[Peakoil] Oil futures

[Paul Pollard]

I refer to my email of Monday discussing the reported offer by an oil company 
to sell oil at US$70 in 2011.

I set out some financial and other reasons why this might indicate that the 
oil company expected the price of oil to be about $120 in 2011. This 
discussion was based on the assumption that the offer was to receive the $70 
payment now, with oil delivery in 2011. 

However, Alex Pollard has pointed out that it could well be that the offer is 
to receive payment of $70 in 2011, when the oil is delivered, which is a more 
usual futures arrangement. (It isn't clear from the original email on this 
which arrangement applies).

If it is the latter, the oil company seems to be willing to accept an oil 
price in 2011 of about $55 in present day money values, taking inflation and 
risks into account.

If this is the case, I can only conclude that the other factors I mentioned 
come into play even more strongly, such as market herd mentality, and 'loss 
leader' demonstration pricing designed to give the impression that the oil 
industry is convinced prices aren't going up.

Above all however we can be absolutely certain that only a minute part of 
expected 2011 production is being sold off early in this way. The idea that a 
significant part of a company's oil production would be sold years ahead for 
a price lower than today's, in oil, of all commodities, is absurd. Even iron 
ore prices are negotiated yearly.

Just on industry expertise in predicting prices, it is useful to recall that 
Woodside agreed to sell gas for a long-term price to China just three years 
ago which is now looking very cheap.  (I know this contradicts the point 
about commodity prices being negotiated frequently but a massive new gas 
venture is a bit different from oil and iron ore).

Paul Pollard