Oil Trading Volume Surge: Desperation Of The Roaches

After appropriately peaking out at $66.6 last week, oil fell all the way back to $64 Monday but, since that’s just a 4% retracement, we know they’ve got at least another point in them. This run really started at $52, back in January and we finished the day (not counting the .20 closing pump) at $64.40, so yesterday’s drop was just $2.20 of $14 or 16% and our readers know that means we are much more likely to test 20% at $63.20 than go back over $65 on this run.

In the longer view, we have made a strong retracement of the drop from $75 in July and August to $60 (-20%) that held through Jan (some might say artificially, but we don’t truck with conspiracy theorists) but the downward "spike" (some would say natural move) to $52 (some would say desperately propped up before crashing through $50) represented another 15% down move from the $61 median price and, unless that is balanced by a move above $70 (+15%) that lasts for a couple of weeks, then we are still in a pretty big downtrend.

Speaking of investing, look at the monthly NYMEX volume on the last link - the majority of trading goes through the ICE, who just reported energy futures volume was up 69% this March. 11.5M contracts, representing 11.5Bn barrels of oil were exchanged on the ICE, while the NYMEX rolled about 9Bn barrels during the month. The reason traders prefer ICE is because it is far less regulated so they can play games (like taking both sides of a trade just to churn barrels higher) more easily than on the NYMEX, which has rules.

Still 20Bn barrels of oil represents some pretty active turnover for a country that "only" consumes 20M barrels a day but I’ll leave you to draw your own conclusions as to why there would be a 69% increase in activity this year on the ICE alone when, back in 2003, when there was just the NYMEX and oil was $30 (and this was AFTER 9/11), the whole country got by just fine trading 3M contracts in a month.

Oil rose from $30 in 2004 to $75 last year trading an average of 4Bn barrels a month on the NYMEX and the rise took 30 months. Even if you assume that the ICE traded a similar amount on average, the rate of exchange is now up 125% at least, meaning we could be subject to significantly sharper moves in either direction, but I think the very sharp surge in volume this quarter represents the desperation of the oil roaches as they scramble to prop up the price of oil, simply in order to maintain the value of the $4T worth of energy stocks that they simply can’t get out of fast enough.

What will someone do for a Billion dollars? What will 4,000 people do who each have $1 Billion on the line? What will 40,000 traders do who have $100M on the line, their lives, their careers, their reputations? Thank goodness we can all count on these people to behave morally and ethically and take their losses with grace and dignity should they find themselves on the wrong side…

Comments

[scott146]

Interesting information I personally wasn't aware of...thanks for giving us some info the mainstream press ignores...

[Saul Sterman]

Scott,
Don't get over excited. The currency markets trade a trillion dollars worth of currencies a day. That's a whole year's GDP in thirteen sessions. That's a whole years worth of global international trade in ten sessions or less. Obviously trade and consumption are two different features. Like options calls and puts, you don't have to take physical delivery of the stock. The same with oil.

[Georealist]

This is typical over pumped, over hyped Phil Davis garbage. He was calling weeks ago for oil to collapse..declining oil production numbers...continued (and unending) geopolitical problems..all a figment of our imaginations. Oil may rise a few dollars..but we all know the fix is in? Right....The real problem with this lightweight is he sees oil as a technical issue....instead of one that is exclusively fundamentally driven. And the fundamentals of this commodity are that it is in decreasing supply...and increasing demand.
It's no coinicidence that he never mentions Canaterel or Burgan or Daquing...all huge fields in free fall.
Follow his advice all the way to $90 oil and beyond and see how rich this nonsense makes you.

[Quaker]

I wish I had some idea what you were talking about. Light sweet crude is $64 in WTI, $68 USD in Brent and $74 USD in Australia. Personally, I don't understand why anybody even pays attention to WTI. Volumes are tiny, it has 15 speculators for every actual buyer and it's sitting 20 miles from almost a billion bbls of inventory.


Haliburton moved to Dubai for a reason. America has no oil industry. We have a rig glut, the rest of the world has a massive shortage. The oil industry is leaving America faster than you'd leave a burning hey loft. In the last three years, we drilled 50,000 wells, the equivilent of half the wells drilled in Texas in the last 100 years, and didn't raise natural gas or oil production one iota. The average american oilwell produces less than 100 barrels per day.

The Saudi's cut HEAVY oil production. They did this to reduce the difference between heavy and light, which was approaching $15 a barrel.

Maybe we can all post on how Ford sales are a benchmark for the worlds auto industry of how GE makes the worlds best light bulbs.

[Philip Davis]

Saul, I am excited - it takes currencies 13 sessions to trade a year's worth of the US GDP yet in 13 session oil trades 50 days worth of consumption so perhaps this sharp increase in trading volume means we are leading up to a dollar-like collapse in oil..

Ah Greg, I thought you went broke in the last oil plunge - very glad to see you still have your web connection! Cantarell (proper spelling) is producing 1.6Mbd and is predicted to go donw to 1.4Mbd in 2008, down from a peak of 2.1Mbd, ask your pals as Pemex if this is due to declining prodcution or just doing their share of the overall OPEC cutback?

Production at Cantarell was "boosted" through a massive nitrogen injection project that Pemex used to ramp production up from the 1.1Mbd it was producing in its first 5 years of life all the way to a peak output of 2.1Mbd in 2003. After pulling 2.6Bn barrels out of the field in 4 greedy years, it's no wonder your employers are able to point to this as "evidence" of peak oil. Peak oil? Certainly not! Peak Greed, Peak Irresponsible Field Management, Peak Manufactured BS by Peak Oil Fanatics desperate to find something that looks like it proves their case - Absolutely!

Burgan Field in Kuwait was set on fire by Iraqi forces in 1991 and lost 3 gathering stations but still produces over 1.7Mbd in its 61st year of commercial production. As I'm sure you know, they don't even have rigs in that feild as the oil literally seeps up through cracks in the ground and they just sort of vacuum it up.

Your alarmist note about this field no doubt stems from you taking Al Zanki at his word when he said that average production will fall from historical 2Mbd to 1.7Mbd over the next 30 to 40 years - surely this is earth shaking proof that peak oil has finally arrived!

Surely you can do better than Daqing (oh, but of course you can't because most major oil fields are well documented and hard to fabricate your nonsense about) - The Daqing field has been in production since 1960 and, so far 1.78B tons of the 5.7Bn tons of reserves have been pumped. This is another overpumped field that was stressed out at 40M tons in 2003 but is now comfortably producing 30M tons and is expected to settle down at 20Mt around 2020 with about 1B Tons (50 years) of "recoverable"... crude left to pump. Of course the real danger for your long-term portfolio is if someone finds a nice way to get to the other 3B tons of crude as that would push your peak oil scenario back another 100 years (didn't Hubbert originally "prove" it would occur in 1970?).

And let's not forget that it's very possible that oil never runs out because it is abiotic, rather than fossilized: educate-yourself.org/c...

Don't worry though, this scam runs long and deep and you and your friends may get your $90 per barrel if you are lucky enough to have a big hurricane this year - Maybe it will be one that kills lots of people and then we'll see how many more poor people can freeze to death while you count your profits. After all "if they are going to die, then let them do it quickly and decrease the surplus population" right?

======================...

Paul, 15 speculators for every actual buyer is right, talk about a crock! WTI affects the price of gas pretty directly and that affects the consumers, which is what we mainly track on my members site. I think HAL moved to Dubai because they don't have extradition and the noose is tightening over here as the Dems are investigating their war profiteering but yes, until oil hits $70 and stays there, we don't have much usable oil in the states.

[Quaker]

Phil, Again, I'm at a loss as to what you're getting at here. I was a production engineer in Ghawar in the 80's. All of Shedgum had about 200 wells and produced 4mmbpd. The kingdom now has 54 land rigs! (Officially, the actual number is closer to 65) Offshore they have 6 (Officially but if you look at drillers rig reports there are 14) 65 Land rigs will drill you a new Shedgum field about every 6 months. If you knew anything about Saudi production, you'd know that these fields weren't supposed to ever have to be redrilled.

When I monitored Ghawar, the wells produced 20,000 bpd. Now, again, Saudi Arabia is producing 6,000 barrels per well.

As to their production, what they produce, what they can produce at peak and what they should produce are entirely different things. Over the last 20 years, they really only produced at peak production for about 16 months. Obviously, with a flood front the amount of oil they can produce is more dependent on the amount of water they can produce than what the wells have.

As to WTI, as I said, who cares. US oil production fell from 10mm to about 4. The average US well produces less than 100 barrels per day. 99% of the worlds oil is not light sweet that goes through west Texas. 80% of US oil and gas is priced on benchmarks other than WTI. You seem to have a basic misunderstanding of what a benchmark is. Also, an increasing amount of world oil is light sweet. When oil was $79 a barrel the Saudi blend was $57. The price of oil didn't so much drop as the grade spreads narrowed.

One of the most interesting thing about Hubbert, is that nobody seemed to really understand what he was saying. The point was never that the world is going to run out of stuff underground called hydrocarbons. The problem is, you reach a tipping point where the cost of recovery and energy effeciency gets so challenging, that it's no longer worth it. Furthermore, his biggest venom was for the market mechanism for pricing didn't work. You have to be blind as a bat not to see that this is happening



.

[Quaker]

Also, an increasing amount of world oil is light sweet."

This is a typo, it should read NOT light sweet.

[Philip Davis]

Much like the Dow, I think we have to go with the index that moves the markets and, in the US, it's the NYMEX quotes for WTIC.

I am intrigued by your sour numbers and I will go check that out but when you look at the crack spreads the refiners are getting you'll see that they sell based on WTI and buy Sour - nice work if you can get it.

Whether Hubbert was right or not they key now, as it would have been in 1960 as well, is to cut our usage. As I just wrote in my latest article, the $30 per barrel premium we are paying represents over $200Bn that could be put into alt. energy research and conservation - the same things they railroaded Al Gore for back in the mid-90s because it would add .13 per gallon to our .85 gasoline.

Now that .13 is looking kind of good and there is no amount of Opec Production cuts that can offset a sustained US consumption cut of 20%. If we took a moon-mission approach to it and put a .50 per gallon tax on fuel ($153Bn per year US alone) we would probably do a hell of a lot better than 20% in 36 months.

With that kind of R&D, we could become world leaders in energy efficient technologies, something we would be able to export to the rest of the world for decades to come. Before peak oil there was peak coal and before peak coal there was peak wood (really in Europe they were worried) and I'm already hearing peak Uranium and I have bets with my freinds as to how long before they say we are going to use up all the solar energy...

It's always something but we used to live in a can do nation where nothing was a problem. I'm sure, as an engineer, you appreciate that we don't suffer from a lack of ability or ideas, just a lack of leadership...

[Saul Sterman]

"just a lack of leadership..."
Somehow I knew this was going to end up on Bushs' head...:)
Have a nice weekend Phil.
Saul

BTW, we are still in trading range 51 to 65, midpoint 58. Upper breach not relevant. XOM Q1 calculations @$52, up $1 from Q4 2006.

[Augustus]

When I read some of the nonsense about how just spending more immediately on research will immediately solve all energy problems, I must laugh a bit. Raise taxes and spend more on research / ethanol / alternative energy. The Jimmah Carter approach.

It is somewhat the same as writing that Abe Lincoln could have had a jet airplane and a television if he had just spent the money on research rather than an invasion of the Confederacy. Nope. No way.