Crude Oil, Gold Prices Plummet: Time to Get Cautious About Dollar Bears 10 comments
-
Font Size:
-
Print
- TweetThis
"Bad news from the Baku-Tbilisi-Ceyhan pipeline - an installation that may not normally draw much of your attention," writes Martin Vander Weyer in thye U.K.'s Telegraph, "but which is a throbbing artery of global energy supply, carrying vital oil supplies from Central Asia towards a tanker terminal on the Turkish coast. On some remote, sun-baked plain of Anatolia, an explosion sparked a fire earlier this week, temporarily cutting the flow through the pipeline. But guess what? Here's the good news: the oil price did not zoom upwards in response, not a blip, barely a flicker. Actually the price of a barrel of crude has been falling: from a peak of $145 in early July, it came down to $117 and was trading yesterday at $120. That's almost a 20 per cent drop in little more than three weeks."
Was it only a month ago that the rumbling stomach of Mahmoud Ahmadinejad, picked up by an inopportunely placed microphone, would have been interpreted as a viable threat to world oil supplies? Three weeks since the prospects of a rain cloud over the Gulf of Mexico was interpreted as a vital danger to U.S. crude and natural gas -- good for a $5-increase in prices?
Friday's news reminded me of an incident from January 9, 2007, when a U.S. nuclear submarine collided with a Japanese ship near the straits of Hormuz. Despite the proximity to the world's most important bottleneck, the oil price back then didn't blip. Even then, it was the holy trinity of the oil bulls' bubble creed that Peak Oil-China-Bernanke were the cause for rising prices, supported by the tryptophane troica of "Trouble in the Middle East - Hurricane Warnings for Next Summer - Nefarious Nodes of Nigeria".
The lack of response to an actual (if minimal) threat to supply support the thesis I have put forward here at TodaysFinancialNews.com for months, and most recently in a Smart Investing interview with Krista Das: Prices had nothing to do with supply and demand. The lube-job on oil was performed mostly by speculators, not traders. Desk-jockeys who don't really have the wherewithal to make an honest living trading oil... but who moved markets and commodity prices by electronically allocating assets to the commodity that promised the easiest reward.
Oil now is trading below $113. I believe that there is a very good chance that once prices fall below $110, we may see a rout as hedge funds cash out in a panic. This could reduce prices further at a rapid clip. Without actual large-scale terrorist activity, hot war between Israel and Iran, we may be back to prices around $70 by spring.
I'd not be surprised at all to see Ben Bernanke swing from whipping boy of the Hard Money crowd (because, obviously, he caused oil prices to go up by printing money) to whipping boy of the U.S. manufacturers and exporters (because, obviously, the resulting increase in dollar exchange rates makes the U.S. economy less competitive internationally.)
A look around the market indicates that not just oil is at risk, but almost all commodities buoyed up by the Commodities Super-Cycle. Demand destruction, mild as it has been so far, has not just occurred in regard to gasoline consumption -- but in regard to building materials like copper, concrete, lumber. A protracted dip in U.S. consumption will result in economic recessions not just in North America but Europe and Asia alike, affecting commodities from coal to indium. The result could be an avalanche of liquidation sales as hedge funds cash out on their hoards to return investors' principal.
Gold, too, has plummeted $130 in two weeks. Nobody asked me, but I'd say that makes for a terrible safe haven against inflation. This is the time to get cautious with your Hard Asset "gold-is-real-money" strategy!
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 10 comments:
From August through early October is the seasonally strongest period for crude prices. Corrections in a bull market are sharp , but short. Demand dampening in the OECD has been more than matched by demand growth in the ROW (rest of the world). The EIA reports for the past 4 weeks show increasing US demand for gasoline week over week. As soon as prices backed off a bit, demand responded quickly. So the fundamentals are quite strong for crude and gasoline.
Look at the timeline of events that coincide with the oil correction. The fed and treasury demonstrated that they would not allow a major bank or broker to go bankrupt. The SEC put 19 financials on a protected list. The CFTC threatened to change the rules for oil longs. Then came the big bail out of FRE and FNM. Those actions caused a host of funds that were long oil/gold etc and short financials to reverse their trades. This reversal had nothing to do with fundamentals. That's the major point that I'm making. We saw a radical change in how far the fed and treasury would go to manage the markets and that altered the perception of speculative fund managers.
Also, the banks that loan money to hedge funds were and are strained. So they called in loans, reduced lines of credit and forced hedge funds to reduce leverage. It was not possible for these speculative funds to remain long oil at 10-1 leverage and have enough cash to cover their financial shorts, so they sold. Profit taking, hedge funds imploding, de-leveraging, sector rotation and spec fund shorting are all short term factors. Actual physical demand for crude is still growing, production is flat and the big demand quarter is still ahead.
Finally, ask yourself what OPEC will do if oil does get into the 100-110 range. Do you really think that they will ever let it get below 100 again?
We are in a deflationary cycle now. That's right deflation. A hoarding of cash. There is no one willing to put their cash on the line because thay are waiting for prices to drop further. That folks is serious deflation. The credit crunch will be coming to a car dealer near you. Where I live 3 car dealerships went out of business in the last month, A Chevy, Dodge and Pontiac. Not to mention a Bennigans and Steak and Ale and I live in one of the wealthiest counties in the country. Throw in a Linens and Things just for fun.
Wall Street is a mess. Not that I am unhappy about that. They deserve everything they get and worse if you ask me. Just one problem we are bailing them out. This is the first recession of the wealthy in this country I have ever seen. There were 45 foreclosures in Southampton alone and about 25 in Grennwich, CT and we are just warming up.
Panic is setting in overseas. The real estate bubble is far worse there than here. England is already in trouble, Spain and Italy are in recession and Germany is on the cusp. Friday's Euro rout is just a warm up. You will see the euro back at par within the next 5 years.
In Asia, things are not better there either. Japan is falling back to recession. China's growth is set to slow from 11% to 9%, not a big deal but in India growth will collapse in '09 from 8% in '08 to 2%. That will feel like a recession.
Back to the USA. Housing prices will fall at least another 10-15% next year, in Manhattan they are expected to 20% as reported on Bloomberg.
We have been in a deflation cycle for 10 years only no one is saying anything about it. Just look at stocks they've done nothing since 1998. Actually they have done something, they have lost value. This FED/Treasurey induced dollar rout is the only thing that propped up commodities. Now courtesy of the hosuing bust we are out of cash.
Next year you could see the big 3 auto companies go chapter 11. I would put the likelihood at 50/50. Think I am crazy. GM has only have $28 billion in cash versus $128 billion a few years ago. Chapter 11 is a real possibility. Chrysler may not make it to the end of the year. Leasing a SUV will be a liability.
Had enough, well let's see. The trailing PE on the SPX is a lofty 22 as of the 2nd quarter. This is a about a 1/3 above its long term range. Either stock prices must drop a third or earnings have to rise a 1/3 just to get even. In a zero or 1% economy how will that happen? It won't. This bear that started 10 years ago has another 6-8 years to go. The DJIA will see 8800 before it sees 14K, imho and I hope not lower than that.
Gold will fall back to the $500 level or lower. Oil, $70 is a real possibility. Treasuries prices will rise and yields will hopefully fall. I say that because if we have to bail out FNM, FRE and everyone that got a bad mortgage and the GM, Ford and Chrysler pension plans borrrowing will soar. The budget deficit could go as high as $1 Trillion. At least that is what Bill Gross said. It is projected to be half that now. But since when did the government predict anything correctly. Then the central bankers will get serious about reflation. You will see a serious global reflation effort by the worlds central bankers. They will do anything to save the global economy from deflation.
There will be no winners here, none. There is no place to hide. Enjoy the rally in stocks but sell it you must. As Carl Ichan said before this is over it will take all the Kings horses and all the Kings men to put Humpty Dumpty together again.
Given my simple minded view of economics, just suppose the current level of oil demand is X and that level is associated with a certain commensurate aggregate level of world economic prosperity. If that level of world prosperity drops, just suppose again that pacemakerj is correct on that point, then isn't it logical that the oil demand commensurate with that drop is going to be W not X. Some bright soul could graph the levels of gross world product and gross world utilization of oil and see what the two might tell us when compared over time. That comparison may not predict short term problems with the price of oil recovering as implied by gigem77 but instead it could identify a longer term bearish trend bearing (sorry) some parallel but finite correlation with gross world product could it not?
Even given all the short term factors mentioned by gigem77, isn't the likelihood of a return to a mean price (even granting that lower prices could increase utilization which is not a given anymore) over coming years (not months where everything from the Russian invasion to the (possible) strike on Iran could act as another powerful short term price spiker) driven by a fall in the sum total of the demand generated by sinking gross world economies the better of the two possibilities?
Maybe the perspectives that made certain far sighted people rich in the past - back when oil was much cheaper- in other words the paradigm that the production of oil will simply not be up to the demand side of the equation and amplified by the oil speculators suddenly find itself reversed for a period of time longer than anybody would predict and again be amplified by the oil speculators?