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Oil, Gold and the US $


mangrove

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I thought this was better out of the Introduction thread.

 

Oil

 

I agree, but based on terrorist action in Middle East, it could be up to $60 pbl. Don't flinch at this. If you adjust the 1980 Oil price up with inflation I am reliably told that it is $89.00 pbl. Still a way to go to reach this level but possible.

 

Gold

 

I cannot see how oil prices will increase Gold prices. An increase in gold prices is more likely going to be caused by weakness in the US $. I think that there will have to be an interest rate increase in the US and this will strengthen the US $ and weaken Gold so under $400 is my feeling.

 

US $

 

A little stronger but much the same with the Aus $ which I expect to strengthen a little also.

 

The trouble with predictions, is that they are about the future and are mostly wrong but this is my guess.

 

Regards M.

 

 

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Mangrove,

 

I agree with you on oil - we are likely to see prices a lot higher especially if there are any further terrorist attacks aimed at disrupting supply (notice I said aimed - I don't even think they will need to be successful to distress the market).

 

As to gold and the US$ I have to disagree. I think that the inverse relationship between POG and US$ will be broken in the near term and my reasons are based on inflation, inflation, inflation.

 

The price of oil is going to have a huge impact on the price of gold because it is a highly inflationary commodity. US interest rates are currently at 1% and true US inflation is at about 5%. That means that anyone currently holding US$ is losing 4% of the value of their investment every year. The reason that people are still holding US$ is that they are swallowing the Fed line that inflation is under control and is running at about 2%. This is the doctored, sterilised "spun" figure that people want to keep hearing.

 

Inflation will force US Interest rates to rise and there will be a short term move into US$ (and possible retreat in POG) but the real inflationary environment will quickly become evident and the US$ will be dumped. The Fed has left it's foot off the brake for far too long and by the time they put interest rates up to 3-4% (slowly so as not to annoy the paymasters), inflation will be running at 7-9% and they will be unable to hide the real loss that US$ investors are suffering. There will be nowhere else to put large buckets of cash, as the house of cards that is the derivatives market will be coming down around the ears of investors and that is when the gold bull will take off.

 

I'd be happy to hear an argument that US$80/b oil will not cause massive inflation but I just can't see it.

 

This is my opinion and is the reason that almost my entire portfolio is made up of energy and gold shares.

 

Cheers

 

Badfish

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  • 4 months later...

The real oil shock

 

Traders are geared up for $70 a barrel, but some analysts say prices above $50 are unsustainable.

October 21, 2004: 7:16 PM EDT

By Michael Sivy, CNN/Money contributing columnist

 

 

 

NEW YORK (CNN/MONEY) - The price of crude oil has risen steadily for a year and continued to surge in the past month, climbing as high as $55 a barrel.

 

But the real oil shock could be a pleasant one -- a surprise drop in prices sometime before next spring.

 

Traders and some analysts expect the price of oil to run up to $60 or even $70 a barrel in the next month or two. That may well happen. Momentum is intense, and it's notoriously hard to pick the top for a commodity in the midst of a runup.

 

 

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Oil Rises to Record as China's Growth Expected to Boost Demand Listen

Oct. 22 (Bloomberg) -- Crude oil closed above $55 a barrel in New York for the first time after China said its economy grew more than expected. Oil's rally lifted heating oil to a record and natural gas to a 20-month high.

 

China last year surpassed Japan as the world's second- largest oil consumer after the U.S., because of a surging economy. Chinese oil use is expected to jump 15 percent to 6.3 million barrels a day this year, the International Energy Agency said. Oil has also risen on concern that U.S. stockpiles of heating oil are insufficient to meet winter demand.

 

``China's growth rate is still strong and the numbers point to a continuing uptrend in demand,'' said Tom Bentz, an oil broker at BNP Paribas Commodity Futures Inc. in New York. ``We are going into the winter heating season with inventories at the lower end of where we would like them to be.''

 

Crude oil for December delivery rose 70 cents, or 1.3 percent, to $55.17 a barrel on the New York Mercantile Exchange. Prices reached $55.50, the highest intraday price since futures began trading in 1983. Oil futures were 84 percent higher than a year earlier and the December contract has jumped 2.2 percent this week.

 

In London, the December Brent crude-oil futures contract rose 50 cents, or 1 percent, to $51.22 a barrel on the International Petroleum Exchange. Brent reached $51.65, the highest since the contract began trading in 1988. Prices were up 2.6 percent this week.

 

``What strikes me is that we are maintaining these highs without any new supply threats,'' said Michael Fitzpatrick, vice president of energy risk management with Fimat USA in New York.

 

China's Expansion

 

China's 9.1 percent growth in the third quarter was faster than the 8.9 percent projected in a Bloomberg survey. An expansion of 7 percent to 8 percent would allow for a healthy economy for the next two decades, according to China's Central Bank Deputy Governor Li Ruogu.

 

German Chancellor Gerhard Schroeder's government has cut its 2005 growth forecast to 1.6 percent from 1.8 percent as record oil prices damp the export-driven recovery, a lawmaker from the ruling Social Democratic Party, who declined be identified by name, said yesterday. Germany is the world's third-biggest economy.

 

`Anemic Growth'

 

``The Europeans would probably have anemic growth with or without high oil prices,'' said Kenneth Rogoff, director of Harvard University's Center for International Development, and a former chief economist at the IMF. ``In principle Western Europe and Japan should be affected most by a rise in oil prices. In fact it's the U.S. that's least flexible.''

 

Prices surged in 1974 after an oil embargo that followed the Arab-Israeli war. The average cost of oil used by U.S. refiners was $35.24 a barrel in 1981, according to the Energy Department, or $73.39 in today's dollars.

 

``There's a rule of thumb that a rise of $15 for a year will reduce global and U.S. GDP by close to 1 percent,'' Rogoff said. ``We still don't know how big an effect this rise will have on growth.''

 

Oil futures may rise for a seventh week in New York because of concern that U.S. heating oil stockpiles won't meet winter demand, a Bloomberg survey shows. Thirty-nine of 60 traders and analysts, or 65 percent, predicted a rise in oil futures next week. Ten expected prices to fall and 11 said they will be little changed.

 

Heating-Oil Supplies

 

Heating-oil inventories fell 1 percent to 49.5 million barrels in the week ended Oct. 15, leaving supplies 11 percent lower than last year, the Energy Department said Oct. 20.

 

Heating oil for November delivery rose 1.49 cents, or 0.9 percent to $1.5944 a gallon in New York. Prices reached $1.603, the highest since the fuel began trading in 1978. Gasoline for November delivery rose 2.54 cents, or 1.8 percent, to $1.4376 a gallon, the highest close since May 24.

 

Natural gas gained because of the increasing price for oil- based fuels. From 5 to 10 percent of U.S. factories can burn either natural gas or petroleum products, depending on which is more economical.

 

Natural gas for November delivery rose 40.8 cents, or 5.3 percent, to $8.105 per million British thermal units in New York, the highest close since Feb. 26, 2003.

 

Retail Prices

 

The average U.S. retail heating-oil price advanced to a record $1.988 a gallon for the week ended Oct. 18, the Energy Department said. It is the highest since the government began conducting the weekly survey of fuel retailers in October 1990.

 

The average U.S. retail price for regular-grade gasoline rose 4.2 cents the past week to $2.035 a gallon. Diesel reached a record $2.18 a gallon, according to a department report on Oct. 18.

 

The New York Mercantile Exchange, the world's largest energy futures market, said it will increase some of the margin requirements on light sweet crude oil, heating oil, natural gas and swap futures contracts at the close of business today.

 

Margins represent cash that traders must deposit to safeguard transactions. The exchange adjusts margins when it believes its members and customers need to put down more or less capital to cover their trades.

 

``The theory is that raising margins will drive the speculators out of the market,'' said Bill O'Grady, director of fundamental futures research at A.G. Edwards & Sons Inc. in St. Louis. ``The market reaction shows that this is the real deal and not the action of speculators that's brought prices to this level.''

 

 

 

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I think we'll see 70 a barrel, USA election, ie more terrorist/distrubtive attacks and increase demand, and the momentum we have now...

 

Things may change if Bush loses, since he's policies seem geared to increasing the oil price since he and the Saudis seem to have an interest in higher prices, ie lets attack a country which increases the oil price we'll increasing their reserves at the same time. So maybe a win for Carey may stabilize the oil price a bit...?

 

Anyway, Northern hemispere winter is approaching quickly, another plus to increase demand. I think we'll see a major boom in oil stocks come December, this is just the beginning http://www.ShareScene.com/html/emoticons/wink.gif

 

 

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Petrol to hit $1.20 as oil price surgesOctober 24, 2004

The Sun-Herald

 

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Petrol is set to reach $1.20 a litre within weeks after crude oil surged to a record $US56.17 a barrel in New York yesterday.

 

The rising oil price spooked Wall Street, sending the Dow Jones more than 100 points lower, while the greenback fell on world currency markets, lifting the Australian dollar to US74.02 cents.

 

Local stock watchers said the sharemarket would open lower tomorrow on the back of Wall Street's lead and on growing concern over the latest oil price shock.

 

But AMP Capital Investors' Shane Oliver said that while a high oil price was unambiguously bad news for the US economy, it was not necessarily so for Australia's.

 

"Australia is a net energy exporter, so the rise in oil is a positive for the sharemarket and the economy, and China is still going strong, which is good news for our mining stocks," he said. "While I think we will still be down on Monday, we'll not be down by anywhere near as much as Wall Street. I think we'll finish about 10 points lower."

 

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Crude jumped on Friday night after data showing the Chinese economy was still expanding at 9.1 per cent - that's an economy with a population of 1.2 billion growing at more than twice the rate of Australia's economy with a population of 20 million.

 

China overtook Japan as the world's second-largest user of oil behind the US earlier this year, but Chinese consumption per person is still a 10th of that in America.

 

It was the first time crude had closed above $US55 a barrel.

 

GOOD LUCK ALL STUers http://www.ShareScene.com/html/emoticons/biggrin.gif

 

 

 

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Don't fret - oil price jump has its positives

By Ross Gittins

October 23, 2004

 

Is the sky-high price of oil only temporary? Sure. Will oil prices stay high forever? Sure.

 

That's not as contradictory as it sounds. All it's saying is that the present very high world price of oil - around $US55 a barrel - is the product of two sets of factors: short term and long term.

 

The short-term factors should be temporary, allowing the price to fall back to, say, $US46 a barrel over the next year. But the long-term factors should be lasting, preventing the price falling to anything like the $US28 level it was at just two years ago.

 

According to a special article in this month's Reserve Bank Bulletin, the oil price has risen - surprise, surprise - because global demand for oil has been growing faster than global supply.

 

Over the past two years, the world economy has grown quite strongly, causing the demand for oil to increase by 5.5 per cent. The rapid industrialisation of China accounts for almost a third of this increase, with other developing countries in Asia accounting for another slice.

Global supply capacity has been expanding, too, but not at the same rate. New oilfields are being developed, but they're not as big as new fields used to be, and they generally involve oil that's harder - and thus more expensive - to get at.

 

For quite some years until recently, members of the Organisation of Petroleum Exporting Countries had a lot of excess capacity and adjusted their production levels to limit swings in the price.

 

But OPEC is currently producing at very close to its capacity and, in any case, now accounts for less than 40 per cent of global supply, down from more than half in the mid-1970s.

 

So that's the basic long-term story. Further expansion of the Chinese economy will keep pressure on oil demand, with oil consumption per person likely to rise significantly from current low levels as Chinese incomes rise.

 

On top of these longer-term developments, however, there's been considerable anxiety about the potential for short-term disruptions to supply.

 

The restoration of Iraqi oil production, for instance, has been limited by the dilapidated infrastructure and constant interruptions to supply caused by sabotage. Terrorist activity in Saudi Arabia, the world's largest oil exporter, has led to market concerns over the security of its oil supply.

 

Russia has become a major oil exporter, but the largest Russian oil company is facing bankruptcy because of unpaid taxes. And to that you can add political tensions in Nigeria and Venezuela and hurricanes in the Gulf of Mexico.

 

All these anxieties seem to have caused the market to add a significant "risk premium" to the world price. That's putting it politely. More bluntly, speculators in the market seem to have overdone things, pushing the price higher than it needed to go.

 

This is the familiar characteristic of asset and commodity markets, where price rises lead to more price rises until the longer-term market fundamentals reassert themselves.

 

So that's the reason for expecting the price eventually to come down somewhat, but to nowhere near what it used to be.

 

Next question: what does the present sky-high price of oil mean for the world economy, not to mention little old Oz?

 

Well, for a start, just how sky-high is the price? In nominal terms, it's the highest on record. In real terms, however, it's about the same as it was after the first OPEC oil shock in late 1973, but still way below what it got to following the second OPEC shock in late 1979 - $US100 a barrel in today's dollars.

 

Each of those shocks plunged the world into recession - as well as causing a leap in inflation that took years to overcome.

 

But the Reserve Bank article cites four reasons the latest price increase isn't likely to do nearly as much damage.

 

First, as well as the current real price not being as high as it was in 1979, the rise hasn't been as great nor as rapid. What's more, since then we've gained a lot more experience with price volatility and there's much wider use of hedging instruments to dampen its effects.

 

Second, economic activity is much less dependent on oil than it was 30 years ago. The "energy intensity" of world output - measured as barrels of oil consumed per $1 billion of real GDP - has declined by almost half.

 

Third, inflation expectations in the industrial economies are a lot lower and more stable today than they were then. This means one-off increases in the price of oil are less likely to provoke compensating pay rises and thus add to the wage-price spiral. That, in turn, means there's less need for central banks to hit the monetary brakes.

 

Fourth, and most important, the latest price rises are qualitatively different. They're the product of strongly growing world demand, whereas in 1973 and 1979 the price hikes were the result of purely supply-side shocks.

 

In other words, the price suddenly leapt because the OPEC cartel decided to achieve that effect by slashing its production.

 

A supply-side shock is much worse than a demand-side shock because, for net oil-importing countries, the former is inflationary and contractionary at the same time. That is, it lifts the price of petrol and other fuels while it cuts people's real incomes and thus consumer spending.

 

So it makes the central bank want to raise interest rates and lower them at the same time. If the bankers raise rates to control inflation, they invite a recession, whereas if they lower rates to fight recession, they get a lasting inflation problem.

 

A demand-side shock, on the other hand, is much easier to handle. It will lead to a rise in the price level but, since it comes at a time when demand is strong, its subtraction from demand should hardly precipitate recession.

 

That's the bottom line for the world economy: the jump in the oil price is a small negative for aggregate demand (with the size of the loss to a particular economy varying according to its degree of dependence on oil and the extent to which it's a net importer) and will push up the consumer price index to some degree, but at this stage doesn't seem too big a deal.

 

That's the story for Australia, too, with one major qualification: though we're only 78 per cent self-sufficient in oil, we're a net exporter of natural gas and a huge exporter of that alternative energy source, coal.

 

So whereas a jump in the oil price is bad news for most countries, for us it's good news as well as bad. Be alert but not alarmed.

 

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I'm sure the reserve bank was saying that last spike.

 

Of course oil will effect everything, everything is linked to oil, transport is part of our civilisation, and if it costs more to move around everything will be effected...

 

Had a fright yesterday when the news came about Japan earthquake, almost hit Toyko, that's something that could easily lead to a large crash, Toyko being flattened by an earthquake..

 

I think the only positive thing for Australia is that we do have a bit of oil and gas, so some people will make lots of money http://www.ShareScene.com/html/emoticons/wink.gif

 

 

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HereÃÆâ€â„¢ÃƒÆ’ƒâ€Â ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒ¢Ã¢â‚¬Å¾Ã‚¢ÃƒÆ’ƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¾ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢s my take on oil:

 

Gittin's article demonstrates that he has a less-than-complete understanding of global oil market dynamics. But he's not alone, most analysts can't see the wood for the trees when analysing oil.

 

Here, I'm making a case for overweighting oil, and energy stocks in general, on a three to five year view.

 

QUOTE
The short-term factors should be temporary, allowing the price to fall back to, say, $US46 a barrel over the next year. But the long-term factors should be lasting, preventing the price falling to anything like the $US28 level it was at just two years ago

 

While I don't disagree that we could see a temporary pull-back from current price levels, over the intermediate term (say three to five years) I expect explosive price growth.

 

And while the oil/GDP ratio is nothing like it was in the past, it is not at all safe to assume that, in modern economies, broad market sentiment is resilient to the effects of sky-high oil.

 

I see oil prices as posing the chief threat to equity investment performance over the intermediate term.

 

How high could the oil price go? Could oil hit US$150+ a barrel? I think the answer is yes - and easily. Why?

 

1) Demand for oil is highly price inelastic. This is why the oil price series is so volatile. Put in simple terms, demand for oil is relatively inflexible. Think about it, you will buy around the same amount, or quantity, in any given period, irrespective of the price.

 

2) Supply is also relatively inflexible. Short-term supply flexibility consists of stocks and any excess capacity. However, long-term supply flexibility is a function of exploration and development spend in conjunction with technology. Exploration and development spend is, in turn, a function of oil prices and can be typically expected to exhibit a mild lag to the price series.

 

At the margin, prices reflect changes in growth of these global aggregates - supply and demand.

 

Demand Growth:

 

Aggregate (global) oil demand growth is, in the short term, a function of global GDP - holding technology constant ÃÆâ€â„¢ÃƒÆ’ƒâ€Â ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒ¢Ã¢â‚¬Å¾Ã‚¢ÃƒÆ’ƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“ and in the long term a function of both global, per-capita GDP and population growth. Growth in both population and GDP is geometric.

 

But this is not the whole story. The income elasticity of oil demand is not properly understood by most analysts. There is what I call the "subsistence threshold effect". That is, as soon as aggregate incomes exceed subsistence thresholds, oil demand becomes highly elastic.

 

Think about it, what is the first product a farmer in Asia - or anywhere else - seeks to acquire once subsistence needs are met? The answer is, typically; a motorcycle, generator or farm machinery - oil consuming plant. By comparison, the income elasticity of oil demand in mature economies is relatively low, for obvious reasons.

 

So, by this logic, GDP growth in emerging markets is the best forward indicator of aggregate oil consumption growth. This is no superficial relationship; the oil-price history supports this view. The last time we witnessed sub US$10/barrel oil prices was early 1999 - just after the Asian Economic Crisis.

 

Asia accounted for 76% of aggregate global oil demand growth in the 10 years to 1998 - almost all of it. The greatest gains were recorded in the fast-growing Asian Tiger economies where vehicle stocks grew explosively over the decade. With the contraction in Asian GDP capping global oil demand growth in the late 1990s, the oil market quickly manifested glut conditions with demand for oil storage breaching capacity and oil stocks accruing off-shore in floating storage.

 

Recent economic conditions have seen China and India record very strong GDP growth - see IMF chart below. These countries have high population densities. But, more importantly, they are also countries in which the "subsistence threshold effect" is very strong. We can expect that, in absence of either a hard economic landing in china or a fierce global economic slump, global demand for oil will be very strong going forward.

 

http://www.imf.org/external/pubs/ft/weo/20...1pdf/fig1_7.pdf

 

Supply Growth:

 

Global oil supply is relative sticky as it is characterized by highly-cyclical, heavy capital spend on exploration and development in conjunction with long lead times to cashflow generation. Moreover, much of the oil that is easy to find and develop oil has been exploited ÃÆâ€â„¢ÃƒÆ’ƒâ€Â ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒ¢Ã¢â‚¬Å¾Ã‚¢ÃƒÆ’ƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“ hence the increasing spend on expensive, deep-water exploration by the oil majors.

 

The greatest increments to oil supply growth over the last 15 years have been achieved on the back the application of new technology to oil exploration and extraction. Directional drilling, 3D seismic surveys and new techniques assisting sub-sea completions have increased the hit rate for explorers, increased the quantum of developable off-shore acreage, and increased the rate of extraction over the existing global production spectrum.

 

However, this new technology applied to oil exploration and extraction is of diminishing marginal importance. Most realizable increments to production on the back of these recent technological improvements have largely already been achieved. There is nothing, on the technology front, that I can see providing any real increment to aggregate oil supply growth over the intermediate term. In other words, the fillip granted to aggregate oil supply growth on the back of recent technology improvements is largely finished.

 

Oil production (the rate of extraction per unit of time) from any given oil-producing area tends to exhibit a table-top formation with a fast-rising, leading edge and an asymptotic trailing leg when viewed over a time series. HubbertÃÆâ€â„¢ÃƒÆ’ƒâ€Â ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒ¢Ã¢â‚¬Å¾Ã‚¢ÃƒÆ’ƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¾ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢s work on this is very instructive ÃÆâ€â„¢ÃƒÆ’ƒâ€Â ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒ¢Ã¢â‚¬Å¾Ã‚¢ÃƒÆ’ƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“ see link. What is important for balance in oil-markets is that, given that demand for oil grows geometrically over time, the new increments to supply are sufficient to more-than-offset declining production rates across the existing global oil production spectrum.

 

Given that many of the recent elephant finds ÃÆâ€â„¢ÃƒÆ’ƒâ€Â ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒ¢Ã¢â‚¬Å¾Ã‚¢ÃƒÆ’ƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“ e.g. UK North Sea and Alaska ÃÆâ€â„¢ÃƒÆ’ƒâ€Â ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒ¢Ã¢â‚¬Å¾Ã‚¢ÃƒÆ’ƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“ are approaching maturity or are in actual production decline, the industry, going forward, will be hard-pressed to achieve any significant growth in supply at global aggregates. In short, we are rapidly approaching the Hubbert Peak.

 

http://en.wikipedia.org/wiki/Hubbert_peak

 

Moreover, OPEC capacity is already showing signs of strain ÃÆâ€â„¢ÃƒÆ’ƒâ€Â ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒ¢Ã¢â‚¬Å¾Ã‚¢ÃƒÆ’ƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“ see chart.

 

OPEC spare capacity: http://www.imf.org/external/pubs/ft/weo/20...pdf/fig1_21.pdf

 

Summing Up:

 

The global economy is critically dependant on the ready supply of easily pumpable oil. Demand for the commodity is notoriously price inelastic. The key point, I think, is that very small imbalances between supply and demand precipitate very large price moves - in both directions.

 

Moreover, employing absolutes, the supply of oil is, ultimately, fixed while demand growth is geometric.

 

Investment view:

 

Expect price volatility to increase significantly over the intermediate term with a view to increasing weightings in oil stocks in the expectation of explosive price performance. Reduce weightings to stocks adversely affected by high oil prices.

 

High oil prices are here to stay, higher oil prices are on the way. And sky-high oil is a very distinct possibility.

 

Jerry

 

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Hi I have a good read of this thread and believe that yes AUST is well placed going forward as a country that can support itself to `a reasonable degree. I know little about oil and which are the quality shares that one should research . Could you please advise 3-4 companies that you consider look ok for the long term to take advantage of the changing times ,

Thanks Al

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