BrucePile

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    • Mon Apr 28th 12:17 PM | Rating: 0 0
      Commented on:
      Food and Energy Prices: Lessons From the '70s
      You look at the grocery figures like the ones above and you see why everyone and their dog is saying it's a crazy bubble. But a very important lesson from the 70s - and 60s and 80s and 90s - is that a commodity bull is crazy for a long time. Commodity bull and bear cycles run 10 to 20 years as we all know. But less considered is how big the smaller moves are that make up the major bulls and bears. If you examine a chart for the CRB Index going back to the 60s and fit a line through all the major move changes (a 20% swing line or such) you make an amazing dicovery. Every single up move has a duration of 2 - 4 years, and every single down move also except one. The last significant swing was from down to up in late '07. So if this past commodity behavior is any guide, the crazy bubble will go on for another 2 to 4 years!

      That's not so inconceivable when you consider that oil tends to lead commodity movement, and oil will probably be working its way much higher over the next 2 to 4 years.
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    • Sun Apr 27th 17:55 PM | Rating: 0 0
      Commented on:
      The Crude Oil Price Disconnect
      The new projects schedule puts about 20 mbpd online by 2010. That's a lot of oil and has led the ultra optimists like CERA to predict a wall of oil coming with as much as 7 mbpd supply over demand by 2010 and oil at $40 or less. But there are several facts of science and math that the CERA types don't consider.

      For example, there is the math of net energy. Even much of the oil bear contingent accepts that we are at or near the global peak for the old fashion conventional oil from easy to extract fields. They say we are nowhere near an oil problem though because of the flood of new unconventional oil on the way. However, if you look at the new oil we are depending on over just say the next 3 years, you see that about half of it is the rampup in deepwater and tar sand oil. These two sources have EROEI (energy returned on energy invested) estimated at around 3-4 with the old declining conventional field production EROEI at about 10 or better. Comparing these two values on the EROEI oil displacement curve means that it is taking 3 barrels of this new production to offset each barrel of declining conventional production! This amounts to about 7 mbpd in 2010 production that will be missing from the physical barrel to barrel accounting of new replacing old - 7 mbpd missing in action from the globe's net energy supply. This one factor alone completely does away with CERAs wall of excess oil by 2010.

      Also consider the ELM (Export Land Model), which tabulates the effects of internal oil consumption increases by the enriched oil exporting nations. In the model, if exports are half of total production and conventional production is near peak (roughly the global case) and assuming conservative figures for existing production decline rate, internal consumption increase rate (about half of what is actually occuring in many major exporters), the amount of oil exported post peak winds up being just 10% of the total exporter's post peak production! A full explanation of ELM is at theoildrum.com. This causes much of the forthcoming wall of oil in the future to fall somewhat flat.


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    • Sun Apr 27th 17:07 PM | Rating: 0 0
      Commented on:
      Don't Shoot the Speculator for Commodity Prices
      Commodities always have the "spec" or investment component, which is anyone holding a contract who does not take delivery of the commodity. The more the supply/demand trends favor higher bidding by the actual users of the beans and cotton, the higher the spec component is going to run and the sharper and more unpredictable the pricing gyrations will be - so live with it!

      The hungry people rioting all over the world are no more alone in their responsibility for higher prices than the investors are.
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    • Sun Apr 20th 17:06 PM | Rating: 0 0
      Commented on:
      Why New Oil Price Highs?
      To see the primary reason oil is in a climb, you need only to look at a chart of global net exports vs oil price. The exported portion of oil production is only about half of the total (the producing countries use the other half) and exports peaked in late '05 with a serious decline setting in since then. Other things are bringing the investment dollar to oil and commodities in general like the weak dollar, etc. but it's mainly a bidding war for a shortage of exported oil.
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    • Sat Apr 19th 16:15 PM | Rating: 0 0
      Commented on:
      12 Potash Companies Sprinting Ahead
      The piece at greenfaucet.com makes some very good points about bubbles. Food crops have actually been a big disinflator since 1980, so the switch to leading inflation is causing a massive pricing climb, after which crops are still historically very cheap just from a technical perspective, not counting the supply and demand fundamentals.
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    • Sat Apr 19th 15:40 PM | Rating: 0 0
      Commented on:
      Many Investors Seem To Think the Worst Is Over
      "Many Investors Seem To Think The Worst Is Over" - Otherwise known as a bear trap. Of course it's always one of the rallys disguised as a bear trap that ends the bear decline. But the market just seems to be breathing a sigh of relief that we aren't going to have seized-up credit markets crippling us, which clearly seems to be the case now. But the market may next begin grappling with consumer credit problems and some serious inflation coming into focus. The market isn't going to like what it sees there.

      Technically, the major indexes are still in dangerous bear mode, but right at the turn point where either the bear trap will be sprung or a technical break from the decline will happen.
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    • Fri Apr 11th 17:52 PM | Rating: 0 0
      Commented on:
      The Coming Commodity Correction: Hedge Your Downside Risk
      Corrections happen. The stronger the bull market, the sharper the corrections. There were some in the last commodity bull cycle from '68 to '82, but in this cycle, there is vastly more of a physical need for the real assets in question. In the 70s, there was a huge demand surge in oil, but there was considerable spare production capacity that was utilized to partially meet that surge (It was not just "the embargo" with oil in the 70s. There was no embargo that lasted for the whole decade). In our present bull commodity cycle, we again have a huge demand surge for oil fueled by a BRIC growth that wasn't present in the 70s. But this time, we are close to global production peak and there is essentially no spare capacity to deal with this surge. It's scary when you consider that the price of oil climbed 900% during that 70s surge despite the swing producers being able to ramp production way up to reservoir damaging levels. What's oil going to do this time with no big ramp up coming?

      As for agri commodities, there is much more of a physical shortage than in the 70s on crops needed for emerging market food need and the explosion of ethanol use.

      As for the rotation of the world's investment money between the stock market and commodities, you probably have a stronger version of that in this cycle too. Think of all that fiat money that has been created out of thin air since the financially staid 70s. There's much more investment money to rotate this time around.

      The physical need for commodities being stronger will probably tend to make the corrections more muted than in the 70s, but the attraction of more investment money into the space will probably aggravate the corrections. So they will be an unpredicatable, necessary evil as usual if you are to participate.
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    • Tue Apr 8th 19:49 PM | Rating: 0 0
      Commented on:
      Commodities Boom and Rotation
      If you look at a chart of the financial asset/hard asset cycle over the last 50 years, you see a pretty smooth cycle length of about 15 years. You can draw a historical mean through it which shows that oil is leading the charge in the new hard asset bull cycle that began in earnest about 4 years ago. The crops are lagging oil and gold and about everything else. Relative to the CPI inflation and to the financial/commodity cycle, they are just now breaking a very long decline, in fact, and the recent strong action is probably more akin to a very long base break than to a bubble.
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    • Tue Apr 8th 19:10 PM | Rating: 0 0
      Commented on:
      Brother, Who Can Spare Another Dime for Oil?
      We have been hearing the speculation explanation ever since $45/bbl. We've had adequate inventories ever since $45/bbl. We've been at demand destructive levels ever since $45/bbl.

      There are two types of explainers to keep in mind when it comes to what's happening with oil. First, there are geophysical types, the followers of Marion Hubbert who look primarily at the oil situation in the ground - the Marion Independent Nonaffiliated Deducer types or MINDs for short. This type has been writing The End of Cheap Oil and other science oriented works since oil was $12/bbl in the late 90s (Deffeyes, Campbell, etc.) Hubbert himself explained clear back in 1956 that the U.S. production would peak by the early 70s and he explained that by the early 2000s global production would be peaking. Then there is the second type of explainer, the economist types who look primarily at some soap opera of above ground intrique - the Market Oriented Reporters Of Nonsense or MORONs for short. These people have been publishing errant projections on oil for many moons. Just go back over Valueline's price range predictions on microfilm for the last 20 years or so (I have). Nearly every projection was wrong, both for up and down ranges and they totally missed the rise in oil of the last 5 years. You would have done very well investment-wise doing the exact opposite of their projections.

      The MINDs, on the other hand, have been right all along. Hubbert was about the only human on the planet who knew U.S. oil would peak in 1971 and that global peak is happening very close to now. The End of Cheap Oil has indeed arrrived. And I really don't think it's just a speculation.
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    • Sat Apr 5th 17:06 PM | Rating: 0 0
      Commented on:
      Chance This Is The Bottom? Zero.
      The problem with comparing the present problem with the S&L crisis and other things of the past and saying it should blow over quickly like they did is that the scale of the problem has changed - the debt house of cards has been stacked to a much more unstable level. The creation and scattering of debt instruments is much more entrenched into everything now. It's a stability thing.

      You can hold the good stocks in the time it's going to take to unwind the problems (a lot of them will climb), but bear markets typically have sudden, hard to predict sell-offs that grow in intensity gradually dragging even the strongest areas of the market into them untill a capitulation phase is reached. It's going to get more and more dangerous both long and short stocks. The Fed will continue to throw bail-out money making a short portfolio a mine field, and sudden fits of market anxiety over debt's lack of visibility will probably make a long portfolio a constant struggle.

      A commodity portfolio may be the best area as it will benefit from the flooding of the money supply no matter what kind of problems are created or solved in the stock market. You won't have to be right about the next big gyration of stocks. We are likely into a long market cold spell like '68 to '82 associated with the mega financial/hard asset inflation cycle where commodities will be outperforming a dangerous stock market for quite awhile as we are only about 4 years into the upswing of the hard asset bull market, not even reverted to the historical mean yet (not really "bubble" territory).
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    • Thu Mar 20th 19:20 PM | Rating: 0 0
      Commented on:
      4 Factors Fueling Oil Prices Higher
      One reason for climbing oil prices that doen't get talked about is EROEI. That's Energy Returned On Energy Invested and it's one of the least understood and most important issues with oil. We tend to look at the massive reserve numbers and the massive flow rates of total liquids production and think we have more energy supply than what we actually have. A sharply increasing amount of our high EROEI conventional crude is being used to manufacture the unconventional oils that go into the total liquids number (tar sands, shale oil, deepwater, ethanol, and biofuels). But these oils are very low EROEI taking about as much "real" oil to make as they supposedly add to our supply.

      When oil was extracted decades ago, it took about 1 barrel of oil energy to hand us each 80 barrels of net energy from shallow, naturally pressurized reservoirs. Now it's about 10 to 20, depending on location. This figure is dropping faster and faster as the "hanging fruit" has already been exploited. There is a simple math fact about EROEI that dictates a rapidly collapsing net energy supply to the economy as you go below an EROEI of around 3 to 4. If you go from an energy source with an EROEI of 20 to a source with an EROEI of 1.3 (the most agreed upon figure for corn ethanol), YOU MUST MAKE 60 TIMES THE AMOUNT OF THE LOWER EROEI SOURCE TO GAIN THE SAME NET ENERGY AS GIVEN BY THE HIGH EROEI SOURCE. That means to displace one barrel of oil, you must make 60 barrels of ethanol. Most all of the manufactured fuels have EROEI of less than 3 making them nearly useless in displacing foreign oil, but very usefull in causing catastrophic food inflation.

      EROEI makes our true energy supply not the total liquids curve commonly accepted but something much closer to conventional crude plus condensate, which is falling behind the total liquids curve at a quickening pace (it peaked in 2005 and hasn't made a new high since, although it nearly did this past month).

      What's left of the big reserve amounts of oil has big EROEI issues and a large amount of it is going to take more energy to extract than the oil will supply. The rapidly declining EROEI curve is going to make the energy world going forward much different than what we've been spoiled by in the past. For some charts on this and a good overview, see the current EROEI story by Robert Rapier at theoildrum.com
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    • Thu Mar 20th 17:57 PM | Rating: 0 0
      Commented on:
      Burst Bubble? Commodities' Long-Term Story Remains Intact
      If you look at a chart for relative valuation between paper and hard assets over the last 50 years, it's clear that there is a powerful cycle at work with about a 15 year bull/bear phase. We seem to be clearly beginning a bull phase for hard assets that is just now getting going (only about 4 years into it). The cycle has yet to even revert to the mean.

      As for the volatility that goes along commodities, you can either be the fast trader and try to anticipate each gyration and buy and sell around them (good luck with that) or you can dollar cost average into a line-up buying more aggressively after the corrections and adjusting the line-up only if the good areas of sector warrant it. You pretty much have to make up your mind which approach suits you and stay with it.

      It seems to me that most fast traders anticipate 4 or 5 phantom corrections for each real one and wind up rotating in and out too much and being on the sidelines when a lot of the quantum surges happen when they least expect them. They chop the bull climb into bitty pieces of small gains to mix with small loses, which typically results in underperforming a more stable strategy. Not that there aren't traders who can do better with faster trading, but averaging better long term results this way is precarious to say the least.
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    • Wed Mar 12th 21:52 PM | Rating: 0 0
      Commented on:
      Commoditizing the 'Decoupling Theory'
      It's difficult to guage the current upturn in commodities by comparing it to the past for absolute valuation guides. We have some things now that are unprecedented like peak debt and peak oil. One is going to cause a never before experienced bidding war for commodities as an investment class and the other is going to cause a never before experienced bidding war for energy to survive with.
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    • Wed Mar 12th 20:58 PM | Rating: 0 0
      Commented on:
      Short Covering Helps Boost Stocks
      Eventually, the debt problems will get fixed. But as Satyajit Das highlights in Traders, Guns, & Money, this credit crisis is all about the unknown. And what is it that the stock market abhors more than anything? Uncertainty, of course. That is the very defining feature of the current market problems. Das even subtitled his book Knowns and UNKNOWNS in the Dazzling World of Derivatives (emphasis added). The market's habit of shooting first and sorting it out later is making this a most dangerous stock market. That's one nice thing about the commodities market as opposed to the stock market - whatever the fix winds up being for the credit mess, it's a pretty safe bet it will mean big increases in money supply and inflation and investing money rotating into hard assets as shown in the chart I mentioned in my post above (I gave the incorrect Drumbeat date, by the way; it's March 8). At some point, the stock market will see enough resolution to turn back to a bull market. But the waters may be pretty murky for awhile. Not so with the bull market in commodities.
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    • Tue Mar 11th 21:28 PM | Rating: 0 0
      Commented on:
      Short Covering Helps Boost Stocks
      Whether the latest move by the Fed is inflationary or not (sounds a little fishy to me, but I'm not a banker) is perhaps not the critical question. We have plenty of inflation already with more on the way.

      Technically (which efficient market theory says is "all things considered") we have the leadership areas that have lead the start of the bull and the roll over process into the bear being the small cap and value end of the spectrums, and they have already thoroughly broken lower than their January lows (look at $RUT, $RUV, $IJE, etc.). The broader market has been very faithfully following the lead of these groups, which strongly suggests that, after some bouncing, the S&P 500 will take up residence below its January low.

      This whole market condition in '08 is remarkably similar to the 70s. After the 70s, every economic downturn has been countered with a Fed loosening. This brought the investment money on the sidelines back into the stock market because there was no problem inflation. But now we have a downturn CAUSED by loose money and the Fed must fight loose money with still more loose money. The mounting inflation caused by this is causing the money on the sidelines, which stands at high levels seen at stock market bottoms, to choose commodities over stocks, which causes still more inflation! It's a cycle that feeds on itself somewhat.

      We had this in the 70s where the stock market made no progress for the 15 years from '66 to '82, but a 15 year commodities bull raged. The 70s version was defused by, among other things, a quick return to very cheap oil in the mid '80s. But in our current version, we are going to have very much more expensive oil. The defusing of this investment money inflationary spiral effect may be tough this time. If you look at a chart of paper vs hard asset investing over the decades, you see a clear and powerful cycle at work and where we are now in that cycle. I posted this chart at www.theoildrum.com/nod...
      If this doesn't link directly, go to "Drumbeat" for March 9 and scroll down to near the bottom of comments for the chart - posted by "netfind". It clearly shows where we are on the issue of over/under valuation of commodities.
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