-time closing high for front-month contract; natural gas sinks
E-mail | Print | RSS Feed | Disable live quotes
By Myra P. Saefong, MarketWatch
Last Update: 3:24 PM ET Jul 5, 2006

SAN FRANCISCO (MarketWatch) -- Crude-oil futures closed at a new record Wednesday, finishing above $75 a barrel for the first time since mid-May, with developments in Iran and North Korea raising concerns among traders ahead of U.S. data expected to show a decline in crude inventories.
"Over the last 24 hours, Israeli planes hit the Interior Ministry in Gaza City, the Arab League transferred $50 million in funds to the Palestinians, Iran rejected a July 12 deadline [to respond to a United Nations proposal] and North Korea launched seven missiles," said Michael Fitzpatrick, an analyst at Fimat USA, in a note to clients. "This is the opposing force to the thinking that ever-higher commodity prices will eventually choke off demand as central banks struggle to keep inflation in check."
Crude for August delivery climbed as high as $75.40 a barrel on the New York Mercantile Exchange, matching the record intraday high for a front-month contract seen on April 24 and marking the contract's first rebound to that level since May 11, when prices reached an intraday level of $75.85. ...

 

[Magdoran]

Re: OIL AGAIN!

Errata:

The HUSpotV data on the last chart in post 141 was wrong. The apparent spike up and close near open never happened. The new chart shows the actual bar, and also last nights price action.

This paints a very different and bullish picture, and my reservations in my comments before on HU (Unleaded futures) are reversed. Look at the attached chart with the now correct bar, and this looks bullish.


Regards


Magdoran

 

[stockmaster]

Re: OIL AGAIN!

How will oil price go for next week? Man, if it goes up even more, i can't afford the oil bill. Need to catch a train tomorow

 

[Magdoran]

Re: OIL AGAIN!

Behaving Technically as expected... Please see charts - still working on the time projections...

 

[wayneL]

Re: OIL AGAIN!

Pretty sensible analysis there Mag.

Those time/price levels... what are they? They look similar to monthly pivots (though must be different)

Cheers

 

[Magdoran]

Re: OIL AGAIN!

Hi Wayne,


Thanks... How’s WA?

I’m not quite sure what you’re asking me. Are you asking me what I'm working on, or what is showing in the chart - maybe my arrow musings about the pattern I'm expecting?

These charts are primarily aimed at price and wave projections. The time factor needs a Gann based chart to project time with any precision. Gannalyst can do time and price, but Advanced GET's time capacity is rudimentary, and inadequate from a Gann perspective.

I sometimes mark highs and lows with an arrow to make it easier to observe counter trends and wave counts manually. The Elliott wave generation in GET is based on moving averages, and can have some odd labeling that I don’t agree with.

Essentially I manually work out time and price projections; hence I mark these with whatever text and drawing tools that is available on the chart.


Regards


Magdoran

 

[wayneL]

Re: OIL AGAIN!

Hi Wayne,


Thanks... How’s WA?

:sleeping:

I’m not quite sure what you’re asking me. Are you asking me what I'm working on, or what is showing in the chart - maybe my arrow musings about the pattern I'm expecting?

These charts are primarily aimed at price and wave projections. The time factor needs a Gann based chart to project time with any precision. Gannalyst can do time and price, but Advanced GET's time capacity is rudimentary, and inadequate from a Gann perspective.

I sometimes mark highs and lows with an arrow to make it easier to observe counter trends and wave counts manually. The Elliott wave generation in GET is based on moving averages, and can have some odd labeling that I don’t agree with.

Essentially I manually work out time and price projections; hence I mark these with whatever text and drawing tools that is available on the chart.


Regards


Magdoran

OK

One day I'll study this Gann stuff (time & price stuff only) to see if there's anything for me. To much on ATM though.

Nevertheless, any suggestions for a starting place will be appreciated.

Cheers

 

[michael_selway]

Re: OIL AGAIN!

:sleeping:



OK

One day I'll study this Gann stuff (time & price stuff only) to see if there's anything for me. To much on ATM though.

Nevertheless, any suggestions for a starting place will be appreciated.

Cheers

http://www.abc.net.au/4corners/content/2006/s1680717.htm

Peak Oil?
Reporter: Jonathan Holmes

Broadcast: 10/07/2006

"The price of petrol is disgusting, absolutely disgusting…"

"It’s just going up and up…"

"It’s outrageous…"

"I get so mad – you ever get so mad you can’t even talk about it no mo’?"

(Vox pops – motorists in Australia, UK and US)

If, like these motorists, your fury rises with the numbers ticking over on the petrol bowser, get a grip. You may soon look back fondly on the good old days when petrol was $1.40 a litre.

The world is at the beginning of the end of the age of oil, according to a growing body of analysts. It stands at a precipice of "peak oil" – the point at which oil producing countries can no longer keep up with growing demand, where production climaxes and then plunges into irrevocable decline.

This, say the doomsayers, may send national economies spinning into turmoil, up-ending comfortable urban lifestyles that rely on oil for the cheap transport of people and goods and for the manufacture of thousands of mundane household and office items – from mousepads, banknotes and drink bottles to carpets, clothes, cosmetics and deodorants.

The crunch will come some time in the next few years, without warning, they say. "The worst case is that it’s occurring now or very soon because the world is unprepared, it’s absolutely unprepared," says one of the most influential pessimists.

But this is just scaremongering, say many authoritative oil industry voices. While they agree that oil is unlikely to get cheaper any time soon, they insist that oil production will keep pace with demand for decades to come. There is simply no end in sight to the black gold bonanza, according to these optimists.

They check off their list: vast untapped oil reserves claimed by Middle Eastern nations; the prospect of further discoveries; and smarter technology that will extend the life of existing oil fields and make new ones easier to exploit.

Even the optimists concede that massive discoveries of easy-to-reach oil are a thing of the past. But, they say, higher prices will make other ways of producing oil and alternative fuels commercially viable.

Who is right? Four Corners investigates a truly global issue that reaches into every home and every car and touches every human life. This special report* explains why oil prices are high right now and asks how long the world has left to prepare for a day when there is not enough oil to go around.

Reporter Jonathan Holmes goes in search of an answer in the Middle East, the US and Europe, interviewing the key protagonists. He asks if the world is being told the truth about the vast unexploited reserves that are claimed to lie beneath the desert sands of the Middle East. He looks at alternative oil sources and the obstacles to exploiting them. And he explains what peak oil means for Australians who depend so heavily on oil for transport and tourist income.

"Peak Oil?" … on Four Corners, 8.30 pm Monday 10 July, ABC TV.

This program will be repeated about 11 pm Wednesday 12 July; also on ABC2 digital channel at 7 pm and 9.30 pm Wednesday.

*Four Corners also presents a Broadband Edition on "Peak Oil?" … See the program in full; watch extended interviews with the experts; delve into interactive maps showing who produces the oil and who buys it; browse key reports about how much oil remains untapped; learn about the alternatives; and discover the impact of peak oil on Australia’s economy and way of life.

thx

MS

 

[RichKid]

Re: OIL AGAIN!

................
.............

"Peak Oil?" … on Four Corners, 8.30 pm Monday 10 July, ABC TV.

This program will be repeated about 11 pm Wednesday 12 July; also on ABC2 digital channel at 7 pm and 9.30 pm Wednesday.

*Four Corners also presents a Broadband Edition on "Peak Oil?" … See the program in full; watch extended interviews with the experts; delve into interactive maps showing who produces the oil and who buys it; browse key reports about how much oil remains untapped; learn about the alternatives; and discover the impact of peak oil on Australia’s economy and way of life.

thx

MS

Thanks for that Michael, I didn't realise it was all on the web, missed most of the show so I will have to catch the repeat. It's a shame they didn't consult our resident expert Smurf as his posts had a hell of a lot of stuff that they could have used. Maybe you should do some consulting for these researchers and reporters Smurf? Your posts are top quality. Thanks for sharing your knowledge and expertise, it's very educational.

 

[michael_selway]

Re: OIL AGAIN!

Thanks for that Michael, I didn't realise it was all on the web, missed most of the show so I will have to catch the repeat. It's a shame they didn't consult our resident expert Smurf as his posts had a hell of a lot of stuff that they could have used. Maybe you should do some consulting for these researchers and reporters Smurf? Your posts are top quality. Thanks for sharing your knowledge and expertise, it's very educational.

NP u can watch it online below, its split into 6 parts

http://abc.net.au/4corners/special_eds/20060710/4c_interactive.swf

thx

MS

 

[YOUNG_TRADER]

Re: OIL AGAIN!

A good read, I recommend it

Talks about Coal to Oil,

Tar Sands of Canada (Apparantly more Oil here than in Saudi region,



http://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=66A21D5C-17A4-1130-F5EDC6317BAD1CAC



Enjoy

 

[Realist]

Re: OIL AGAIN!

A company is worth the PV of all future cashflows (forecast EPS) discounted for time and risk, nothing more or less.

1/PE = ROI. Money in the bank is about 5% return or PE of 20, but risk free.

Risk = high debt, commodity price sensitivity etc [/QUOTE]

What is PV? :confused:

also, I like to value a company for what you would get if it was liquidated NOW!

i.e. Net tangible assets (all assets less liabilites (not including intanglibles) does that fall into your equation Michael?

There have been times when a compay is selling for less than what it is worth now - CMI for instance was selling at 97 cents - if you work that back you'd see that is less than what it is worth if you liquidated it. So any future profits (and it does make profits) are your for free.

I'm not having a go, I'm just interested in your thoughts. Thanks. :)

 

[michael_selway]

Re: OIL AGAIN!

A good read, I recommend it

Talks about Coal to Oil,

Tar Sands of Canada (Apparantly more Oil here than in Saudi region,



http://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=66A21D5C-17A4-1130-F5EDC6317BAD1CAC



Enjoy

Hi YT thanks for that!

The article has alot of info from the ABC 4 corners show recently

http://abc.net.au/4corners/special_eds/20060710/4c_interactive.swf

Will Coal Replace Oil?
FN Arena News - July 13 2006

By Greg Peel

One of the reasons Hitler lost the war is because he ran out of fuel. As Germany had not been bestowed with oil reserves, Hitler was aware of the important part oil would play in his plan for world domination. The eastern front was very much about securing Russia's oil supply.

In the end he failed, but not before exploiting new technology that had been pioneered by two scientists called Fischer and Tropsch in the 1920s. They were able to turn coal into diesel. Rumour has it that when Patton made the final push into Germany, he did so using syphoned-off Nazi synthetic fuel.

Not long after, the Middle Eastern oil fields were opened up. There was seemingly an endless supply. The concept of coal conversion became irrelevant. It remained irrelevant right up until recently when oil could be purchased for US$16/bbl.

Except in South Africa. During the 1980s when South Africa was under the rule of an apartheid regime, oil imports were subject to international sanction. In order to overcome a lack of fuel, one company, Sasol Ltd, took advantage of the country's vast coal reserves and revisited the earlier German technology.

It was a long road, but for the last seven years aircraft flying out of Johannesburg International Airport have used a blend of jet fuel containing 50% converted coal. After decades refining the technology, and in a new oil price regime where US$70/bbl is beginning to feel like the norm, Sasol is making windfall profits. It hopes to win approval for a 100% synthetic jet fuel this year.

Sasol has become the leading world expert in coal conversion, and the US is very interested. For one thing, the US is keen to reduce its reliance on Middle East crude. But with a focus that only an American could have, the real push is coming from the military. Rummy wants in.

More than half of the fuel consumed by the US government is used by the air force. About US$4.5 billion per year's worth. The air force recently learnt its fuel bill would rise, as of June 1, by 57c per gallon. Last year it rose 40c.

While the military may be leading the charge, so to speak, commercial airlines are watching with acute interest. Rising jet fuel costs have threatened to all but cripple the global airline industry. The general thinking has always been that synthetic fuels, in various forms, only come under the radar when the oil price exceeds US$50/bbl. Any less and traditional jet fuel is the most economical. Will we see US$50/bbl again?

The US is, nevertheless, not without its coal conversion converts. One Pennsylvanian company, WMPI Pty Ltd, has been working on turning that state's waste coal into zero-sulphur diesel or jet fuel and is commissioning a plant this year. It is doing so finally due to a big, fat grant from George Bush. There are other coal or gas conversion plans being rolled out in other US coal-producing states.

It makes sense. While the US is a net importer of oil, and it's pretty light-on for gas as well, it boasts 27% of the world's known coal reserves. Russia has 17%, China 13%, India 10%, Australia 9% and South Africa 5%.

Why, then, has the US been so slow to adapt coal conversion technology when the concept should have been banging successive government's over the head? The US is far and away, daylight second, the world's biggest consumer of oil.

The answer lies largely in cost, as much as it might in a lack of foresight, or a blind belief in the God-given right to consume oil at will. Converted coal can produce oil at around US$35-40/bbl. Add in fixed costs and you reach the rough US$50/bbl figure for economic viability. Crude oil has never been higher than US$50/bbl until last year.

That's in nominal terms of course. The 1980 previous oil price peak generated a similar wave of panicky interest in alternative fuel sources, with one of the most predominant being shale. Shale oil was going to be the West's great saviour, and Sheik Yamani could go and stick it. The problem was, it was also expensive.

By the time anyone thought seriously about large-scale shale oil production, the oil price collapsed again when the OPEC supply-side shock was over. Shale oil became of minor historical interest.

When the oil price shot up again recently, one was hard pressed to find analysts who didn't see it as a short term phenomenon. Sure, China was suddenly buying lots of oil, but at higher prices demand would fall and supply would increase and everything would revert to normal, except at maybe a slightly higher average.

When Goldman Sachs issued its infamous US$101/bbl prediction two years ago, most fellow analysts laughed. They're not laughing anymore.

Governments, in the meantime, have relied on their respective energy agencies to keep them grossly misinformed. Only a year ago the US Energy Information Agency predicted crude would soon be back at US$30/bbl. The equally incompetent Australian agency, ABARE (Australian Bureau of Agriculture and Resource Economics), has said consistently in recent years that oil prices are about to fall.

"I have made the occasional mistake", said Dr Brian Fisher, executive director of ABARE, to a senate committee recently (source: Four Corners).

Coal is converted into oil by first mixing it with oxygen and steam at high temperature and pressure to produce carbon monoxide and hydrogen. The second step – the Fischer-Tropsch synthesis – uses a catalyst to transform the gas into a liquid synthetic crude, which is further refined.

By-products are mercury, sulphur, ammonia and other compounds that can be sold. The other major by-product is carbon dioxide, and herein lies a problem.

A coal-based power plant of equivalent size to WMPI's conversion plant in Pennsylvania discharges about four million tons of carbon dioxide per year. As greenhouse gas emission controls come into play, at least in some countries, the additional burning of coal may not be viable, particularly if carbon emissions are monetarily quantified.

However, there are environmentally positive outcomes for coal-conversion as well. The actual diesel fuel, when used in a car for instance, has been shown to produce only 10% of the carbon monoxide and 70% of the particulate emissions of conventional sulphur-free diesel (source: Scientific American). Moreover, the South African experience has shown that oil can be produced from waste coal.

In Pennsylvania, as an example, for every two tons of coal extracted, one ton is low-energy, useless waste coal. This sits in a stockpile – 260 million tons of it at present – that is in itself an environmental hazard.

While South Africa has refined the technology, the fact remains work needs to be done to sell coal-conversion as a cleaner alternative to regular crude. It has even been suggested that electricity be produced during the conversion process, and that carbon dioxide emission be collected to be pumped down oil wells. At least they're trying.

But when it comes to alternative non-renewable energy sources (ie other than wind, solar etc) pundits tend to overlook one thing. Nuclear energy might be clean, but uranium mining is far from clean. Coal-converted oil might be better than regular oil but coal mining is a very dirty business. The same can be applied to "clean coal" technologies.

What price might the earth pay to ultimately bring the oil price down?

There is little doubt that the demand side of the equation is what has been driving up the price of oil. No one quite anticipated just how much energy the world's emerging economies would require. It hasn't helped that geopolitical and religious conflict have further thrown supply into doubt. And supply itself has been a long time catching up to rising demand.

Could it be that China might be forced to utilise its extensive coal reserves for oil production?

The answer to this question might be, despite China's already drastic pollution problems: it might have to. The world's reserves of oil may indeed be dramatically low. If you believe some experts, we may have already reached "peak oil".

The question of peak oil has suddenly been a headline-grabber, even though scientists have been warning of the peak oil phenomenon for years. Peak oil may only be a decade away, or we may have passed it already.

What is peak oil?

When an oil reserve is first tapped, up from the ground comes a-bubbling crude. Or if you're more of a Jimmy Dean fan, it spurts high into the air. This is because underground oil reserves are trapped under a lot of pressure.

When the first well is drilled, the oil delivers itself. Maybe hundreds of barrels a day. The next step is to see just what sort of area the reserve might cover by drilling a lot of new wells. Eventually, the one reserve may have been accessed by hundreds of wells, delivering thousands of barrels per day under its own pressure.

After a period of time, natural laws dictate that the pressure will begin to subside and eventually reach equilibrium. From this point on, the oil needs to be pumped out. As the level in the well starts dropping, it may be necessary to pump water in to get the oil out. This becomes more costly and does not produce the same barrel-per day volume. In order to cover the shortfall, more wells need to be drilled to keep production levels up....
.

 

[wayneL]

Re: OIL AGAIN!

The situation in the middle east is looking a lot more volatile as well.

Very dangerous... very sad.

 

[michael_selway]

Re: OIL AGAIN!

...Finally an oil reserve simply will not be able to produce the same volume per day and the cost of recovering the remaining oil will rise. The reserve has passed its peak. It's now all down hill. After a period of time any remaining oil left will not be able to be economically recovered. Game over...

The technology that allowed oil to be recovered from under the sea was a great leap forward for an oil-hungry world. Thanks to the North Sea, Britain became an oil exporter in 1981.

In 1999, production peaked at 4.5 million barrels per day. By 2005, it had slumped to 1.5 million. That was 14% less than 2004, and less than Britain's daily consumption. (Four Corners)

The US Department of Energy's stance on peak oil is that it's "decades away". But then one wouldn't want to start a panic. Because according to US oil company Chevron, in 33 of the world's 48 most important oil producing countries production has already peaked. Australia's peak was passed in 2000. (Four Corners)

The Association for the Study of Peak oil has visited every oil producing country and every well in the world and the downward trend is evident everywhere. One saviour may well be the next big oil discovery. When that happens we can all get some sleep.

The only problem is oil discovery has also been trending down – for the last 50 years in fact. Consumption has risen in the meantime, and it was in 1981 when the world last found more oil than it consumed. (Four Corners)

While the US doesn't want you to think oil has peaked, the Middle East doesn't either. Rather, the Middle East is gearing up its production capacity to be able to meet the needs of the emerging economies. Granted, it's taking some time, but new wells are being drilled and we'll get there eventually.

Middle Eastern oil reserves are one explanation offered by those who believe the oil price will eventually fall from its highs. Twenty years ago, Saudi Arabia claimed to have 260 billion barrels of oil under the ground. The Saudis produce over 9 million barrels per day, or 10% of world consumption.

No one is allowed in to assess Saudi's oil reserves for themselves. It is a closely guarded secret. Having pumped 10% of the world's oil needs for twenty years the Saudis now claim to have – 260 billion barrels of oil under the ground. That's right, it hasn't changed. (Four Corners)...

Suspicious? I would be. If the Saudis still have that much oil then why is the oil price up here? Even US$40/bbl seemed exorbitant a couple of years ago. And it is definitely not in the interest of Saudi Arabia or any other Middle Eastern oil producer to allow the price to go so high. It is at this price that the world starts talking about moving away from oil.

If the oil is really there, then the most sensible course of action would be to let the world assess that for themselves. Okay, it might take some time yet to ramp up production, but knowing definitively that there's nothing to ultimately worry about would ease pressure on the oil price. Yet the best the Saudis can come up with is a figure that never changes.

If the oil is not there, what happens next? There are the massive tar sands of Canada, but recovering oil from tar sand is expensive and environmentally unsound. There are reserves in the Arctic regions, and perhaps the Antarctic, but will that be a popular move?

If the world needs oil for its existence, then one possibility is clearly coal conversion. Coal is already used to produce electricity, and steel. Estimates suggest there is 200 years of known coal supply in the world, or 100 if it is used for conversion to oil.

From an environmental perspective, one would hope we can quickly move away from needing any form of oil. Realistically, the price of coal is not likely to drop much from here

PV = Present Value, basically adjusted for time

Yeah NTA is a another way to value a company.

Lets say a company has in proven in-ground uranium worth 1 billion based on spot prices. But the thing is if not managed well they can actually make a loss when it comes to production and selling

Also a "cheap asset" can earn alot of money. And vice versa an expensive asset (if sold on market) could be making losses if not managed well (but it could be taken over, but then again it coudl ge bust)

Actually i have a question for you Realist

Lets say an Aussie listed company with 100mil shares (fully diluted) can earn 100mil in NPAT per annum with near 100% certainty but no growth (so dividends are possible). Also assuming no disaster world events such as Terrorism, SARS, etc, whats the most you are willing to pay for each share roughly?

Ill give u my answer after yours

Thanks

MS

What is PV?

also, I like to value a company for what you would get if it was liquidated NOW!

i.e. Net tangible assets (all assets less liabilites (not including intanglibles) does that fall into your equation Michael?

There have been times when a compay is selling for less than what it is worth now - CMI for instance was selling at 97 cents - if you work that back you'd see that is less than what it is worth if you liquidated it. So any future profits (and it does make profits) are your for free.

I'm not having a go, I'm just interested in your thoughts. Thanks.

 

[wayneL]

Re: OIL AGAIN!

Oil futs punching through $76