Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Semiconductor Sector – Watch the Early Bird in 2019 - 21st Jan 19
From ASEAN Economic Development to Militarization - 21st Jan 19
Will China Surprise The Us Stock Market? - 21st Jan 19
Tips to Keep Your Finances Healthy in 2019 and Beyond - 21st Jan 19
Tips for Writing Assignment in Hurry - 21st Jan 19
UK House Prices, Immigration, and Population Growth Mega Trend Forecast - 21st Jan 19
REMAIN Parliament to Subvert BrExit with Peoples Vote FIXED 2nd EU Referendum - 21st Jan 19
Pay Attention To The Russell Stocks Index and Financial Sectors - 20th Jan 19
Hyperinflation - Zimbabwe's Monetary Death Spiral - 20th Jan 19
Stock Market Counter-trend Extends - 20th Jan 19
The News About Fake News Is Fake - 20th Jan 19
Stock Market Bull Trap? January 22 Top Likely - 19th Jan 19
After the Crash, the Stock Market Made a V-shaped Recovery. What’s Next - 19th Jan 19
David Morgan: Expect Stagflation and Silver Outperformance in 2019 - 19th Jan 19
Why Brampton Manor Academy State School 41 Oxbridge Offers is Nothing to Celebrate! - 19th Jan 19
REMAIN Parliament Prepares to Subvert BrExit with Peoples Vote FIXED 2nd EU Referendum - 19th Jan 19
Gold Surges on Stock Selloff - 18th Jan 19
Crude Oil Price Will Find Strong Resistance Between $52~55 - 18th Jan 19
Stock Market’s Medium Term is No Longer Bullish. It is Now Mixed - 18th Jan 19
SPX and Gold; Pivotal Points at Hand - 18th Jan 19
Fable Media Launches New GoWin Online Casino Affiliate Site in UK - 18th Jan 19
The End of Apple! - 18th Jan 19
Debt, Division, Dysfunction, and the March to National Bankruptcy - 18th Jan 19
Creating the Best Office Space - 18th Jan 19
S&P 500 at Resistance Level, Downward Correction Ahead? - 17th Jan 19
Mauldin: My 2019 Economic Outlook - 17th Jan 19
Macro Could Weaken After US Government Shutdown. What This Means for Stocks - 17th Jan 19
US Stock Market Indexes Reaches Fibonacci Target Zone – Where to Next? - 17th Jan 19
How 2018 Was For The UK Casino Industry - 17th Jan 19
Gold Price – US$700 Or US$7000? - 16th Jan 19
Commodities Are the Right Story for 2019 - 16th Jan 19
Bitcoin Price Wavers - 15th Jan 19
History Shows That “Disruptor Stocks” Will Make You the Most Money in a Bear Market - 15th Jan 19
What Will the Stock Market Do Around Earnings Season - 15th Jan 19
2018-2019 Pop Goes The Debt Bubble - 15th Jan 19
Are Global Stock Markets About To Rally 10 Percent? - 15th Jan 19
Here's something to make you money in 2019 - 15th Jan 19
Theresa May to Lose by Over 200 Votes as Remain MP's Plot Subverting Brexit - 15th Jan 19
Europe is Burning - 14th Jan 19
S&P 500 Bounces Off 2,600, Downward Reversal? - 14th Jan 19
Gold A Rally or a Bull Market? - 14th Jan 19
Gold Stocks, Dollar and Oil Cycle Moves to Profit from in 2019 - 14th Jan 19
How To Profit From The Death Of Las Vegas - 14th Jan 19
Real Reason for Land Rover Crisis is Poor Quality of Build - 14th Jan 19
Stock Market Looking Toppy! - 13th Jan 19
Liquidity, Money Supply, and Insolvency - 13th Jan 19
Top Ten Trends Lead to Gold Price - 13th Jan 19
Silver: A Long Term Perspective - 13th Jan 19
Trump's Impeachment? Watch the Stock Market - 12th Jan 19
Big Silver Move Foreshadowed as Industrial Panic Looms - 12th Jan 19
Gold GDXJ Upside Bests GDX - 12th Jan 19
Devastating Investment Losses Are Coming: What Is Your Advisor Doing About It? - 12th Jan 19
Things to do Before Choosing the Right Credit Card - 12th Jan 19
Japanese Yen Outlook In 2019 - 11th Jan 19
Yield curve suggests that US Recession is near: Trading Setups - 11th Jan 19

Market Oracle FREE Newsletter

UK House Prices, Immigration, and Population Growth Trend Forecast

Why Crude Oil Prices Are Entering a "New Normal"

Commodities / Crude Oil Oct 03, 2012 - 07:40 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleDr. Kent Moors writes: One of the things I have learned from almost four decades of doing this is that oil and gas specialists know a great deal about what they do for a living.

However, few of these specialists really understand enough about what the person to the right or left of them does. This tends to breed tunnel vision.


And these days it has become a serious problem.

That's because what is now hitting the oil and gas markets requires a more expansive and integrative understanding of what is actually taking place.

The truth is energy markets are evolving.

We are entering a period in energy and oil prices that I have begun calling the "New Normal."

You see, a volatile, dynamically changing combination of factors now undermines the traditional way of viewing oil and gas markets.

And it is about to get a whole lot more unnerving for the average analyst who still insists on pushing square pegs into round holes.

Unfortunately, for the old school aficionado, we are rapidly moving into new territory. Here, market machinations are occurring that defy the "traditional" explanations.

Oil Prices and the Talking Heads
You know what I mean by "traditional."

The talking heads on television try to explain the latest spurt or dive in oil prices by relying on the same trite and tired lineage of explanations.

In just the last month, we've seen movements in energy prices justified solely on the following factors:

•A supply glut in Cushing, Okla.;
•Fluctuations in the euro-dollar exchange rate;
•The European credit crunch;
•The latest unemployment figures;
•Inflation;
•Manufacturing, housing, or production figures.

But it really doesn't work this way anymore. While such factors are not completely irrelevant, they are also not calling the shots.

There are several factors contributing to this New Normal, but I will be restricting my comments this morning to just three.

They are:

1.The balance between conventional and unconventional production;
2.Increased market volatility; and
3.Global geopolitical matters.
So let's get started.

Unconventional Production is on the Rise
The rise of shale and tight gas and oil, coal bed methane, heavy oil, bitumen, and synthetic (upgraded) volume from oil sands has fundamentally changed the production landscape.

But it has also fundamentally altered the dynamics upon which pricing is determined.

Initially, most of us assumed that these unconventional sources would serve to restrain price, as more supply came online to meet rising global demand.

The reality, however, appears to be that this new largess is becoming more expensive to produce, transport, and process, while the distribution of the shale, sandstone, or in situ hydrocarbons are rendering basin projections less reliable.

There is more available, but the cost of production and the price commanded on the market are creating short-term aberrations with attendant risks and opportunities.

One thing it has done is temper the Peak Oil approach.

Over 50 years ago in an address here in this city of the Alamo, Shell scientist M.K. Hubbert kicked off the movement with one of the most famous presentations in the history of petroleum analysis.

Today, it is not availability, but where it is available and at what price that is making all the difference. The balance between conventional and unconventional, therefore, is making an impact but hardly all in the same direction.

Volatility with a Capital "V"
The second factor - volatility - is no stranger to regular readers of Oil & Energy Investor.

This is not simply quick rises or falls in price, although these are the clearest impressions left.

The Oil VIX is supposed to register volatility, and a "traditionally normal" market would expect that the OIL VIX would rise (as risk rises) in parallel with a fall in oil prices.

That often no longer happens.

The volatility now experienced is occurring within the average range of VIX figures.

Stated simply, our new volatility is providing cycles occurring more rapidly than the session averages provided by the VIX. The traditional way of expressing what volatility means in the oil and gas markets no longer helps us in compensating for changes in investment patterns.

Such volatility also translates into how futures contracts on oil and gas determine current market prices. It used to be that, as we moved closer to the expiration of a futures contract - as the convergence between the paper barrel (the futures contract) and the wet barrel (the actual consignment of crude or natural gas) approaches, the two would merge into the same underlying price.

Often, that would make it necessary to buy on one side or the other to produce the desired equivalence. But such arbitrage was easily done, and the market was better off because of it.

Not anymore.

As I indicated in my last book (The Vega Factor: Oil Volatility and the Next Global Crisis), this is not usually a result of speculators or manipulations by companies, distributors, or mega investment funds.

Rather, the inability to connect the future contract with the actual price of the oil or gas results from problems within the trading system itself. This volatility has produced the rise of a whole new generation of derivatives, itself a clear sign that the market is not coping with rapid change.

Global Tensions Heat Up Oil Prices
Third is the geopolitical factor.

Now international events have always had an impact on oil prices. The current climate, on the other hand, has given the factor new urgency.

It is the reason I have been spending much time lately dealing with the Iranian crisis and the prospects of Iraqi production. Flash points in the region upon which the global market still depends for the brunt of its conventional oil are weighing heavily on our ability to estimate supply and price.

Most observers still regard these considerations as exceptions to some general textbook rule of market practice.

Sorry, this is not the case.

As I indicated last week when writing from my briefings in London, the closer one gets to the crisis centers, the more analysts recognize the longer-term implications of the geopolitical.

None of these new factors is going anywhere anytime soon. They are central parts of the New Normal.

Investors should become used to dealing with them.

Source :http://moneymorning.com/2012/10/03/why-oil-prices-are-entering-a-new-normal/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules