BF2S Forums Speculation and Regulation, Shell Oil Chief sez oil should be <$90/bbl

ACCORDING to Shell Oil president John Hofmeister, the “proper” range for oil should be somewhere between US$35 - US$90 a barrel.

Based on that statement and assuming it’s more or less accurate, what do you think we should make of the current oil price of US$130 - US$140 per barrel? How much of the spectacular rise in oil is due to speculation? That is important to determine as excessive speculation could basically drive prices much higher than its real demand-supply equilibrium.

Open interest in WTI oil futures has been growing exponentially at 18% per annum since 2001, thanks to the entry of non-commercial players. The entry of more non-commercial players and speculators generally mean they would be on the long-side of the futures and options.
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The new index speculators are not your average in-and-out trading outfits. Collectively, these funds have stockpiled (long on inventory via the futures market) 1.1 billion barrels of petroleum. It’s not like they are actually going to take delivery of these oil barrels, but their stockpiling is tantamount to hoarding 1.1 billion barrels from the real market place. If real supply is constant, one can imagine what the 1.1 billion long positions will do to oil futures prices if they are rolled over.

Apart from index speculators, a huge number of long-only commodity funds and plethora of dedicated commodity ETFs have entered the scene in the past five years. A quick glance at Nasdaq will be able to give you an idea on the rising emergence of ETFs.

Essentially, they are long players, trying to cash in on investors interest on a prolonged commodity bull run.

But are they really interested to consume these commodities? NO.
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Amidst all these hoopla, it would appear that Opec, which is traditionally everyone’s punching bag, is probably an innocent party to this catastrophe, this time around.

According to market estimates, the actual costs incurred in producing the most expensive oil is only around US$70-US$80 a barrel; the rest of the current oil price represents the market’s risk premium plus speculation.

Note, that assumption is based on the high end of the cost spectrum and most are produced at a much lower cost.

The tangled web of subprimes has claimed more than its share of victims in recent months: homeowners by the hundreds of thousands, to be sure, but also those who created, packaged, insured, distributed, and ultimately bought what should have been labeled "junk mortgages" but which by a masterstroke of marketing genius received a more respectable imprimatur.

"Skim milk masquerades as cream," warned Gilbert and Sullivan over a century ago, and sure enough, today's subprimes, packaged into financial conduits with monikers such as SIVs and CDOs, pretended to be AAA-rated cubes of butter.
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What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.

My Pimco colleague Paul McCulley has labeled it the "shadow banking system" because it has lain hidden for years, untouched by regulation, yet free to magically and mystically create and then package subprime loans into a host of three-letter conduits that only Wall Street wizards could explain.
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Now, with confidence waning, the visible but unphotographable run from George Washington into the euro, the yen, and other currencies is under way. Protecting an American-made pocketbook should begin by seeing that purchasing power is more likely to be enhanced via investments in strong currencies, not weak ones. More than ever, your portfolio should have a international perspective and include non-dollar-denominated assets.