Why Oil Between $50-$75 Is a Good Thing 17 comments
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As WTI Crude oil for July delivery passed $65 a barrel last week there was talk that high oil prices could derail the recovery. We share this view with one qualifier; oil prices above $50 take significant political risk off the table.
Most of the Gulf States have based their previous budgets on oil above $50 a barrel. When oil dipped below this level, many countries, including Iran were forced to cut expenditures. The fastest way to derail economic recovery would be to have political and social unrest in Iran.
Our neighbor to the south, Mexico, has also been labeled a dangerous state with the potential for rapid collapse. The Mexican government has been fighting a losing battle with drug cartels. The government relies on oil sales to fund over 30% of the budget. In what was probably the greatest trade by a country in 2008, Mexico hedged its oil output at $70 a barrel through Goldman Sachs (GS). This allowed the government to continue to fund the war against the drug dealers. As oil approaches that level again, we would advise President Calderon to pay a visit to his friendly bankers at Goldman Sachs. And since the US government is so keen on intervention, we should encourage this meeting in the name of national security. Despite the light sarcasm of our suggestion, social unrest is a serious threat and is a direct result of not enough money.
Additionally, oil at the higher end of the range ($75) makes exploration and alternative energy a profitable venture. Certainly, higher gas prices will crimp consumer spending and is why we see oil above $75 a barrel as detrimental to the economic recovery. There is a delicate balance between stability and recovery.
Disclosure: I am long UGA.
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This article has 17 comments:
At this range of crude oil, best strategy is to long XLE and XLY with covered call strategy. XLE has not caught up to new range for crude oil; XLY is panicked about $3+ gas price.
As long as crude stays in the $50 to $75 ($65 even better), US economy can grow (it'll take a while though), and equities can find a firm support after a period of consolidation (maybe starting today).
Add to that, an administration that is opposed to developing oil and nat gas in the interim. Volatility is and will continue to be staggering with higher highs and higher lows.
Inflation will support the trend upward. We have buried our economy with unbelievable spending that may or may not be recoverable.
or you can look at the raw numbers here:
tonto.eia.doe.gov/oog/...
(Click on the Data 1 tag)
This week analysts thought stocks would drop by some 2 million barrels. Instead they increased by 2.866 million.
May 29, 2009 365.977 million bbls
May 22, 2009 363.111
That’s a 5 million bbls error which is huge. But it doesn’t begin to capture just how insane the oil market really is. This is the crude oil stock number from last year at this time.
May 30, 2008 306.757 million
We are currently carrying 59.22 million bbl more this year than last year. This is in large part due to the fact that the economy is doing so much worse this year. But that is rather the point. Supply is through the roof. The economy sucks, and the near oil crude future has doubled from its low of $30.28 which it hit on December 23, 2008 at the bottom of its collapse from the previous speculative binge, --or if you prefer the 2009 low, $34.03 on February 12, 2009.
tonto.eia.doe.gov/dnav...
What this screams is manipulation. It is a subsidy for oil producers, a windfall for investment banks, and a hidden tax on already cash strapped American consumers.
While North America and Europe are trying to use oil wisely, the concept is not universal.
Not only is Mexico's production falling off a cliff, the same is happening in the Middle East. (read Matthew Simmons "Twilight in the Desert" for details). The sheiks dare not disclose this fact or else civil unrest would surely unsue. In the Middle East, gasoline is highly subsized and consequently everyone drives gas guzzlers. Furthermore, the huge population explosion taking place in the region requires lots of electricity generated from buring oil (the USA gave up this wasteful practice over 30 years ago). Also, water has dried up in the aquifiers and is produced by desalinating plants using large qunatities of natural gas. No wonder when Bush 43 asked his buddies in Saudi Arabia to ramp up oil production, the answer was a "No", very surprising given that oil was selling $145 at the time.
Wake up & smell the roses. Then read a book or two.
Best,
SOB.
or you can look at the raw numbers here:
tonto.eia.doe.gov/oog/...
(Click on the Data 1 tag)
This week analysts thought stocks would drop by some 2 million barrels. Instead they increased by 2.866 million.
May 29, 2009 365.977 million bbls
May 22, 2009 363.111
That’s a 5 million bbls error which is huge. But it doesn’t begin to capture just how insane the oil market really is. This is the crude oil stock number from last year at this time.
May 30, 2008 306.757 million
We are currently carrying 59.22 million bbl more this year than last year. This is in large part due to the fact that the economy is doing so much worse this year. But that is rather the point. Supply is through the roof. The economy sucks, and the near oil crude future has doubled from its low of $30.28 which it hit on December 23, 2008 at the bottom of its collapse from the previous speculative binge, --or if you prefer the 2009 low, $34.03 on February 12, 2009.
tonto.eia.doe.gov/dnav...
What this screams is manipulation. It is a subsidy for oil producers, a windfall for investment banks, and a hidden tax on already cash strapped American consumers.
About the situation with large inventories but a rising oil price, I intended to go into that in a long article that our colleagues at SA do not seem interested in. But, in brief, if we have a large enough contango in the futures market, it could make considerable sense to acquire and to hedge additional inventories, where hedging here includes paying the cost of storage. (Note the 'could'.)
They are an estimated 10 million Americans out of a job today, Americans are driving less then they have since the 1950's.
Fluctuations and hyperactive are words being used for manipulation and control in the oil industry. Plenty of crude today, around a 19 year high, and yet the price of gas is on the rise.
We can all thank Phil Graham for that.
So how about something original lets regulate the futures energy commodities market? Or better yet, free us from the use of oil altogether? The oil industry as a whole made around $476 Billion in net profit over the last 6 years, the pulse of the worlds economy is under the thumb of 13 OPEC nations and 5 major oil companies. Is this the legacy we want to leave our children and grand children?