Only the Oil Companies Win

Prices of equities did not back off on account of record oil prices, as I thought would be the case. To compound that, Talking Heads Tuesday were discussing the prospects of $200 oil, which I think is irresponsible chatter or paid infomercial – take your pick.

Whatever anybody says that the US economy can grow through further spikes in crude oil prices, I disagree. In effect the tax rebates in the US will just go to paying the higher cost at the fuel pumps for a few months. Who wins by that other than the already booming oil companies?

I think we are all agreed at this point that Fed pumping is what is keeping the equity market afloat in the face of calamity in the Financials and record high fuel costs. But the Fed money is simply more debt, which is supposed to be temporary. Can we trust the Fed statements that these transactions with the commercial and investment banks (loans and dubious asset-backed paper purchases) will one day be reversed? We already have evidence of being misled.

So the bottom line is that many traders are waiting out the present speculation in the equity market. Yes, it’s hard on the psyche when central banks can simply print money and use it to boost the fortunes of the bankers. But, there is no need to act imprudently.

What it does mean is that bankers have made day-trading in vogue. That’s not good because the majority of the public are not equipped to trade against the best brains and computers of the largest banks.

At least this blog is trying to fight back for the People.

Comments

[Larry House:]

I couldn't agree more. The Fed is giving the markets a fix with buckets of money, and we have yet to begin the withdrawal. I don't think it will be pretty. Where is the potential for growth in corporate profits? House values are falling, consumers are in debt up to their eyeballs and prices for everything are going up. These things can't turn around on a dime. We have not yet felt the real recession. We have indeed been reduced to being traders instead of investors. Be patient. Keeps lots of cash. There is no "fat pitch" in this market to swing at.

2008 May 07 11:49 AM

[ajwooley@gm...:]

I disagree, printing up cash does not make anyone richer, not even bankers. I agree, oil is making a killing in the market and holding us all hostage. That's the downside of having a highly inelastic demand for oil, the consumers are screwed.

2008 May 07 12:37 PM

[Moses:]

Oil won't stay high forever, at this point pure speculation is driving it higher. Eventually a catalyst will come along and oil will drop well below $100. It's a bubble, just because it is inelastic does not mean it is not. The price has increased much faster then the demand caused by the emerging markets, not to mention we are finding new oil fields all the time with new ways of getting to them. What will cause oil to finally plunge and how long till then is anyone's guess.

2008 May 07 01:47 PM

[JREwing:]

Did it occur to anyone, that speculators can also go short oil? If the oil market is really completely separated from supply and demand, why don't traders short the hell out of the market?

Because, as we've all seen Thursday and Friday of last week, good economic news and a supply disruption here and there and the shorts get blown out of the water.

Today the EIA reported an increase in crude supplies rose of 5.3 million barrels and oil sold off more than a buck. 5 minutes later the API reported an increase of just 630.000 barrels and oil was back were it was.

That's the problem: These supply data are educated guesses at best. There is just no reliability in oil market data - Worldwide. And that makes markets nervous.

Another thing is: You really have to have some guts to short oil. I mean, one maniac blows up something in a Saudi port, the Israelis bomb something in Lebanon, Turkey bombs something in Kurdistan... and oil is up three bucks.

It's no wonder oil is up most Fridays, because no one knows what's gonna happen on the weekend.

That's why Natural Gas was underperforming for so long - it much less risky to short than oil.

Another thing is: There is no 'one oil'. The sort of crude, that is traded in New York is WTI (West Texas Intermediate). So, the fact that crude supplies in the US are higher than last week, doesn't necessarily mean something for WTI. When you look at the numbers, one can see, that supplies in Cushing, OK (crucial for WTI) are a lot lower than last year. A trader in New York doesn't give a hoot about imported oil from Venezuela or Saudi Arabia, because it's low quality and has little to do with that Light Sweet Crude WTI.
Every refinery can use WTI, only a limited number can handle the bad stuff.
That's why Nigeria is so important, 'cause they got the good stuff, too.

Refinery utilization is only 85%. Of course, it's maintenance season. The market knows, that as soon as maintenance season is over, refineries need new crude. So, it goes up.

Robust World Economy: Did you check out the Baltic Dry Index lately. It's going up almost everyday. Looks like the world economy is quite well. That's why oil didn't collapse when the dollar rallied, like a lot of people expected.

No demand destruction in emerging markets: Not because their economies are so indestructible, no, because their governments subsidize oil products. If you drive a car in China you don't realize, that oil is at 120$ a barrel. Why would you cut back on your driving? China's oil consumption last year up 16%.

Oil companies would be crazy to sell for less: All significant new discoveries are in deep water or even ultra-deepwater. This is not for the faint of heart. The first test well Petrobras drilled in Tupi cost 240 million dollars. And that's just a test well.

The era of cheap oil is over. It was an unnatural state while it lasted. For 50 years the West lived of a dozen giant fields where an idiot with a straw could suck oil out of the ground. These are close to death. And now comes the hard (NORMAL) part.

2008 May 07 03:31 PM

[JREwing:]

By the way. If the Democrats really get their windfall tax for oil-companies, you'll have an economic crisis on your hands, that would make the subprime crisis look like a stimulus package. Oil companies will cut their E&P to zero and folks will stand in line at the gas station.

2008 May 07 03:37 PM

[JREwing:]

And another thing:

Why can't "the people" invest like the bankers.

First: Looks to me, that the bankers aren't that good themselves.

Second: Nobody forces "the people" to sit at home and watch stupid American Idol or crap like that. One could look for information where to invest one's money. And please not in a house, but in oil, oil companies, oil service companies, offshore drillers... and anything else, that profits from the global commodity boom. And then one should spent one's time looking for information, when that boom is over.

I hate that, I really hate "people" who live their lives without thinking about their financial future, and as soon as they are in trouble, because they bought the third widescreen TV on credit, or gas prices go up, THEY ELECT A COMMUNIST!

That's why i live in the Bahamas.

2008 May 07 03:51 PM

[JREwing:]

I am completely baffled by the illogic of this article.

The title says: only the oil companies win

Well, that's may be correct.

The author than rambles on about all those evil things that are happening to his 'people'.

Why doesn't the author suggest to his 'people' to invest in these oil companies?

Then there wouldn't be any cause to complain and the article wouldn't have to be written.

Dear Mr. Cara,

this blog is about money. At least that's what I was thinkin'. Looks to me, that this article would fit in better at Moveon.org.

2008 May 07 04:13 PM

[aamerican:]

I totally agree, doesen't take a genius to see this is the Bush regime payback for the big oil money that got him elected. Last year of regime and consumer will pay plenty. Bush says he will veto latest bill in congress for housing, becuse it is a quick fix, what does he think his tax rebate is?

2008 May 08 12:32 PM

[Bingo 2:]

American- Bush and his economic advisers are all idiots- what do you expect?

2008 May 08 02:22 PM

[cynic69:]

Dear Moses
No new meaningful oil fields have come on line in 4 years. The cheap oil is all gone due to human greed and stupidity. The price of oil will always go higher in the future. Read "The Long Emergency" and 'Collapse". Saudi Arabia has already started hoarding oil for future princes. Wait until Russia starts hoarding (maybe next month). At that point the 600,000,000 gas burning vehicles in the world will be useless.

2008 May 08 09:47 PM

[Itsonlymoney:]

Oil is still cheap if we can afford to burn it. When we consider oil's other better uses, private transport on the current scale seems frivolous.

2008 May 09 11:01 AM

[pharma:]

Oil companies are not any different from any other successful businesses.

Idiots, politicians and demagogues love to blame successful businesses: oil/gas, pharmaceuticals, airspace, etc.,

As soon as these businesses lose their free-market opportunities, there will be energy supply shortages, no new life-saving drugs, etc.,

2008 May 09 11:52 PM

[JREwing:]

right on pharma

2008 May 10 10:00 AM

[nevket240:]

Those evil empires of Capitalist Enterprise, the OIl Cos now control only 5% of the worlds oil fields. The rest are in the hands of ideologically driven politicians and their back-slappin swill. Why does everyone, mostly ignorant ravers, think that something so expensive to find, extract, transport, treat, store, ship & distibute should be free??? Buy smaller cars, get rid of your, "mine is bigger than yours" idiotic SUV & learn to live within your means. There is no real "peak-oil" this is just money making verbage like "Global Warming" There is just business needs for a real return on capital, and less bullshit political opportunism from the likes of the Femocrats in the US.

regards.

2008 May 11 07:46 AM

[JREwing:]

nevket240

standing ovations!

2008 May 11 01:47 PM