Oil: from Perpetual Backwardation into Contango
It’s finally happened. And only a few hours after my post about tomorrow’s Treasury BEFU announcement. For the first time in history, al oil futures are higher priced than the present price.
Backwardation is when prices in the future are lower than in the present. Contango is the reverse, where future prices are higher than in the present.
What are the odds that tomorrow’s BEFU announcement will be the usual backwardation fiesta? Very good odds. As I said in my earlier post, my eyes are gleaming with horror, not delight. The world is not ready for this, despite the evidence in plain view. Although no one can predict when peak oil will occur, the long emergency may well have begun today.
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May 22nd, 2008 at 2:22 am
A quick check of the Wikipedia page on contango will tell you that its not the first time in history; the situation also existed in 2005 and 2006. Howver, it does tell you what produces it in oil markets: perceptions of a future supply shortage.
So, it’s official: the oil markets think we’re running out.
May 22nd, 2008 at 3:04 am
Frog, the world has been preparing for this through the choice of new vehicles. The countries that conduct travel diary surveys have all found that the newest half of the vehicle fleet account for the two-thirds of km travelled. Look at the trends in new vehicle sale in Austalia and USA over the last ten years to see just how important that vkt factor is going to be over the next few years. Even F1 is now facing up to reality and from 2009 F1 will allow the kinetic energy recovery system (KERS) hybrid-drive system into the championship.
Temper your horror with a little hope:
http://www.popularmechanics.com/automotive/new_cars/4261289.html?serie s=19
http://www.popsci.com/invention
http://www.popsci.com/cars/article/2008-04/transitional-engine
May 22nd, 2008 at 9:50 am
Thanks idiot/savant and Kevyn. I am actually a hopeless optimist. This just feels to me like I am watching a slow motion car wreck in a dream and I can do bugger all about it. Very interesting point about the percentage of vkt travelled by the newest half of the fleet. That is good news indeed! Oil prices will only encourage that trend. US$133. Even my peak oil sensibilities didn’t see it coming so soon. I still think we’ll see a brief drop in price with some good production news, but I think we can kiss double digit prices goodbye.
May 22nd, 2008 at 9:51 am
Oil refineries take a long time to build. Oil people have probably been learning from the Enron electricity power price fiddling in California a few years back.
There may well be a pumping bottleneck. The oil is there, but demand is growing faster than it can be pumped. OPEC’s cartel will also have a huge role in emulating shortages simply by lagging on meeting rising demand.
If you want to get even wilder, try this one:
Thought Model in Oil Exec’s Mind: With rapidly rising demand from India and China, how can we make oil prices do what electricity did in California? Well…..We can take refineries offline for maintenance. That worked in March/April 2008 in the US. We can drag our heals building new refineries, creating a refining bottleneck. Doesn’t matter how fast they pump it if we can’t make it into petrol / diesel fast enough. We can try to build refineries in places that will see lots of environmental opposition (that way we get to blame greenies for any fuel shortages that eventuate and may be able to get laws changed to let us build where we want, if we want to). A refining cartel could create the effects of “peak oil” where no immediate “shortage” may exist.
You would have to have excellent visibility of the entire oil production / refining chain to workout if any of these ideas were actually having an effect either locally or globally. The people who have the best view are the same people who benefit the most from shortages.
May 22nd, 2008 at 9:53 am
I should have been more explicit in my post. This is the first time that oil has been in continuous contango, where each price each year going forward is higher than the last. My bad!
May 22nd, 2008 at 12:58 pm
Frog: How about Peak Greed instead of Peak Oil as explanation for what we’re seeing right now? There is compelling evidence to support the proposition that while peak oil will certainly come, there may be other explanations for what is going on right now.
I make a case here - as a thought model for discussion, NOT as an assertion.
http://truthseekernz.blogspot.com/2008/05/peak-greed.html
May 22nd, 2008 at 3:01 pm
OutinFront: “OPEC’s cartel will also have a huge role in emulating shortages simply by lagging on meeting rising demand”
Do you think the OPEC countries have much spare capacity? Many OPEC members are (and have been for ages) not able to ship their quotas. With the exception of Saudi, which probably has a couple of mill a day up its sleeve, I’m of the opinion that OPEC are a spent force in terms of oil supply control. They are more or less flat out.